PepsiCo is a world leader in convenient foods and beverages with revenues of about 25 billion dollars with over 142,000 employees. PepsiCo was founded in 1965 through the merger of Pepsi-Cola and Frito-Lay. Tropicana was acquired in 1998 and PepsiCo merged with the Quaker Oats Company, including Gatorade, in 2001.
PepsiCo is organized in six divisions: Frito-Lay North America, Frito-Lay International, Pepsi-Cola North America, Gatorade/Tropicana North America, PepsiCo Beverages International and Quaker Foods North America. The Company’s North American divisions operate in the United States and Canada and accounts for seventy percent of its sales. Its international divisions operate in over 175 countries, with PepsiCo’s largest operations in Mexico and the United Kingdom. PepsiCo is working hard to build its presence in emerging markets like India, China and Russia. PepsiCo World Headquarters is located in Purchase, New York. PepsiCo is traded as PEP on NYSE.
PepsiCo ranks fourth among food and beverage companies in the world, after Nestle, Kraft Foods and Unilever. Pepsi is ranked first in “refreshment beverages” in United States and is the world’s second most popular soft drink after Coca-Cola Classic. It is the number one driver of supermarket sales growth. PepsiCo is a leader in innovation (three of top ten new food and beverage products are Pepsi-Cola brands). Consumers consider PepsiCo’s Quaker and Tropicana brands the healthiest among all brands. PepsiCo’s success is the results of superior products, high standards of performance, distinctive competitive strategies and the high integrity of its people.
II. BRANDS AND COMPANIES
PepsiCo has hundreds of brands. These are some of the best known: Frito-Lay Brands, Pepsi Cola Brands, Gatorade Brands, Tropicana Brand, and Quaker Brands.
PepsiCo operates in a mature market, and all of its product lines are faced with stiff competition. A strategic analysis of PepsiCo would be incomplete without a thorough examination of these competitors and the challenges that lie ahead.
PepsiCo’s main competitor is Coca-Cola. PepsiCo has better growth potential than Coca-Cola because of its diverse product line. Pepsi and Coke are usually neck-to-neck with sales, so they are both always trying to win over the others customers. In 2000, Pepsi-Cola revives its “Pepsi Challenge” advertising/campaign which included customer preferred product among Pepsi-one and Diet Coke as well as Regular Cola. Pepsi-Cola proved itself when more people chose to drink Pepsi-Cola over Coca-Cola.
With its diversified product line, PepsiCo also competes strongly with Cadbury Schweppes, Kraft, Nestle, General Mills, Kellogg and Lance.
IV. CURRENT FINANCIAL SITUATION
PepsiCo Inc., financial year begins in January and ends in December. As of 2002 annual report, comparable earnings per share grew 14%, divisions operating profit grew 11% and volume and net revenues grew 4% from 2001(Exhibit 1).
Following is a summary of the financial ratios for the years 2002 and 2001 (Refer to Exhibit 2), and a discussion of the significant ratio values.
Financial Leverage (Current Ratio & Liquidity Ratio)
PepsiCo’s current and liquidity ratios decreased slightly at the year-end 2002 over year-end 2001. The slight decrease comes from a greater increase in current liabilities than current assets. However the company has adequate liquid assets to pay off its current creditors.
PepsiCo Inc., customers include franchise bottlers, independent distributors and retailers. PepsiCo does not sell directly to the consumer1. No single customer represents more than 10% of its net sales. However in terms of volume sold Wal-Mart Stores, Inc. is a significant customer.
PepsiCo is in good shape with regards to receivables. The receivables ratio has increased from 32 days in 2001 to 36 days in 2002. Even though the receivables are slightly greater than the ideal it is still doing pretty well because it has a longer time to pay its bills (greater payables ratio).
The amount of time that the company takes to pay its bills has increased in 2002 to 156 days over the 149 days it took in year 2001. This high payables ratio could be considered beneficial to the company, in that it provides an interest free use of money.
Note: There is an old saying in business that if you can buy well then you can sell well. Management of creditors and suppliers is just as important as the management of debtors. It is important to look after the creditors – slow payment may create ill feeling and can signal that the company is inefficient (or in trouble!). The terms of the company with its suppliers and creditors should be considered in evaluating its payables ratio. PepsiCo should revise its creditor policy accordingly to avoid any detrimental effect to its supply chain or long-term relationships with its suppliers.
The inventory turnover ratio for PepsiCo Inc. appears to have improved slightly from 2001 to 2002. If PepsiCo continues to improve in this area, it can significantly gain from cost savings (reduced inventory storage costs).
