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PepsiCo Case Analysis
PepsiCo is the world's large snack and beverage company. PepsiCo enjoyed the envious position of market leader of the convenience food industry with 21% market share and its next competitor Kraft Foods had only 11% market share. PepsiCo manufactures, markets and sells sweet and salty snacks, carbonated and noncarbonated beverages and products produced from oats and other grains. PepsiCo had a ten-year record of increased net revenue and net income and paid their shareholder a growing annual dividend. Recently, PepsiCo's stock price declined most likely due to the U.S. financial crisis of late 2007 and all of 2008.
PepsiCo thought it might have to restructure its snack and beverage business to improve overall profitability and revise the downturn in its stock price, specifically it wanted to improve the profitability of its international business through its ability to capture strategic fits between its various brands and products.
In 2008, PepsiCo reorganized from four operating companies -- Frito-Lay North America, PepsiCo Beverages North America, PepsiCo International and Quaker Oats North America -- into three divisions with six reporting segments. This organizational change combined Frito-Lay North America with Quaker Foods North America and the food and snack businesses in Latin America into PepsiCo Americas Food division. The Latin America beverage division would be moved from Pepsi International to become a part of PepsiCo Americas Beverage division. PepsiCo's International division would now be responsible for all manufacturing, marketing and sales of products outside of North America and Latin America. The three new divisions included six reporting segments: Frito-Lay North America, Quaker Oats North America, Latin American Foods, PepsiCo Americas Beverage, UK and Europe and the Middle East, Asia and Africa.
Pepsi's management was faced with a declining stock price. While many of the factors contributing to the price decline were beyond Pepsi's control, management knew it had a strong performance record and thought the new corporate structure would capitalize on the synergies across and within divisions and brands. Pepsi management teams also believed the shifting of responsibility for Latin America to the PepsiCo Americas Beverage division world provide the international team with an opportunity to improve its market share and reduce its operating costs. With the structural changes and the improved focus on its international business, Pepsi believed it would be able to revise the declining stock price.
Managers at PepsiCo know how to grow their businesses. This growth was achieved through large and small acquisitions, new product development, responding to consumers and retailers needs and expansion into new markets. Additionally, PepsiCo breathe and depth of brands and products allow for customized products by region. It's "Power of One" strategy worked to share the benefits of all three divisions to improve the bottom line of PepsiCo. Implementation of this strategy also brought the consumer and retailer into the process of product development and the co-creation of improvements in the distribution process.
In the carbonated-beverage industry, Pepsi is faced with strong competition from Coke-Cola. Pepsi's was experiencing market share lose: its 31.1% market share of the carbonated beverage industry in 2007 was dwarfed by Coke-Cola's 2007 market share of 41.6%. PepsiCo has fought back with new brands and strategies to improve local distribution. Pepsi has focused its soft drink innovation efforts on improving the nutritional properties of soft drinks. An additional weakness in its beverage division is the ten-year limitation on co-distribution of Gatorade and PepsiCo's soft drinks. This limitation was a condition for FTC approval of PepsiCo's merger with Quaker Oats and it was put in place to reduce PepsiCo/Quaker Oats' control over the distribution channels.
PepsiCo has lower profitability and higher production cost in its international division when compared to the North America businesses. This weakness may be a factor in the declining stock price.
McKinsey 7-S analysis of PepsiCo
The McKinsey 7-S model is a methodology for assessing the alignment between a company's strategies, structure, systems, shared values, style, staff and skills all align to maximize shareholder value. The 7-S method of analysis can be used to improve the performance of a company, examine the likely effects of future changes within a company, align departments and processes during a merger or acquisition and to determine how best to implement a proposed strategy. This section will review all seven factors within PepsiCo. Please note that for some of the 7-S variables little to no information was provided in the case document.
PepsiCo had focused on a growth strategy and market leadership in all snack food and beverage categories. Their strategies are product innovation, close relationships with distribution allies, international expansion and strategic acquisitions. PepsiCo is responding to consumer demands for healthier foods and beverages in a timely manner with better-for-you and good-for-you products. The products that have been launch thus far have produced positive returns and are increasingly contributing PepsiCo's total revenues.
PepsiCo's structure is based upon products and geography. The recent restructuring will help to coordinate improvements in their international business. The moving the Latin America business into the newly formed PepsiCo Americas Food division and the newly formed PepsiCo Americas Beverage division reduced the International division's geographic responsibility allowing PepsiCo International can focus on improving revenue and decrease operating costs.
The case provided no direct information about PepsiCo's systems. It did discuss improvements in its distribution processes. One can also conclude that PepsiCo's financial report is a strong attribute and provides the leadership with information for strategic decision-making. The new organizational structure includes three new divisions with six reporting segments: Frito-Lay North America, Quaker Oats North America, Latin American Foods, PepsiCo Americas Beverage, UK and Europe and the Middle East, Asia and Africa. These reporting segments provide management with performance information for individual brands and specific geographic regions.
PepsiCo appears to emphasis cross-pollination of best practices between its divisions. The management also looks to improve integration of an acquired company's product lines, distribution systems and production capabilities.
Style, Staff and Skills were not addressed in the case study.
The current ratio measures a firm's solvency by indicating the company's ability to pay current debts with current assets. PepsiCo current ratio was 1.12 in '05, 1.33 in '06 and 1.31 in '07. PepsiCo's current ratio for years 2005-07 is below the desired bank ratio of 2.0.
The quick ratio measures how the most liquid assets can be used to meet current debt. Bankers are looking for a ratio above 1. PepsiCo has consistent achieve a ratio high than 1 from 2005 to 2007.
PepsiCo's inventory turnover has decreased from 19 times/year in '05 to 17 times/year in '07. While the numbers have decreased slightly, an average inventory turnover of is well above the expected 6- 12 times per year.
From 2003 to 2007, PepsiCo's asset utilization ratios are all above 1 and the fixed assets ratio is above 3. Both of these ratios show PepsiCo's assets are being efficiently used to generate revenues.
PepsiCo's debt -- to- equity ratios are all below 1 indicating that they owe more than they own. This may hinder PepsiCo's ability to obtain credit.
For the three-year period of 2004- 2007, the average return on assets is 16% and return on equity averages around 32%. During the same time frame the P/E ratio averaged 17% and the profit on sale ratio with an average of 14%.
There are three major opportunities, which PepsiCo can use to their advantage: international expansion, increased international consumption habits and the increasing desire for more health conscious product.
PepsiCo's two largest threats are in their beverage business. Coke-Cola wants to increase its market share to 50% and there is increasing competition in the isotonic beverage category.
The U.S. economy has been struggle since 2008's market crash. There is high unemployment and consumers have adopted more cautious spending habits.
The FTC 10-year ban on co-marketing of Gatorade and PepsiCo's soft drinks expires in August 2011. This will allow PepsiCo to realize efficiencies in their distribution process and increase the profitability of the beverage divisions.
The aging of the baby boomers will have an impact on what products will be purchased by consumers. Health concerns will drive the need for new product development. PepsiCo has began packaging its snack in 100 calorie bags which begins to address portion control and health eating habits.
Porter's 5 Forces
Supplier power is limited due to the overall size of PepsiCo. PepsiCo's size allows them to benefit from the economy of scale. They have consolidated procurement of product ingredients and packaging material, which proves PepsiCo significant leverage when negotiating purchases amounts and pricing.
Buyer Power of retailers exists in the selection of which brands and which products within the brands to put on their shelves. The consumer has a large set of products and manufacturers from which to choose their snacks and beverages.
Entrance barriers of the food and beverage industries are moderately high.…[continue]
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