Case Notes Pepsi Co

PepsiCo – 2009Case Notes Prepared by: Dr. Mernoush Banton

Case Author: John & Sherry Ross

A. Case Abstract

Pepsi (www.pepsico.com) is a comprehensive strategic management case that includes the company’s calendar December 31, 2008 financial statements, competitor information and more. The case time setting is the year 2009. Sufficient internal and external data are provided to enable students to evaluate current strategies and recommend a three-year strategic plan for the company. Headquartered in Purchase in the U.S. state of New York, PepsiCo is traded on the New York Stock Exchange under ticker symbol PEP.

B. Vision Statement (Actual)

“PepsiCo’s responsibility is to continually improve all aspects of the world in which we operate – environment, social, economic – creating a better tomorrow than today. Our vision is put into action through programs and a focus on environmental stewardship, activities to benefit society, and a commitment to build shareholder value by making PepsiCo a truly sustainable company.”

Vision Statement (Proposed)

To become the leading producer and marketer of food and beverage products in the world.

C. Mission Statement (Actual)

“Our mission is to be the world’s premier consumer products company focused on convenient foods and beverages. We seek to produce financial rewards to investors as we provide opportunities for growth and enrichment to our employees, our business partners and the communities in which we operate. And in everything we do, we strive for honesty, fairness and integrity.”

Mission Statement (Proposed)

To be the world’s (3) premier consumer products company focused on convenient foods and beverages (2). We strive for healthy financial rewards to investors (5) as we provide opportunities for growth and enrichment to our employees (9), business partners, and the communities (8) in which we operate. We have outstanding technological (4) and marketing (7) systems to continually innovate and create differentiated products for our customers (1) worldwide. And in everything we do, we strive for honesty, fairness, and integrity (6).1. Customer2. Products or services

Copyright © 2011 Pearson Education Limited

http://www.pepsico.com/

3. Markets4. Technology5. Concern for survival, profitability, growth6. Philosophy7. Self-concept8. Concern for public image9. Concern for employees

D. External Audit

CPM – Competitive Profile Matrix

PepsiCo Coca-Cola Kraft

Critical Success Factors

Weight

Rating

Weighted Score

Rating

Weighted Score

Rating

Weighted Score

Market Share 0.1 3 0.30 4 0.40 2 0.20Product Quality 0.09 2 0.18 4 0.36 3 0.27Customer Service

0.02 2 0.04 3 0.06 1 0.02

Organizational Structure

0.09 2 0.18 3 0.27 4 0.36

Price Competitiveness

0.09 2 0.18 3 0.27 1 0.09

Financial Position

0.1 3 0.30 2 0.20 1 0.10

Customer Loyalty

0.08 1 0.08 3 0.24 2 0.16

Global Expansion

0.12 3 0.36 4 0.48 2 0.24

Advertising 0.09 3 0.27 4 0.36 1 0.09Social Responsibility

0.08 2 0.16 3 0.24 1 0.08

Quality of management

0.05 2 0.10 3 0.15 1 0.05

Size of product line

0.09 3 0.27 2 0.18 1 0.09

Total 1 2.42 3.21 1.75

Opportunities

1. Increase in international market demand for colas, chips and breakfast foods2. In 2013, the United States savory snacks market is forecast to have a value of

US$28 billion, an increase of 27.8 percent since 2008 and the compound annual growth rate of the market in the period 2008–2013 is predicted to be 5 percent

3. Purchase smaller, successful developers of competing products 4. Healthy food snack is on the rise as consumers are shifting to healthy food5. Teens are less conscious of health issues and still like sweet drinks


Threats

1. Regulation – FDA, Clean Water Act, etc. 2. Foreign exchange rates in current economy3. Raw materials supplies – clean water4. Changes in consumer taste5. Health issues – more consumers are shifting to healthy food6. Consumers switching to lower cost house brands for both snacks and

beverages7. Substitute products – other snacks, water, tap water, ready-to-drink, sports

drinks, etc.8. Decrease in U.S. cola market9. Reduction in buying power of large retailers10. Strong direct (Coke) and indirect (Kraft) competition