Debt to Equity Ratio
The debt to equity ratio for PepsiCo Inc. has decreased from 0.31 in 2001 to 0.24 in 2002. This would indicate that if necessary it could borrow more funds at a lesser cost without going into bankruptcy. The debt-equity ratio for Coca-Cola is also very low with 23% in year 2002.
Return on Sales
Return on sales or net profit margin is a measure of overall business success. The ratio has increased from 11% in year 2001 to 13% in 2002. This shows that PepsiCo makes a profit of $13 for every $1 invested.
Return on Equity
The Return on Equity of a company measures the ability of the management to generate adequate returns to the capital invested by the owners of the company. The management of PepsiCo seems extremely efficient in creating value to their owners. PepsiCo return on equity of 36% is very high, especially compared to the industry average of 21%. The ROE ratio has increased over the years though it decreased slightly in 2001, which may be a result of the acquisition of Quaker Oats Company (because of the merger costs).
V. FREE CASH FLOW ANALYSIS
The table below shows that PepsiCo has $7710 million in free cash flow. This indicates that PepsiCo has adequate excess cash to raise its dividends or make an acquisition or repurchase shares without borrowing. This might be the reason for such low debt/equity ratio. The debt rating for the company is “A1” from Moody’s and “A” from Standard and Poor’s credit rating. This reflects its strong operating cash flow and includes the impact of the cash flows and debt of its other competitors. PepsiCo has maintained this rating since 1989 demonstrating the stability of its operating cash flow. This shows that PepsiCo is financially strong. However, Coca-Cola free cash flow of 11807 (refer to Exhibit 1 in the index) millions dollars exceeds that of PepsiCo’s.
VI. CONTRIBUTION ANALYSIS
PepsiCo Inc. sells a variety of products through its North America and International divisions. The tables below show that more than half of the sales and operating profits of PepsiCo is generated from its snacks division, with beverages and food division occupying second and third places respectively.
From the pie charts below it is clear to see that all the three divisions are profitable, because each division’s operating income is proportional to corresponding sales. The lower contribution to profits of food division over other divisions might be because of its new entry into food market (PepsiCo entered into food division in 2001 with the acquisition of Quaker Oats Company). Sales and operating profits over a three-year period did not increase considerably. PepsiCo should maintain or improve present sales to gain greater market share to outperform its competitor Coca-Cola.
Nearly 70% of the Pepsi-Cola sales are from North America and only 30% from countries outside North America and Canada. In the case of Coca-Cola it is in reverse (70% of the sales are from international operations and only 30% from North Americas). PepsiCo is already at a competitive disadvantage over Coca-Cola by losing benefit of first entry into other markets of the world. PepsiCo should work hard to capture the highly populated emerging markets like India and China. PepsiCo should also extend its food division to capture the international customer base.
VII. SWOT ANALYSIS
– Savings resulting from economies of scale.
-Broader product line
-PepsiCo has outstanding reputation with minorities.
-Merger of Quaker Oats produced synergy across the board.
-Record revenues and increasing market share.
-Lack of capital constraints (availability of large free cash flow)
-Great brands, strong distribution, innovative capabilities
-Number one maker of snacks, such as corn chips and potato chips.
-Lower debt/equity ratio
– Hard to inspire vision and direction for large global company.
– Not all PepsiCo products bear the company name.
– PepsiCo is far away from leader Coca-cola in the international market.
– Demand is highly elastic.
– Food division should expand internationally.
– Hybrid distribution system allows for capturing emerging markets.
– Noncarbonated drinks are the fastest-growing part of the industry.
– Target health conscious customer base.
– Focus on most important customer trend- “Convenience”.
-Pepsi is blamed for pesticide residues in their products in one of their most promising emerging market (India)2.
-Over 50 percent of the company’s sales come from Frito-Lay; this is a threat if the market takes a downturn.
-PepsiCo now competes with Cadbury Schweppes, Coca-Cola, and Kraft foods (because of broader product line).
-Size of company will demand a varied marketing program
– Social, cultural, economic, political and governmental constrains
Notes on SWOT Analysis:3
PepsiCo sells three products through the same distribution channel. For example, combining the production capabilities of Pepsi, Gatorade and Tropicana is a big opportunity to reduce costs, improve efficiency and smooth out the impact of seasonal fluctuations in demand for particular product. This is a competitive advantage over Coca-Cola, which produces just one product. Broader product range allows capturing greater market share.
