PepsiCo Case Analysis

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1 | Page Case 3: PepsiCo Morgan La Femina MBA 710

description

A business analysis of the Pepsi Company

Transcript of PepsiCo Case Analysis

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Case 3: PepsiCo

Morgan La Femina

MBA 710

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Introduction:

Donald M. Kendall of Pepsi-Cola and Herman W. Lay of Frito-Lay founded PepsiCo, Inc. through

the merger of both companies in 1965 (PepsiCo Our History, nd). Caleb Bradham, who was a N.C.

pharmacist, created the Pepsi-Cola company itself during the 1890s (PepsiCo Our History, nd). The Frito-

Lay, Inc. was formed during 1961 through a merger of the Frito Company and the H. W. Lay Company

(PepsiCo Our History, nd). Herman Lay is the chairman of the Board of Directors of the newly created

PepsiCo company while Donald M. Kendall is president and chief executive officer (PepsiCo Our History,

nd). The new company has 19,000 employees and sales of over 500 million dollars per year (PepsiCo Our

History, nd). Some of the products of the Pepsi-Cola Company are Pepsi-Cola which was developed in

1898, Diet Pepsi developed in 1964 and Mountain Dew, created in 1948 (PepsiCo Our History, nd).

Mission Statement Analysis:

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 (PepsiCo Our Mission and Vision, nd).

The PepsiCo mission statement talks about their products, being food products, which are easy

to eat including consumer beverages. The PepsiCo mission statement also talks about the company’s

concern for its financial stability, its concern about the enrichment of its employees and its concern for

how it operates its business. The statement shows concern about how the company will operate, with

integrity and honesty. The PepsiCo mission statement also shows concern about its business partners

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and the public, operating with fairness and integrity. They are concerned about their growth and also

want to be number one in their market category which is clearly stated by PepsiCo’s mission statement

as consumer products.

Internal Factors:

1. Marketing

PepsiCo is a global company with respected high quality brand name products such as Quaker

Oats, Tropicana, Lay’s, and many Pepsi Cola products (David, 2011). These products are impulse

buys which also generate significant revenue for both PepsiCo and the retailers who sell them. In

addition, healthier products featuring Whole grains, fruits and nuts under their “good for you”

portfolio are growing snack divisions. PepsiCo’s many brands are moving into 40 developing regions

worldwide (PepsiCo Annual Reports 2009). They use their brands in commercial’s, TV shows, and

movies, online and in print in order to facilitate brand familiarity and market expansion.

2. Management

PepsiCo’s goal is to utilized strong corporate governance along with experienced corporate

management to score high on governing metrics, manage the company effectively and provide

consistent value to their shareholders. PepsiCo’s management leads by experience with John Compton

with 26 years at the company, Eric Floss with 28 years at PepsiCo, and Massimo d’Amore with 30 years

in the global consumer market and 15 years with PepsiCo (PepsiCo Annual Reports 2009).

3. Operations and Technology

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PepsiCo’s main goals are to invest in research into more affordable, nutritionally whole products and

to reduce waste while increasing efficiency. PepsiCo’s goal is to continually make their core products

healthier and expand a variety of new snacks to the public. The company plans to reduce product

packaging by 350 million pounds (PepsiCo Annual Reports 2009). Operationally PepsiCo seeks to

consolidate bottling plants, expand into developing regions, and reduce water consumption while

increasing energy efficiency at their facilities (PepsiCo Annual Reports 2009).

The Internal Matrix:

Internal Matrix for PepsiCo

Key Internal Factors

Key Strengths Weight Rating Weighted

Score

1 Adjust costs downward in economic climate 0.11 3 0.33

2 The unification of bottling plants 0.12 4 0.48

3 Diversified product line including snacks, juice 0.1 4 0.40

4 Expanding into other countries 0.09 3 0.27

5 Company is run by experienced management

team

0.08 4 0.32

Key

Opportunities

1 Adjust costs downward in economic climate 0.11 3 0.33

2 Increase healthy foods divisions 0.11 3 0.33

3 Expand research and development 0.09 3 0.27

4 Expand marketing to web related media outlets 0.08 4 0.32

5 Reduce long term debt 0.11 2 0.22

Total 1

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The average total weighted score is 3.27

Rational:

The average total weighted score for PepsiCo is 3.79, which is above average for companies in

the consumer food category. This is to be expected since they are number two in market share with the

Coca-Cola company number one. The two have battled for market share for many years, but also

combined dominate this industry. PepsiCo had a diversified product line from carbonated beverages,

non-carbonated teas, sports drinks, fruit juices as well as snacks like potato chips, baked snacks and

various healthy snack products (PepsiCo Annual Reports 2009). They repurchased their North American

bottling plants combining them and expanding heavily into China (David, 2011). They are also expanding

their marketing onto the internet. PepsiCo does need to reduce its long term debt which they incurred

through restructuring and they need to hold costs down internally as the cost of raw products have

continued to increase (David, 2011).

