BRAND EXTENSION STUDYALCOHOLIC BEVERAGE MARKET
January 8, 2010
Michael KochanJames Thomson
Trey PackardNidhi Raj
AgendaObjectives of Today’s Discussion 2
Framework for Analysis 4
Hypothesis Testing: Assumptions, Findings, and Conclusions 5
Scalability – Can market demand support a new entrant? 8
Inimitability/Defensibility – Is there a first-mover advantage? 10
Execution – Can Pepsi leverage existing capabilities? 13
Value Proposition – Will customers pay a premium for the product? 17
Conclusions & Recommendations 19
Next Steps & General Work Plan 21
3
Objectives of Today’s Discussion
• Provide an analysis of the alcoholic beverage industry (and associated sub-markets, including beer, wine, liquor, and the nascent pre-mixed & energy segment)
• Analyze PepsiCo’s operational and strategic advantages as they relate to potential entry into those markets
• Identify, test, and address prerequisitesfor successful market entry
• Provide strategic recommendations onwhether, and how, PepsiCo shouldpursue a new product launch in thealcoholic beverage space
4
Should PepsiCo Launch an Alcoholic Beverage?Hypothesis:
Current conditions are favorable for PepsiCo to launch a alcoholic beverage.
Sub-Hypotheses:1. Scalability: Growing demand in the alcoholic-beverage market supports a new entrant. 2. Inimitability / Defensibility: There a first-mover advantage in this market. 3. Execution test:
– PepsiCo’s existing manufacturing, bottling, and distribution infrastructure can be leveraged to minimize costs through economies of scale vis-à-vis its competitors.
– Adding an alcoholic beverage to PepsiCo’s portfolio would not negatively impact brand equity and is compatible with core corporate values.
4. Value Proposition: Customers perceive an added value and are willing to pay a price premium for a Pepsi-branded alcoholic beverage.
Necessary Assumptions to be Tested 4. There is sufficient space in the alcoholic beverage market for another entrant.5. There is a significant first-mover advantage in being the first major soft drink brand to enter the alcoholic
space6. The infrastructure for production and distribution of soft drinks is not materially different then for alcoholic
beverages (and there is significant overlap between alcoholic and nonalcoholic channels) 7. Adding alcohol to PepsiCo's product portfolio does not conflict with its core corporate values8. Pepsi's brand equity can be successfully extended to the alcoholic beverage market 9. Pepsi's brand yields a price premium that extends to alcoholic-beverage customers
AgendaObjectives of Today’s Discussion 2
Framework for Analysis 4
Hypothesis Testing: Assumptions, Findings, and Conclusions 5
Scalability – Can market demand support a new entrant? 8
Inimitability/Defensibility – Is there a first-mover advantage? 10
Execution – Can Pepsi leverage existing capabilities? 13
Value Proposition – Will customers pay a premium for the product? 17
Conclusions & Recommendations 19
Next Steps & General Work Plan 21
6
Recommendation:
Summary of Findings: • The alcoholic beverage market (and the pre-mixed and energy segment, in particular)
are expected to grow at an accelerating rate, and• PepsiCo’s manufacturing and distribution capabilities can be extended to the alcoholic
beverage space.• Nevertheless, the proposal should be rejected for two primary reasons:
• Incompatibility with PepsiCo’s core corporate values and the company’s 5-year strategic vision, and
• Lack of defensibility of the move due to a lack of transferability of the Pepsi brand into the alcoholic beverage space
PepsiCo should NOT pursue the launch of a branded product in the alcoholic beverage space, although the launch or
acquisition of a non-branded mixed- or energy-drink line merits consideration.
7
Assumption Testing
ScalabilityGrowing demand supports a new market entrant
DefensibilityA first-mover
advantage exists
ExecutionInfrastructure can be
leveraged without eroding the Pepsi
brand
Value PropCustomers value the
Pepsi brand in the alcoholic space, and
will pay a premium for it
• There is sufficient space in the alcoholic beverage market for another entrant
• There is significant first-mover advantage in being the first major soft drink maker to enter the alcoholic beverage space
• The infrastructure for production and distribution of soft drinks is not materially different then for alcoholic beverages
• Adding alcohol to PepsiCo's product portfolio does not conflict with its core corporate values
• Pepsi's brand equity can be successfully extended to the alcoholic beverage market
• Pepsi's brand yields a price premium that extends to alcoholic-beverage customers
8
SCALABILITY: Growing Demand in the Alcoholic Beverage Market will be sufficient to support a new entrant
Market Cost (unit) Market Price (unit) Break-Even Volume ($B)
Market Share (2012)
Pre-Mixed $2 $4 7 8%
Liquor $11 $20 21 23%
Wine $6 $12 113 36%
Beer $1.5 $3 74 27%
2005 2006 2007 2008 2009 2010 (E) 2011 (E) 2012 (E)0
100
200
300
400
500
600
700
800
Pre-MixedLiquorWineBeer
CAGR = 4%
CAGR = 3%
CAGR = 31%
CAGR = 1%
Source: Goldman Sachs Consumer Goods Forecasting Group
Source: Survey data from 100 companies across the 4 markets
Dol
lars
($B)
Attractive Opportunity
9
SCALABILITY: New Entrants in 2009 were able to Gain Share and Achieve Profit in Certain Markets
Conclusion: The alcoholic beverage market is growing sufficiently to support a new entrant. The Pre-mixed beverage market has the most opportunity for a entrant to gain share and achieve profitability.