External Factor Evaluation (EFE) Matrix

Key External Factors Weight

Rating Weighted Score

Opportunities 1. Increase in international market demand for

colas, chips and breakfast foods0.08 4 0.32

2. In 2013, the United States savory snacks market is forecast to have a value of US$28 billion, an increase of 27.8 percent since 2008 and the compound annual growth rate of the market in the period 2008-2013 is predicted to be 5 percent

0.08 3 0.24

3. Purchase smaller, successful developers of competing products

0.06 3 0.18

4. Healthy food snack is on the rise as consumers are shifting to healthy food

0.08 3 0.24

5. Teens are less conscious of health issues and still like sweet drinks

0.08 3 0.24

Threats 1. Regulation - FDA. Clean Water Act, etc. 0.06 1 0.06

2. Foreign exchange rates in current economy 0.05 2 0.1

3. Raw materials supplies - clean water 0.07 2 0.14

4. Changes in consumer taste 0.09 2 0.18

5. Health issues – more consumers are shifting to healthy food

0.08 2 0.16


6. Consumers switching to lower cost house brands for both snacks and beverages

0.04 2 0.08

7. Substitute products – other snacks, water, tap water, ready-to-drink, sports drinks, etc.

0.07 3 0.21

8. Decrease in U.S. cola market 0.06 2 0.12

9. Reduction in buying power of large retailers 0.04 2 0.08

10. Strong direct (Coke) and indirect (Kraft) competition

0.06 3 0.18

Total 1.00 2.53

Positioning Map

E. Internal Audit

Strengths


Strong Product Variety

Weak Product Variety

Customer Loyalty (High)

Customer Loyalty (Low)

PepsiCoke

1. Name recognition both domestically and internationally2. Stronger than industry average in price to cash flow ratio3. Strong marketing and promotion advertising campaigns4. Reliable and established distribution channel management5. Has diverse business units which reduces overall business risks 6. Recent reorganization7. Owns more bottling companies than 10 years ago8. Sales increased by approximately US$3.5 billion from 2007 to 20089. Increase in net profit for the last consecutive years

Weaknesses

1. Short term liability of US$369 due in 20092. Increasing long term debt by US$3.6 billion from 2007 to 20083. Increase in other liabilities by US$2.3 billion from 2007 to 20084. Decline in carbonated beverages from 2006 to 20085. Recent acquisition of companies could cost the company additional acquisition

cost along with some internal negative synergies

Financial Ratio Analysis (December 2009)

Growth Rates % PepsiCo Industry S&P 500Sales (Qtr vs year ago qtr) -1.50 -0.20 -4.80Net Income (YTD vs YTD) 2.00 3.70 -6.00Net Income (Qtr vs year ago qtr) 9.00 -0.70 26.80Sales (5-Year Annual Avg.) 9.91 4.26 12.99Net Income (5-Year Annual Avg.) 7.64 14.03 12.69Dividends (5-Year Annual Avg.) 21.24 10.40 11.83

Price Ratios PepsiCo Industry S&P 500Current P/E Ratio 18.3 18.3 26.7P/E Ratio 5-Year High NA 11.7 16.6P/E Ratio 5-Year Low NA 5.2 2.6Price/Sales Ratio 2.22 1.71 2.25Price/Book Value 6.16 5.16 3.48Price/Cash Flow Ratio 14.00 13.10 13.70

Profit Margins % PepsiCo Industry S&P 500Gross Margin 53.2 26.5 38.9Pre-Tax Margin 16.6 13.0 10.3Net Profit Margin 12.3 9.7 7.15Yr Gross Margin (5-Year Avg.) 54.9 46.8 38.65Yr PreTax Margin (5-Year Avg.) 18.7 13.5 16.6


5Yr Net Profit Margin (5-Year Avg.) 13.7 9.8 11.5

Financial Condition PepsiCo Industry S&P 500Debt/Equity Ratio 0.52 0.92 1.09Current Ratio 1.3 1.2 1.5Quick Ratio 1.0 0.9 1.3Interest Coverage 47.5 20.5 23.7Leverage Ratio 2.5 3.0 3.4Book Value/Share 9.81 8.52 21.63Adapted from www.moneycentral.msn.com