One of the PepsiCo’s major strength is its reputation with minorities. PepsiCo has been a leader in seeking out and working with minorities and women suppliers. The company has received many honors for its participation in the community, and its undying support to women and minorities. Some of these honors include: The One Hundred Companies Providing the Most Opportunities to Hispanics, America’s 50 Best Companies for Minorities, The World’s Best Global Company, America’s Top Corporation for Women’s Business Enterprises and Top Companies for Minority MBAs. Reputation is one asset that will never show up on any balance sheet, or financial statement, but is by far the most valuable asset a firm can hold.4
PepsiCo’s main strategy is growth through vertical and horizontal integration. With such a diverse portfolio of companies, PepsiCo has been forced to devote a common vision and give direction as a company. This common vision might not be compatible across all divisions. It is hard to inspire vision and direction for this large global company. However, through the merging of these companies, Pepsi-Cola has grown at a substantial rate with their product lines nearly doubling along with their customers. These mergers have allowed them to take advantage of synergy, while they have strengthened their effectiveness and efficiency.
The demand for PepsiCo products is highly elastic, which means customers, can easily shift to other substitute products (for example: products of Coke and Kraft foods) with slight increase in price (this is also a threat of substitute product). Due to high presence of competitors, PepsiCo should offer valuable products at competitive prices.
Many Americans are seeking to lead a healthier lifestyle, reducing the fat and sugar in their diets. PepsiCo should expand to capture this target customer group through Quaker and Tropicana.
Recently PepsiCo has seen sales in India (one of their most promising emerging markets) pummeled by the accusations of a local environmental group that the level of pesticide residues in their products was too high. It was proved that the pesticide level in PepsiCo’s products meets the local standards. However, it complicated the task of winning back the consumer confidence.
VII. STRATEGIC ALTERNATIVES / RECOMMENDATIONS
PepsiCo Inc. is very strong financially. Given this it has many strategic alternatives available.
1) Expand into Healthier Products: Many consumers are seeking to lead a healthier lifestyle, reducing fat and sugar in their diets. I would recommend PepsiCo board of directors to emphasize promotion of the Tropicana and energy drink products. Because of the increase in the consumer health awareness, the rise in sales for these markets has steadily grown over recent years. Energy drinks alone rose 21 percent last year in new product launches.
2) Packaging: Most of the PepsiCo products does not bear company name. PepsiCo should repackage their products so they all bear a common name, PepsiCo. This should increase sales for all divisions through consumer loyalty and by “branding” of their products.
3) Pursue International Growth: PepsiCo should extend its products internationally as the market in North America is already mature and it is hard to grow any further. It would be advisable for PepsiCo to enter into new markets where its main rival Coca-Cola is not an absolute leader of the market. This is because it is easier to establish brand image in those countries. PepsiCo should continue to pursue South African operations, which is a six billion dollar market. They should also extend into India and china, which constitute 40% of the world population. It should also extent its food division internationally. In order for PepsiCo to compete with Coca-Cola Enterprise, they should compete in the global marketplace.
4) Make New Acquisitions: Given its high cash flow and low debt-equity ratio, PepsiCo seems to have the resources available to continue to acquire additional key businesses especially in international market. This would make PepsiCo’s expansion into international markets easier and aid to compete against Coca-Cola. This will also ensure PepsiCo’s continued growth and success by adding new products, opening up new markets, and creating a larger pool of resources, PepsiCo may also be able to achieve cost synergies with these new acquisitions, increasing cost saving.
5) Eliminate the unrelated businesses: PepsiCo should eliminate the unrelated businesses and concentrate on its core business i.e. beverage and snack. PepsiCo is already pursing this strategy. In 1997 it spun off Pizza Hut and KFC.
6) Maintain Current Position: PepsiCo is number one beverage company in U.S.A based on sales. The company should continue to main this position through greater product innovation and distribution.
PepsiCo operates in a highly competitive environment. Its major competitors are well-established multi-billion dollar companies. PepsiCo should expand international through strategic acquisitions. PepsiCo should stay focused and compete with superior products, marketing and distinctive competitive strategies.
* PepsiCo, Inc. 2002 Annual Report
* PepsiCo Value line Investment Survey
* Coca-Cola Value line Investment Survey
* Joanna Slater, Coca-Cola, Pepsi Pass India’s Test On Pesticides, Wall Street Journal (Eastern edition). New York, N.Y.: Aug 22, 2003. p. B.5
* “PepsiCo’s New Challenge,” Forbes, January 20, 2003
* Yahoo Finance Website- http://finance.yahoo.com
* PepsiCo website- www.pepsico.com
1 Distinction should be made between the customers and consumers here. Consumers are the people who consume the final product (beverage). Customers are the retailers and independent distributors who resell the product to consumers.
2 Joanna Slater, Coca-Cola, Pepsi Pass India’s Test On Pesticides, Wall Street Journal (Eastern edition). New York, N.Y.: Aug 22, 2003. p. B.5
3 This section is just a general discussion of SWOT. For example, Strengths might talk about a threat regarding the same topic. Includes only those points in SWOT list that are not understood explicitly.
4 Source: http://www.pepsico.com/diversity