2009 New Entrants
Beer (125)
Wine (2
34)
Liquor (3
8)
Pre-mixe
d (16)-2%
0%2%4%6%8%
10%12%14%16%18%
Profit MarginMarket Share
Market (# New Entrants)
Source: Analysis of financial data from selected companies
DEFENSIBILITY: Pent-up demand and a large underserved market means that there is a significant first-mover advantage in being the first major soft drink brand to enter the alcoholic space
2010 20140
5
10
15
20
Pepsi HybridABC2Xyz1AbcdSmirnoff iceWKD
Underserved Market
• An underserved market in the pre-mixed alcoholic beverage area exists• Current competitors in the market are small, regionalized, and unable to
capitalize on the demand gap• Should Pepsi enter the space, it should be able to immediately capture a
significant proportion of the underserved market• Additionally, through targeted advertising Pepsi should be able to accelerate
overall market growth beyond what is currently possible
Source: Alcoholic Beverage Industry Association, 2010
11
DEFENSIBILITY: Moreover, comparable launches have indicated that a time lag before competing entry will enable Pepsi to solidify its first-mover position
Who will respond?
• Existing regional competitors
• Coke, others• New Entrants
How have they responded earlier?
• 6 Months – 1 Year• Aggressive marketing
What are their capabilities?
• Brand equity• Supply chain parity• Exclusive third-party
tie-ups
Anticipated Competitive Response
• Analysis of previous new market entries by PepsiCo (including entry into the energy drink, diet cola, and sports drink spaces) indicates that:• The number of competitive entrants will be minimal (primarily Coca-Cola),• A significant time lag will exist before any competitive response,• Price wars are not a probable outcome, and• Overall market growth can be sufficient to sustain multiple entries
12
DEFENSIBILITY: In the period before competitive response, Pepsi can strengthen its first-mover position through several defensive strategies
• Retail Exclusivi
ty•
• Loyal Customer Base
•
• Marketing leadership
• Distribution Channel
Potential Defensive Strategies to Minimize Competitive Response
Leverage strong distribution network to ensure access to all underserved markets (in the US and globally)
Strong national marketing campaign to ensure uptake and strengthen brand in advance of competitive response
Lock up key retail locations and points-of-sale through exclusive,
multi-year and multi-geography contracts
Pursue key sponsorship
opportunities, launch viral
campaigns, and ensure distinctive
product design
13
EXECUTION: The infrastructure for production and distribution of soft drinks is not materially different than for alcoholic beverages
2003 2004 2005 2006 2007 20086.8%
7.0%
7.2%
7.4%
7.6%
7.8%
8.0%
Bottlers Operating MarginsSoft Drink Only Alcohol Only Both
Conclusion: Operating margins are essentially the same for the alcoholic and non-alcoholic beverage industries. Existing bottlers and distributors of both soft drinks and alcoholic beverages cross-utilize PP&E. Significant competitive advantage should be
realizable over small or regionalized competitors.
2003 2004 2005 2006 2007 20087.0%
7.5%
8.0%
8.5%
9.0%
Distributor Operating MarginsSoft Drink Only Alcohol Only Both
Source: SEC Filings, International public filings, PepsiCo internal bottling & distribution data
14
EXECUTION : Pepsi's brand equity will not be damaged by entering the alcoholic beverage market
Survey: Please rate how this product affects your perception of the Pepsi brand where -5 means “negative affect on brand perception”, 0 means “no impact”, and 5 means “positive impact on
brand perception”
Conclusion: Overall, the Pepsi brand is not damaged by introducing an alcoholic beverage, although there are slight negative brand impacts
among older loyal customers. Younger loyal and non-loyal Pepsi customers’ perception of the brand should actually improve.