Avg P/E Price/ Sales Price/ Book Net Profit Margin (%)

12/08 20.60 2.02 7.00 11.912/07 20.00 3.24 7.17 14.312/06 18.30 3.00 6.67 16.012/05 23.30 3.10 6.87 12.512/04 21.20 3.07 6.45 14.212/03 21.60 3.00 6.67 13.212/02 27.70 2.96 7.53 11.812/01 34.60 3.77 9.93 10.212/00 28.80 3.97 11.33 11.412/08 20.60 2.02 7.00 11.9

Book Value/ Share

Debt/ Equity

Return on Equity (%)

Return on Assets (%)

Interest Coverage

12/08 $7.80 0.68 42.5 14.3 21.112/07 $10.74 0.24 32.8 16.3 32.012/06 $9.38 0.18 36.7 18.9 27.212/05 $8.61 0.37 28.6 12.9 23.112/04 $8.05 0.26 30.9 14.9 31.512/03 $6.96 0.19 30.0 14.1 29.312/02 $5.53 0.29 31.5 12.8 24.112/01 $4.94 0.35 27.7 11.1 16.612/00 $4.38 0.42 33.2 12.3 14.012/08 $7.80 0.68 42.5 14.3 21.1Adapted from www.moneycentral.msn.com

Internal Factor Evaluation (IFE) Matrix

Key Internal Factors Weight Rating Weighted Score


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Strengths 1. Name recognition both domestically and

internationally0.09 4 0.36

2. Stronger than industry average in price to cash flow ratio

0.06 4 0.24

3. Strong marketing and promotion advertising campaigns

0.08 4 0.32

4. Reliable and established distribution channel management

0.07 3 0.21

5. Has diverse business units which reduces overall business risks

0.08 4 0.32

6. Recent reorganization 0.08 4 0.32

7. Owns more bottling companies than 10 years ago

0.07 4 0.28

8. Sales increased by approximately US$3.5 billion from 2007 to 2008

0.07 4 0.28

9. Increase in net profit for the last consecutive years

0.06 3 0.18

Weaknesses 1. Short term liability of US$369 due in 2009 0.07 1 0.07

2. Increasing long term debt by US$3.6 billion from 2007 to 2008

0.09 1 0.09

3. Increase in other liabilities by US$2.3 billion from 2007 to 2008

0.06 2 0.12

4. Decline in carbonated beverages from 2006 to 2008

0.05 1 0.05

5. Recent acquisition of companies could cost the company additional acquisition cost along with some internal negative synergies

0.07 1 0.07

Total 1.00 2.91

F. SWOT Strategies

Strengths Weaknesses1. Name recognition both

domestically and internationally

1. Short term liability of US$369 due in 2009

2. Increasing long term debt





5. Has diverse business units which reduces overall business risks

6. Recent reorganization7. Owns more bottling

companies than 10 years ago



by US$3.6 billion from 2007 to 2008




Opportunities S-O Strategies W-O Strategies1. Increase in international

market demand for colas, chips and breakfast foods.





1. Continue international expansion (S1, S3, S7, O1)

2. Purchase smaller companies offering healthy products (S2, S4, S5, O3, O4)

3. Consolidate bottling operations (S4, S6, O3)

1. Promote “healthy” snacks and drinks (W4, O4)

Threats S-T Strategies W-T Strategies1. Regulation – FDA, Clean

Water Act, etc.2. Foreign exchange rates in

current economy

1. Sponsor programs to teens and younger generation to through virtual Facebook, Twitter,

1. Sell off non-producing product lines and then pay off the long term debt (W1, W2, W3, T8,


3. Raw materials supplies – clean water

4. Changes in consumer taste

5. Health issues – more consumers are shifting to healthy food



8. Decrease in U.S. cola market

9. Reduction in buying power of large retailers


and such (S1, S2, S3, O5) T9)2. Reorganize further and

use the excess cash to buy companies with healthier products (W4, W5, T5, T6, T7)