External Factors:

1. Economic Forces

Most food manufacturers have had significant commodity inflation over the past several years

which has caused an overall cost increase of products and a decrease in per item profit. In addition, this

increased manufacturing and production costs for most of them. European consumers purchasing

power has been reduced due to their prolonged recession as well as American consumers purchasing

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power which has been hampered due to a slower than expected economic recovery (PepsiCo Annual

Reports 2009).

2. Social, Cultural, Demographic and Environmental Forces

Socially, consumers are looking for healthier snacks and beverages along with a greater variety of

healthier snacks and beverages. Expanding into new regions often requires a reformulation of the

original consumer food product or the need to develop new regionalized products completely. Costs of

product packaging and storage have increased (PepsiCo Annual Reports 2009). Finally, transportation

and distribution costs are up due to increased fuel costs.

3. Political, Governmental and Legal Forces

The quality of local urban food, its price and lack of access can cause both obesity and malnutrition

must be addressed. There can be significant supply chain issues from the local farmers where the base

foods are grown to the manufacturing site. Small farmers in the country’s PepsiCo operate are their

suppliers and require training as well as guidelines to produce more abundant crops for PepsiCo

(PepsiCo Annual Reports 2009).

4. Technological Forces

There has been a steady increase in the cost of energy and water required to manufacture food

products. Reduced crop yields have also impacted the cost of raw products such as potatoes, corn, rice,

fruits and nuts. The costs of bottling and the ever present need to bring new bottle designs to market

require a more nimble, responsive and effective beverage system (PepsiCo Annual Reports 2009).

5. Competitive Forces

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PepsiCo operates in the very competitive food market. They compete against extremely large global

food producers, those that are smaller private label companies. They face strong competition with Coca-

Cola in the consumer snack division with Coca-Cola number one in terms of consumption while PepsiCo

has a large share of the liquid refreshment product line then Coca-Cola (David, 2011).

External Matrix:

External PepsiCo Matrix

Key External Factors

Opportunities Weight Rating Weighted

Score

1 Increase in carbonated soft drink usage in Asia

and Europe

0.12 3 0.36

2 Increased demand for sports drinks and flavored

waters

0.12 3 0.36

3 Expand into Brazil through its current acquisition

of Amacoco Nordeste Ltda

0.09 4 0.36

4 Expand low cost line to compete against house

brands

0.08 2 0.16

5 Gain shelf space through product synergy 0.09 3 0.27

Threats

1 Carbonated soft drink market in decline 0.12 3 0.36

2 Industry operates unchanged 0.09 2 0.18

3 Campaign against bottle water affecting usage 0.09 2 0.18

4 Kellogg and Nabisco’s growing snack divisions 0.10 2 0.20

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5 Extensive marketing needed driving marketing

costs up

0.10 2 0.20

Total 1 2.63

The average total weighted score is 2.63

Rational:

PepsiCo’s total weighted score is 2.63, which is slightly above average for companies in the

consumer beverage and snack industry. PepsiCo is taking advantage of their opportunities but is

responding poorly to its threats, many of them long term in nature. Not only are the costs of raw

materials and ingredients increasing but also the substrates that are used in the packaging of the

products. These is a decrease in cola and carbonated beverage consumption in the US that will need to

be offset by increased consumption in other countries. PepsiCo has acquired long term debt from

restructuring and the marketing of their products has always been costly (PepsiCo Annual Reports

2009). In addition, they compete against other companies already well-established in the snack division

such as Kellogg and Nabisco (David, 2011). PepsiCo also has to compete from store brands which often

compete with their products on cost.

Competitive Analysis: Porter’s Five-Forces Model:

1. Rivalry among competing firms

High-

They face very strong competition from Coca-Cola in the beverage market and face strong

competition in their snack division from Coca-Cola, Kellogg, Kraft and General Mills (David, 2011). This

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competition is fought out through advertising, through store shelve space and through various

sponsorship opportunities.

2. Potential Entry of new competitors

High-

PepsiCo faces a high likelihood of potential new competitors. These new competitors can be from

new products from their existing competitors such as Coca-Cola competing with PepsiCo’s existing

brands or new companies developing new products such as Starbucks cold coffee drinks. As PepsiCo

expands into other countries they will face those countries regional food manufactures who already

have had developed a market presence there.

