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Pepsi is vastly superior in terms of size and financial strength. Additionally, they would represent the vast majority of COC's sales volume. For COC, a strategic alliance with Pepsi may hold appeal as it would allow them to continue to build their company by giving them the financial strength to meet the needs of other customers. For Pepsi, a strategic alliance would have little benefit in terms of operations. There would be one potential benefits, however. One is that the Gallery brothers would still have a stake in the business. They are the main source of value in COC so there continued presence is essential. One caveat to that is with a large and stable customer like Pepsi they may lose their drive to create. Most of their major innovations have been responses to crises. In times of stability they have generally rested on their laurels, which would not benefit Pepsi nor would it fit with their culture. A drawback to a strategic alliance is that it would allow COC to have access to Pepsi's competitors. The main benefit of a purchase would be to shut down this possibility, thus preserving a potential source of competitive advantage for Pepsi.
California Pizza Kitchen
For Pepsi, California Pizza Kitchen (CPK) would represent an entry in to the casual dining market. While Taco Bell still retains some growth potential, Pepsi's other major food brands are left with infill to achieve growth in the domestic market. CPK, however, has significant room for expansion.
What CPK brings to the table is a concept that has seen dramatic growth over the past couple of years. The chain had experienced 55% top line growth in the past year; along with bottom line growth of 41.6%. Customer response to the concept has been generally positive and the concept has been successful in a range of geographic areas.
In terms of strategic fit, CPK gives Pepsi a stake in the casual dining industry. This represents much-needed diversification for PepsiCo's food business. It provides more accounts for PFS and the soft drink business. However, Pepsi has little experience in this business besides the small sit-down component of Pizza Hut. The casual dining and quick service industries are different, in the estimation of one key Pepsi executive, and the skill sets for the two segments are likewise different. Pepsi would thus have a learning curve to endure. They failed with their sit-down Mexican concept and would need to perform much better with CPK in order to justify their investment. In terms of staff functions, there appears to be limited synergy with other PepsiCo divisions. Much of the purchasing is still down by individual groups, eliminating many cost-saving opportunities.
There are other downsides to CPK. One is that the concept is only six years old. While popular, it would be a stretch to call it proven. Pepsi executives would have to consider the viability of the concept once the novelty wears off. Another downside is the culture, which does not seem particularly congruous with Pepsi's competitive culture. CPK hires from within, taking on relatively unproven managerial talent, whereas Pepsi's talent is well-proven and did not start at the bottom. The autonomy of PepsiCo businesses will diminish the negative impacts of this, but culture clash is still a potential downside. Furthermore, CPK only has 25 locations. This represents poor saturation, and indicates haphazard growth since these locations range from DC to Hawaii. Another drawback is that only 4 of the locations are franchised. Typically, Pepsi has only had success purchasing companies that have an established franchising framework. Also, there is the question of opportunity cost. The casual dining industry is highly fragmented, so it is likely that a better fit that CPK can be found should Pepsi view entry into this industry as a key strategic objective.
PepsiCo should purchase COC, but should not purchase CPK. Briefly, California Pizza Kitchen is an interesting but unproven concept. Pepsi has had success running large quick service chains, but no successful experience in the casual dining business. There is little operational congruence between their present operations and CPK. Additionally, building CPK to saturation may involve cannibalizing Pizza Hut, or at least may give that perception to Pizza Hut franchisees.
COC has a technology that will be strategically valuable for Pepsi. They will likely come at a very low price. There is cultural congruence, and COC will fit neatly into the existing PFS unit. This purchase will allow Pepsi to pursue an infill strategy, increasing its market share in the mature and highly competitive quick service industry.
In terms of implementation, there are two critical recommendations. The first is that the Gallery brothers must come with the deal. Their acumen is at the core of COC's success. They should thus receive a stock buyout rather than cash, in order to retain their services and align their interests with Pepsi so they do not become complacent. The second implementation recommendation is that COC be a part of the PFS unit. This unit is well positioned to sell COC carts and kiosks to external customers. Additionally, this will make it easier for COC to sell to all of Pepsi's units, not just one or two. The purchase is recommended specifically to prevent Pepsi competitors from having access to COC's superior technology. This will give Pepsi restaurants an 18-month technological head start with respect to…[continue]
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