G. SPACE Matrix


Financial Stability (FS) Environmental Stability (ES)Return on Investment 5 Unemployment -4Leverage 5 Technological Changes -3Liquidity 5 Price Elasticity of Demand -4Working Capital 5 Competitive Pressure -5Cash Flow 4 Barriers to Entry -4

Financial Stability (FS) Average 4.8 Environmental Stability (ES) Average -4

Competitive Stability (CS) Industry Stability (IS)Market Share -2 Growth Potential 5Product Quality -2 Financial Stability 4Customer Loyalty -2 Ease of Market Entry 3Competition’s Capacity Utilization -1 Resource Utilization 3Technological Know-How -3 Profit Potential 3

Competitive Stability (CS) Average -2 Industry Stability (IS) Average 3.6

Y-axis: FS + ES = 4.8 + (-4.0) = 0.8X-axis: CS + IS = (-2.0) + (3.6) = 1.6


FS

CS

ES

IS654321

Conservative Aggressive

CompetitiveDefensive

1

2

3

4

5

6

7-2-3-4-5-7 -1-6

7

-7

-6

-5

-4

-3

-2

-1

H. Grand Strategy Matrix

1. Market development2. Market penetration3. Product development4. Forward integration5. Backward integration6. Horizontal integration7. Related diversification


Weak Competitive

Position

Quadrant II Quadrant I

Quadrant IVQuadrant III

StrongCompetitive

Position

Rapid Market Growth

Slow Market Growth

I. The Internal-External (IE) Matrix

The IFE Total Weighted Score

Strong3.0 to 4.0

Average2.0 to 2.99

Weak1.0 to 1.99

High3.0 to 3.99

I II

PepsiCo Beverages

III

Medium2.0 to 2.99

IV

PepsiCo International

IV

PepsiCo

VI

Low1.0 to 1.99

VII VIII IX

J. QSPM


The EFE Total

Weighted Score

Continue international expansion

Purchase smaller companies offering healthy products

Key Factors Weight

AS TAS AS TAS

Opportunities 1. Increase in international market demand

for colas, chips and breakfast foods0.08 4 0.32 1 0.08


0.08 4 0.32 2 0.16


0.06 1 0.06 3 0.18


0.08 1 0.08 4 0.32


0.08 1 0.08 3 0.24

Threats 1. Regulation – FDA, Clean Water Act, etc. 0.06 --- --- --- ---2. Foreign exchange rates in current

economy0.05 3 0.15 1 0.05

3. Raw materials supplies – clean water 0.07 1 0.07 3 0.214. Changes in consumer taste 0.09 1 0.09 3 0.275. Health issues – more consumers are

shifting to healthy food0.08 1 0.08 3 0.24


0.04 --- --- --- ---


0.07 1 0.07 4 0.28

8. Decrease in U.S. cola market 0.06 4 0.24 2 0.129. Reduction in buying power of large

retailers0.04 --- --- --- ---


0.06 1 0.06 4 0.24

TOTAL 1.00 1.62 2.39Strengths 1. Name recognition both domestically and

internationally0.09 4 0.36 1 0.09


0.06 --- --- --- ---


0.08 --- --- --- ---


0.07 2 0.14 4 0.28

5. Has diverse business units which reduces 0.08 --- --- --- ---


overall business risks 6. Recent reorganization 0.08 --- --- --- ---7. Owns more bottling companies than 10

years ago0.07 1 0.07 3 0.21


0.07 --- --- --- ---


0.06 1 0.06 3 0.18

Weaknesses 1. Short term liability of US$369 due in 2009 0.07 --- --- --- ---2. Increasing long term debt by US$3.6

billion from 2007 to 20080.09 --- --- --- ---


0.06 3 0.18 1 0.06


0.05 1 0.05 3 0.15


0.07 --- --- --- ---

SUBTOTAL 1.00 0.86 0.97SUM TOTAL ATTRACTIVENESS SCORE 2.48 3.36

K. Recommendations

Purchase smaller companies that offer healthier drinks and snacks. Utilize the existing distribution channel for promoting the new line and use penetration pricing strategies to gain market share rapidly and against the competitors.