3. Potential development of substitute products

High-

Foods can be substitute most readily for other foods of equal quality costing less, lower quality

costing less or a different product altogether. Not only can one food be substituted for another but can

be purchased at a different locations. In addition, consumers can simply buy a store brand, have tap

water or go without the any substitute altogether.

4. Bargaining power of suppliers

Low-

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The basic food products PepsiCo needs to develop its products from originate at farms, these farms

sell to intermediaries who then sell it to food processing facilities. It is these intermediaries, food

processing companies and wholesalers who have the most bargaining power in relation to suppliers.

However, should some of these farms experience internal or external environmental issues the result

could hamper PepsiCo’s supply chain.

5. Bargaining power of consumers

High-

Consumers have a high level of bargaining power in relation to food manufactures such as

PepsiCo. Shoppers can chose from a variety snacks and beverages from a wide variety of stores from

within just a few miles of their home. Consumers can chose what types of food stuffs to buy in a store

and they can shop at multiple stores to complete their entire purchase. In addition, shoppers can

substitute one food for another, chose products based on price, quality, sale, marketing, its packaging,

freshness, shelf life and many other characteristics. Consumers can buy in bulk or they can impulse buy,

each determining the profit of the store supplying the snack or beverage and the return on the product

for PepsiCo.

Porter Generic Strategy:

Target Scope

Low Cost Product Uniqueness

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Broad Cost Leadership Strategy

Differentiated Strategy

Narrow Focused Strategy (low cost)

X

Focused Strategy (Differentiation)

Porter rational:

PepsiCo should select continue their differentiated strategy but in addition add a focused

strategy product line that offers the consumer several high quality low cost snacks to compete against

store brands and market fragmentation.

The Competitive Factor Evaluations Matrix:

PepsiCo Coca-Cola Nabisco

Critical Success Factors Weight Rating Score Rating Score Rating Score

Brand recognition 0.14 4 0.56 5 0.70 3 0.42

Product Quality 0.13 4 0.52 4 0.52 4 0.52

Price Competitiveness's 0.12 3 0.36 3 0.36 3 0.36

Management 0.12 3 0.36 3 0.36 3 0.36

Financial Position 0.13 3 0.39 4 0.52 3 0.39

Customer Loyalty 0.11 3 0.33 4 0.44 3 0.33

Global Expansion 0.12 3 0.36 4 0.48 3 0.36

Market Share 0.13 3 0.39 4 0.52 3 0.39

Total 1.00 3.27 3.90 3.13

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The Competitive Factor Evaluations Matrix shows that PepsiCo is out competing Nabisco but not

its chief rival Coca-Cola. PepsiCo produces high quality brand name products that compete on price with

Coca-Cola. In addition PepsiCo has a strong management team but suffers from a high level of long term

debt. PepsiCo has strong customer loyalty but not as strong as Coca-Cola customers brand loyalty

although both companies’ loyal customers can shift their loyalty should product prices increase.

Summary of Operating Results

For the year ending December 31st 2008 2007 2006

In millions of dollars except per share amounts

Net Revenue 43,251 39,474 35,137

Cost of Sales 20,351 18,038 15,762

Selling and General Expenses 15,901 14,208 12,711

Amortization 64 58 162

Interest Expense (329) (224) (239)

Net Income 5,142 5,658 5,642

Cash and Cash Equivalents 2,064 910 1,651

Accounts Receivable 4,683 4,398 3,725

Inventories 2,522 2,290 1,926

Total Current Assets 10,806 10,151 9,130

Short Term Liabilities 369 0 274

Long Term Liabilities 7,825 4,203 2,550

Total Liabilities 23,888 17,394 14,562

PepsiCo’s operating summary for the years 2006, 2007, 2008 show that although PepsiCo’s net

revenue increased net income actually declined (David, 2011). Costs of sales increased over those same

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three years to do an increase in raw food materials which make up PepsiCo’s products and interest

expenses increased as well. In addition, although total current assets increased marginally total liabilities

increased 9 billion dollars (David, 2011) which in the long term will be detrimental to the company

should it not pay it down.

