PePsico inc. - economies oF scALe oR oPPoRTuniTY cosTs?

This Case Study discusses whether PepsiCo Inc. is benefitting from economies
of scale or it should split up to benefit from the associated opportunity costs.

PepsiCo Inc. is an American multinational food and beverage cor- poration

that manufactures, markets and distributes grain-based snack foods, beverages
and other products. The organisation was formed in 1965 by the merger of
Pepsi-Cola Company and Fri- to-Lay, Inc.
Indra Nooyi is the current CEO of PepsiCo Inc. Nooyi has been constantly
questioned by investors who think that PepsiCo has shifted from its core
business of snacks and fizzy drinks to new healthier markets. The carbonated
drinks business has lost its market share considerably and the same seems true
for its snacks business.
Several diversified businesses are splitting up into independent organisations.
Some analysts suggest that PepsiCo should also split into two smaller
organisations, a beverages manufacturing and marketing firm and a snacks
manufacturing and marketing firm. If this is the case, the two organisations for
snacks and drinks would be segregated as Frito-Lay (Doritos, Tostitos and
Walkers), and Pepsi Gatorade (a sports drink) and Tropicana (a maker of fruit
juices). Although, the opportunity costs of running a single organisation are
mounting, the CEO seems determined to maintain PepsiCo as a single unit.
Nooyi admits that as a stand-alone corporation, Frito-Lay, the star performer of
PepsiCo portfolio, might be the best consumer-goods maker in America.
Moreover, it could also be sold for a fortune, which along with sales PepsiCo
might be worth more than the current worth of the organisation.
In spite of these opportunity costs, Indira Nooyi believes in the economies of
scale, given the organisation’s power over its suppliers, retailers and customers.
This could be attributed to the organisation’s ability to market and distribute
several of its brands together. By taking over Tropicana and Quaker Oats,
PepsiCo is now selling less sugary drinks and healthier snacks, which are 25%
less salty and 15% less fatty. Nooyi aims to increase PepsiCo’s portfolio of
“good for you” products (nuts, oats and fruit juices) from about $10 billion to
$30 billion. However, the reality is not the same. Since the initiative for
healthier products has been taken up by PepsiCo, its market share has declined
by 7%, whiles those of Coca-Cola (its biggest rival) have increased by 50 %.

330 BUSINESS ECONOMICS

Case study 9

QUESTIONS

1. Do you think that PepsiCo’s business is trading on powerful economies of

scale?
(Hint: Since the initiative for healthier products has been taken up by
PepsiCo, its market share has declined by 7%, whiles those of Coca-Cola
(its biggest rival) have increased by 50 %.)

2. Suppose PepsiCo Inc. decides to segregate into two different firms. What
could be the possible advantages or disadvantages of the act?
(Hint: Advantages: Frito-Lay might be the best consumer- goods maker
in America. It could also be sold for a fortune, which along with sales
PepsiCo might be worth more than the current worth of the organisation.
Disadvantages: Losing on economies of scale and marketing of several
brands toget