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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
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