SWOT Matrix:

SWOT

Strengths – S

1. Brand Recognition

2. The unification of bottling plants

3. Diversified product line including

snacks, juice

4. Expanding into other countries

5. Company is run by experienced

management team

Weaknesses –W

1. Adjust costs downward in

economic climate

2. Increase healthy foods divisions

3. Expand research and

development

4. Expand marketing to web

related media outlets

5. Reduce long term debt

Opportunities – O

1. Increase in carbonated soft drink

usage in Asia and Europe

2. Increased demand for sports

drinks and flavored waters

3. Expand into Brazil through its

current acquisition of Amacoco

Nordeste Ltda

4. Expand low cost line to compete

against house brands

5. Gain shelf space through product

synergy

SO Strategies

Increase variety of sports or

healthy type snacks aligned with

flavored waters. (S3,O2)

Use Brazilian bottler to expand into

Brazil and other regions in South

America. (S4,O3)

Increase brand name low cost line

for bargain shoppers. (S1,O4)

WO Strategies

Create carbonated health waters.

(W2,O2)

Develop new low cost snacks and

beverages. (W3,O4)

Expand global sale to offset long

term debt. (W5,O1)

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Threats – T

1. Carbonated soft drink market in

decline

2. Industry operates unchanged

3. Campaign against bottle water

affecting usage

4. Kellogg and Nabisco’s growing

snack divisions

5. Extensive marketing needed

driving marketing costs up

ST Strategies

Experiment with other types of

beverage containers based on

regional market. (S4,T2)

Develop powdered drinks. (S4,T3)

Management signing strategic

partnerships with smaller snack

companies. (S5,T5)

WT Strategies

Increase marketing of colas on

alternate media outlets. (W4,T1)

Restructure company by paying

down debts. (W5,T2)

Redesign water bottles for less

plastic, or develop biodegradable

bottles. (W3,T3).

PepsiCo’s SWOT matrix shows that they have room to create new types of products and

packages for those products that will expand their market and reduce their costs. They can use these

new products and packages as they expand into other countries while regionalizing those products to

the areas which they serve. They must reduce their total long term debt and can do this through

decreasing the amount of packaging they use in their products while reducing their fixed costs. The case

shows that PepsiCo is already reducing fixed costs, however reducing package costs can only help them

at this time.

Space Matrix:

Financial Position Ratings

Leverage 3

Liquidity 2

Working capital 2

Cash flow 3

10

Industry Position

Growth potential 4

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Profit potential 3

Financial stability 2

Resource utilization 2

11

Stability Position

Technological changes -1

Price range of competing products -3

Competitive Pressure -4

Price elasticity of demand -4

-12

Competitive Position

Market Share -2

Product quality -1

Customer loyalty -3

Product lifecycle -2

-8

Conclusions:

FP Average = 10/4 = 2.5

IP Average = 11/4 = 2.75

SP Average = -12/4 = -3

CP Average = -8/4 = -2

Space Matrix Coordinates:

X-axis: CP+IP or (-2 + 2.75) = .75

Y-axis: FP+SP or (2.5 + -3) = -.5

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Space Matrix analysis:

The Space Matrix shows that PepsiCo is competing fairly well in a very unstable market. Their

sales are increasing and they are expanding into other countries. PepsiCo is number two in market share

in the consumer snack and beverage category while having a wide portfolio of brands (David, 2011).

They compete on price and quality with their number one competitor Coca-Cola while taking on

companies that are already established in the snack market being Nabisco and Kellogg. They have

experienced management and an active research and development department. PepsiCo is very active

in managing their brands, keeping older brands fresh while creating new brands as consumer tastes

change.

BGC matrix:

fp

3

2

1

cp ip

-3 -2 -1 1 2 3

-1

-2

-3

sp

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High Medium Low

Medium Stars

Lay’s potato chips (7 billion 2009)

?’s

Aquafina water (3 billion 2009)

Low Cash Cows

Pepsi-Cola (20 billion 2009)

Dogs

Rice a Roni (double digit decline

in sales < 500 million)

The BGC Matrix shows that PepsiCo’s main product Pepsi-Cola is a cash cow and this is to be

expected with Pepsi-Cola, Mountain Dew and Diet Pepsi accounting for almost 30 billion dollars in sales

for 2009 (PepsiCo Annual Report 2009 - Management's Discussion). Aquafina water and other non-

carbonated beverages can become cash cows with additional market penetration in regions outside the

United States while marketing those products overseas (PepsiCo Annual Report 2009 - Management's

Discussion). Unfortunately, for PepsiCo products such as Rice a Roni and other types of PepsiCo brand

salty semi-prepared foods are losing market ground as well as having sharp declines in sales (PepsiCo

Annual Report 2009 - Management's Discussion) possibly due to customers being more health conscious

than previous years. For these types of products PepsCo will need to either reformulate those brands or

discontinue them.