Loyal Pepsi Drinkers (21-39)
Non-Loyal Customers (21-39)
Loyal Pepsi Drinkers (40+)
Non-Loyal Customers (40+)
3.6
0.8
(0.3)(0.7)
Source: Focus Group, January 7, 2010
Consumer Reactions to Alcohol Proposal
15
EXECUTION: Adding alcohol to PepsiCo's product portfolio may conflict with its core corporate values
Survey: A Pepsi-branded alcoholic beverage is not at odds with PepsiCo’s corporate strategy. 1 = Strongly Disagree, 3 = Neutral, 5 = Strongly Agree
Division/Team Rating ConclusionExecutive Management 4.1 Strongly Agree
Internal Marketing 1.3 Strongly Disagree
Corporate Strategy Group 0.5 Strongly Disagree
Select Key Shareholders 2.7 Neutral
Board of Directors 1.8 Disagree
Asia/Pacific Executive Management 2.2 Disagree
Latin American Executive Management 2.9 Neutral
EMEA Executive Management 0.9 Strongly Disagree
Source: Focus Group, 2009
16
EXECUTION: Moreover, key stakeholders within the organization oppose the launch as being incompatible with the Company’s commitment to healthier products
• “The goal of PepsiCo’s human sustainability effort is to nourish consumers with a range of products, from treats to healthy eats. We are proud to give consumers choices across the spectrum. Our products deliver joy as well as nutrition.” – Member of Corporate strategy
Conclusion: Critical PepsiCo stakeholders believe an alcoholic beverage is not compatible with the Corporation’s core corporate values
• “We are committed to be a company that offers food and drinks that are ‘fun for you, better for you, and good for you.’ I do not believe adding an alcoholic beverage would be better or good for either our current or potential customers.” – Member of Internal M&A
• “I would be concerned about how an alcoholic beverage might cause backlash in my markets, particularly in the Middle East and Northern Africa.” – Division Head, EMEA
17
VALUE PROPOSITION: While brand commands a price premium in the non-alcoholic segment, pricing power in the Alcoholic segment is driven primarily by Quality
Source: Income levels & purchase frequency by segment
Assumption: “Key drivers of consumer purchasing behavior in the alcoholic beverage market will parallel those in the non-alcoholic space.”
Conclusion: While some variation is seen across sub-segments, consumers in the alcoholic beverage space generally place more of a premium on
quality than on brand. Pepsi’s existing brand equity will not translate well to alcoholic drinks.
Impa
ct o
n Pr
ice
Tole
ranc
e
Impact on Freq of Purchase
Non-Alcoholic Bev Market
HL
HL
Size
Quality
BrandAvailability
Impa
ct o
n Pr
ice
Tole
ranc
eImpact on Freq of Purchase
Alcoholic Bev Market
HL
HL
Quality
Size
Availability
Brand
18
VALUE PROPOSITION: Moreover, the Pepsi brand is unlikely to translate well to alcoholic markets, with the exception of the pre-mixed & energy segment
Source: Bain & Co Focus Group, 1/7/2010
Loyal CustomersNew Customers
Conclusion: While loyal Pepsi customers are very likely to try a Pepsi-branded alcoholic beverage in the pre-mixed and energy drink space, they are unlikely to do so in any other segment. Non-loyal customers are less likely in all cases.
AgendaObjectives of Today’s Discussion 2
Framework for Analysis 4
Hypothesis Testing: Assumptions, Findings, and Conclusions 5
Scalability – Can market demand support a new entrant? 8
Inimitability/Defensibility – Is there a first-mover advantage? 10
Execution – Can Pepsi leverage existing capabilities? 13
Value Proposition – Will customers pay a premium for the product? 17
Conclusions & Recommendations 19
Next Steps & General Work Plan 21
20
Conclusions & Recommendations
Sub-Hypothesis Findings Conclusion
ScalabilityGrowing demand in the alcoholic-beverage market supports a new
entrantSupports Hypothesis
Inimitability / Defensibility
PepsiCo commands a strategic position that could utilize the first-
mover advantage in this marketSupports Hypothesis
Execution
Though infrastructure capabilities are compelling, key stakeholders outside of executive management believe an alcoholic beverage in contradictory to
PepsiCo's values.
Does Not Support Hypothesis
Value PropositionBrand equity does not extend into the
alcoholic beverage market where quality is the key factor to achieve a
price premium.
Does Not Support Hypothesis
PepsiCo should NOT proceed with a branded alcoholic beverage.
21
Summary of Work Performed To-Date
• Timeline– 12 week engagement beginning early January 2010
• 2 preliminary meetings after weeks 4 and 8• Final presentation at end of week 12 (early April) to CEO Indra Nooyi and executive team
• Resources & Assignment Responsibilities– 1 Partner to manage relationship with PepsiCo– 1 Manager to deal with upper management at PepsiCo and manage problems during engagement– 2 Consultants to manage workstreams and prepare proposals to PepsiCo– 3 Analysts to collect and analyze data
• Strategic Question– Should PepsiCo launch a Pepsi-branded alcoholic beverage?
• Hypothesis– Current conditions are favorable for PepsiCo to launch an alcoholic beverage
• Analyses– Does PepsiCo's brand yield a price premium that extends to alcoholic-beverage customers?– Is there is sufficient space in the alcoholic beverage market for another entrant?– Is there is a significant first-mover advantage in being the first major soft drink brand to enter the alcoholic space?– Is the infrastructure for production and distribution of soft drinks materially different than that for alcoholic
beverages (and there is significant overlap between alcoholic and nonalcoholic channels)?– Can PepsiCo's brand equity be successfully extended to the alcoholic beverage market?– Will adding an alcoholic beverage to PepsiCo's product portfolio conflict with its core corporate values?
• Data– PepsiCo Interviews– Surveys– Published Reports– Custom Reports– Market Data
Top Related