PepsiCo case analysis and business strategy

Pepisco

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.

Core Problem/Issue

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.

Internal Assessment

PepsiCo's strengths

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.

PepsiCo's weaknesses

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.

Strategy

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.

Structure

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.

System

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.

Shared Values

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.

Financial Performance

Liquidity

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.

Asset Management

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.

Capital Structure

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.

Profitability

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%.

External Assessment

Opportunities

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.

Threats

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.

Macro Forces

Economic

The U.S. economy has been struggle since 2008's market crash. There is high unemployment and consumers have adopted more cautious spending habits.

Political/Legal/Regulatory

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.

Social/Demographic

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. First you have product differentiation base on brands. Brands require significant investment of resource and significant time for customer loyalty to grow. Additionally, the development of manufacturing facilitates and distribution channels take time to be identified and developed. Exit barriers are extremely low but costly.

The threat of product substitute is very high. Snacks and beverages are low cost products, which are readily accessible. The trial and switching costs to the consumer are very low. PepsiCo has somewhat deflected customer trial and switching by customizing products to local taste preferences.

Rivalry in the food and beverage industry is very high. Millions of dollars are spent on advertising and brand building. Coke-cola publicly stated that it did not see PepsiCo as a threat in the carbonated beverage industry. One must wonder why such a provocative statement was made; it angered Pepsi who took on a full court press to combat Cokes aggressive posture.

Alternative Strategies

A firm has four strategic options available to it: growth, status quo, retrench and a combination of the first three strategies. For the past decade, PepsiCo has focused on growth by acquisition and new product development. They are very skilled at recognizing complementary opportunities, which could be the chance to acquire a strong brand such as Gatorade or acquisition of a company for quick expansion into new product categories and international markets.

Recommendation Strategy

After reviewing the case information, it appears that PepsiCo should use a combination of strategies to maximize shareholder value. This could include an international growth strategy, retirement of under performing products and maintaining the status quo on process that utilize PepsiCo's market size to achieve cost benefits.

Using Porter's generic strategy matrix, the beverage and snack food divisions should channel its resources into creating differentiation in product formulation, package design and product line enhancements. The international division may need to modify the generic differentiation strategy to include a cost focus to improve its profit margins. The international efforts have language, taste preferences and cultural mores to navigate. These challenges may not allow for a single strategy for all international markets but several strategies for aligning products and brands and manufacturing and distribution process to the local customs.

Each division needs to determine its market place strategies. For PepsiCo American Beverages, the management should take a defensive stance in the carbonated beverage categories. They need to defend and grow its market share against Coke-cola. At the same time, the non-carbonated beverage group should take a strong offense to expand PepsiCo's product offerings to grow market share. PepsiCo Americas Food division should maintain the status quo; it has strong market share in many categories and has perfected the design and launching of new products. PepsiCo International needs to focus their product offerings and cost control of its manufacturing processes. The international division needs to answer the flavors desires of many different cultures. Expansion into new markets must be implemented in a thought full manner: where does the manufacturing take place, what are the costs of transporting raw materials and finished goods and is augmenting the product lines to include new flavors profitable?