Strategy Recommendations:

PepsiCo should expand its healthy line of beverages and snacks, develop carbonated flavored

waters, expand overseas with carbonated sodas, sports drinks and healthy snacks, develop new types of

environmentally friendly packaging, reduce high salt semi-prepared meals, reformulate older products

to meet today’s health conscious consumer tastes, develop targeted low cost brand name snacks,

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reduce its long term debt and expand on its powdered drink line. If PepsiCo follows these strategic

recommendations their brand sales will grow, they will develop new brands and they will have increased

sales while having lower fixed costs. Once PepsiCo has several quarters of increased sales and lower

fixed costs they will then be able to pay off their long term debt brought on by restructuring.

Income Statement 2008 2012 Projected Comments

(in millions unless specified)

Sales Revenue 43,251 65,000 Increased sales due to an expansion of star brand and the development of new brands. Cost of goods sold decrease due to lower fixed costs. Lower costs of goods sold through better distribution and reorganization.

Cost of Goods Sold 20,351 21,000

Selling and general expenses 15,901 16,000

Net Income 5,142 6,500

Increase net income due to development of new brands, reduction of dog brands and increase in healthy drinks/snacks

Accounts Payable

8,237

7,000

Reduction of accounts payable do to better turnover, efficiency, reduction of long term debt through paying of principle. Reduction of current liabilities as well due to use of technology.

Long Term Debt

7,858

6,200

Current Liabilities 369 350

Common Stock Repurchase (or sale) -14,122 (5,000) Common stock sold to pay for expansion in other countries.

Cash 2,064 3,100 Cash on hand increases due to SWOT implementation

The above pro forma statement shows a portion of the Consolidated Statements of Operations and

Balance sheet affected by my recommendation and the external factors discussed in the Internal,

External and SWOT matrix. The above Pro Forma statement is comprised of actual 2008 data and

projected 2012 data.

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Epilogue Section:

Since the case was written PepsiCo’s net sales have increased to 65,000 million dollars while net

income grew to 6,400 million dollars (PepsiCo Annual Reports 2011). PepsiCo’s cost of sales increased to

31,000 million dollars while long term debt increased to 20,500 million dollars (PepsiCo Annual Reports

2011). PepsiCo’s cash on hand was 358 million dollars (PepsiCo Annual Reports 2011). For 2011

PepsiCo’s return on investment was at 17 percent while it’s return on equity was 31 percent (PepsiCo

Annual Reports 2011). Their net revenue was up 14 percent while their operating profit rose by 7

percent (PepsiCo Annual Reports 2011). Their investment in Brazil helped them expand deeper into the

backed cookie and dairy product market while distribution improvements increased operating efficiency

(PepsiCo Annual Reports 2011). Currently, PepsiCo’s nutritional food category is at 13 billion dollars in

sales annually while new products such as PepsiMax zero calorie cola was the fastest growing cola drink

in the US in 2011 (PepsiCo Annual Reports 2011). The company made several debt repurchases in 2011

as well as swapping secured debt for variable interest debt (PepsiCo Annual Reports 2011), in addition

to this they are still tied extensively to their repurchasing of both North American bottling plants which

occurred in 2008. This is unfortunate because they are assuming their ability to repay these debts on

their increased sales and increases in their portfolio of financial investments.

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References

David, F. R. (2011). Strategic management: concepts and cases (13th ed.). Upper Saddle River, N.J.:

Prentice Hall.

PepsiCo Annual Report 2009 - Management's Discussion and Analysis. (n.d.). PepsiCo Home |

PepsiCo.com. Retrieved August 4, 2012, from

http://www.pepsico.com/annual09/financialContent_mda_results_of_operations.html

PepsiCo Annual Reports 2009. (n.d.). PepsiCo Annual Reports. Retrieved August 2, 2012, from

https://docs.google.com/viewer?url=http%3A%2F%2Fwww.pepsico.com%2FDownload%2FPEP

SICO_AR.pdf

PepsiCo Annual Reports 2011. (n.d.). PepsiCo Annual Reports. Retrieved August 1, 2012, from

www.pepsico.com/annual11/downloads/PEP_AR11_2011_Annual_Report.pdf

PepsiCo Our History | PepsiCo.com. (n.d.). PepsiCo Home | PepsiCo.com. Retrieved August 4, 2012, from

http://www.pepsico.com/Company/Our-History.html/

PepsiCo Our Mission and Vision | PepsiCo.com. (n.d.). PepsiCo Home | PepsiCo.com. Retrieved August 4,

2012, from http://www.pepsico.com/Company/Our-Mission-and-Vision.html