PepsiCo Acquisition Strategy: Carts of Colorado vs CPK

PepsiCo's Strategic Position

PepsiCo ("Pepsi") has the choice of two companies available for purchase: Carts of Colorado, a manufacturer of mobile food carts and kiosks, and California Pizza Kitchen, a casual dining chain. PepsiCo can purchase both, either, or neither. At the core of the issue is the strategic fit between these prospective acquisitions and PepsiCo.

Both potential purchases are successful companies, but the purchase price is expected to be similar to the net present value of their future expected cash flows. To justify a purchase, PepsiCo must be able either to add value to these companies or to benefit from value they bring. In order to make that determination, PepsiCo must first understand where it stands as a firm today and what synergies these companies can contribute.

Strengths and Weaknesses of PepsiCo

Pepsi operates in several different sectors. Domestically, it is the second-largest soft drink maker, the second-largest quick service restaurant operator, and the fourth-largest food service company. The company has several key strengths and a handful of weaknesses.

In terms of strengths, Pepsi has successfully implemented a decentralized organizational structure. This has encouraged the different companies under the Pepsi umbrella to develop their own operating systems, which have historically been tailored to the needs of each operating company. The result has been strong growth and the development of unique ideas.

Another strength is Pepsi's competitive culture, which has focused management on delivering strong growth and solid results while keeping a close eye on competitors. PepsiCo is generally focused on its larger rivals, and this demanding mindset sets a constant benchmark to be achieved.

A third strength is the company's financial performance. Pepsi has achieved a strong rate of growth despite operating in several relatively mature industries. For example, in the mature U.S. soft drink industry, Pepsi recorded 11.8% sales growth between 1989 and 1991, while profit growth reached 29.2% over the same period. Despite some stumbles — particularly in the snack food business — the company has attained strong growth in both revenue and profits in recent years. In the restaurant business, both Taco Bell and Pizza Hut have achieved very high rates of growth, though KFC has struggled. All three are industry leaders in their respective segments.

Despite its many strengths, Pepsi has notable weaknesses. Chief among them is its decentralized structure. While this structure has yielded many advantages, it also works against Pepsi's best interests in certain situations. There is, for instance, significant duplication of staff functions across different business units. Decentralization has also become so entrenched in Pepsi's culture that some managers resist collaboration, fearing it will inhibit their flexibility or autonomy. This resistance hampers efforts to implement cost-saving programs.

Another weakness is market saturation. In the core U.S. market, most of Pepsi's business lines are relatively saturated and operate in mature industries. This limits the potential for future top-line growth in domestic markets and changes the fundamental nature of Pepsi's business. Having traditionally viewed itself as a growth company, Pepsi must increasingly shift its focus toward bottom-line growth through cost reductions and improved efficiency.