L. EPS/EBIT Analysis US$ Amount Needed: $500 millionStock Price: US$61.37Tax Rate: 26.8%


Interest Rate: 5% # Shares Outstanding: 1.6 Billion

Common Stock Financing Debt Financing Recession Normal Boom Recession Normal BoomEBIT $7,000,000,000 $8,000,000,000 $9,000,000,000 $7,000,000,000 $8,000,000,000 $9,000,000,000Interest 0 0 0 25,000,000 25,000,000 25,000,000EBT 7,000,000,000 8,000,000,000 9,000,000,000 6,975,000,000 7,975,000,000 8,975,000,000Taxes 1,876,000,000 2,144,000,000 2,412,000,000 1,869,300,000 2,137,300,000 2,405,300,000EAT 5,124,000,000 5,856,000,000 6,588,000,000 5,105,700,000 5,837,700,000 6,569,700,000# Shares 1,608,147,303 1,608,147,303 1,608,147,303 1,600,000,000 1,600,000,000 1,600,000,000EPS 3.19 3.64 4.10 3.19 3.65 4.11

70 Percent Stock - 30 Percent Debt 70 Percent Debt - 30 Percent Stock Recession Normal Boom Recession Normal BoomEBIT $7,000,000,000 $8,000,000,000 $9,000,000,000 $7,000,000,000 $8,000,000,000 $9,000,000,000Interest 20,000,000 20,000,000 20,000,000 5,000,000 5,000,000 5,000,000EBT 6,980,000,000 7,980,000,000 8,980,000,000 6,995,000,000 7,995,000,000 8,995,000,000Taxes 1,870,640,000 2,138,640,000 2,406,640,000 1,874,660,000 2,142,660,000 2,410,660,000EAT 5,109,360,000 5,841,360,000 6,573,360,000 5,120,340,000 5,852,340,000 6,584,340,000# Shares 1,605,703,112 1,605,703,112 1,605,703,112 1,602,444,191 1,602,444,191 1,602,444,191EPS 3.18 3.64 4.09 3.20 3.65 4.11

M. Epilogue

PepsiCo continues to make strong growth moves on both the national and international stage, even in the struggling economy. First quarter results for Pepsi Bottling show it has been very profitable due to price increases and stronger U.S. sales of carbonated soft drinks. This helped offset the declining demand for pricier


beverages such as bottled water. In the United States, PepsiCo’s major move has been a bid to buy the remaining shares of Pepsi Bottling. PepsiCo currently owns 33 percent of Pepsi Bottling. Pepsi Bottling has rejected this bid as being too low; however, it is expected that PepsiCo will continue with its bid to buy the remaining shares of the bottling company.

To further improve its international operations, PepsiCo has made a bid to buy PepsiAmericas. Basically, this would consolidate control of the Americas operations. Additionally PepsiCo has pledged to invest US$1 billion in Russia over the next three years, bringing its total investment to US$4 billion over a ten year time span. PepsiCo will also invest over US$1 billion in China over the next 4 years. This is in addition to continued investments in Japan, India, Europe, Mexico and Latin America.

For the first quarter ending 3/21/09, PepsiCo’s net revenues of US$8,263 million are down US$70 million from the same quarter in 2008. However, PepsiCo has also controlled costs by decreasing cost of goods sold by US$90 million and decreasing sales, general and administrative expenses by US$9 million (same quarter comparison). This has resulted in a net profit of US$1,141 million, which is US$90 million less than last year’s first quarter. PepsiCo may need to further adjust costs to reflect continuing economic troubles as consumers shift to less costly drinks and snacks. Second quarter results continued the downward trend with beverage volume down 6 percent, Frito-Lay down 3 percent, and Quaker down 4 percent. However international volume was up 1 percent in snacks and 6 percent in beverages.

The first quarter balance sheet shows that cash is up slightly whereas current liabilities are down slightly; long-term debt has climbed US$1,393 million to a total of US$9,251 million. Part of this increase may well be due to aggressive expansion activities throughout the world.

Second quarter for PepsiCo shows better than expected profits based on cost cutting and growth in developing countries such as China and India. However, growth in the U.S. market continues to remain weak with a 1 percent decrease in volume.


Case Notes Pepsi Co

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