PepsiCo – 2009

Case Notes Prepared by: Dr. Mernoush Banton
Case Author: John & Sherry Ross



A. Case Abstract

Pepsi (www.pepsico.com) is a comprehensive strategic management case that
includes the company’s calendar December 31, 2008 financial statements,
competitor information and more. The case time setting is the year 2009. Sufficient
internal and external data are provided to enable students to evaluate current
strategies and recommend a three-year strategic plan for the company.
Headquartered in Purchase in the U.S. state of New York, PepsiCo is traded on the
New York Stock Exchange under ticker symbol PEP.


B. Vision Statement (Actual)

“PepsiCo’s responsibility is to continually improve all aspects of the world in which we
operate – environment, social, economic – creating a better tomorrow than today.
Our vision is put into action through programs and a focus on environmental
stewardship, activities to benefit society, and a commitment to build shareholder
value by making PepsiCo a truly sustainable company.”

Vision Statement (Proposed)

To become the leading producer and marketer of food and beverage products in the
world.


C. Mission Statement (Actual)

“Our mission is to be the world’s premier consumer products company focused on
convenient foods and beverages. We seek to produce financial rewards to investors
as we provide opportunities for growth and enrichment to our employees, our
business partners and the communities in which we operate. And in everything we
do, we strive for honesty, fairness and integrity.”

Mission Statement (Proposed)

To be the world’s (3) premier consumer products company focused on convenient
foods and beverages (2). We strive for healthy financial rewards to investors (5) as
we provide opportunities for growth and enrichment to our employees (9), business
partners, and the communities (8) in which we operate. We have outstanding
technological (4) and marketing (7) systems to continually innovate and create
differentiated products for our customers (1) worldwide. And in everything we do, we
strive for honesty, fairness, and integrity (6).

1. Customer
2. Products or services
3. Markets
4. Technology
5. Concern for survival, profitability, growth
6. Philosophy
7. Self-concept
8. Concern for public image
9. Concern for employees

D. External Audit

CPM – Competitive Profile Matrix

PepsiCo Coca-Cola Kraft
Critical
Success
Factors
Weight Rating Weighted
Score
Rating Weighted
Score
Rating Weighted
Score
Market Share 0.1 3 0.30 4 0.40 2 0.20
Product Quality 0.09 2 0.18 4 0.36 3 0.27
Customer
Service
0.02 2 0.04 3 0.06 1 0.02
Organizational
Structure
0.09 2 0.18 3 0.27 4 0.36
Price
Competitiveness
0.09 2 0.18 3 0.27 1 0.09
Financial
Position
0.1 3 0.30 2 0.20 1 0.10
Customer
Loyalty
0.08 1 0.08 3 0.24 2 0.16
Global
Expansion
0.12 3 0.36 4 0.48 2 0.24
Advertising 0.09 3 0.27 4 0.36 1 0.09
Social
Responsibility
0.08 2 0.16 3 0.24 1 0.08
Quality of
management
0.05 2 0.10 3 0.15 1 0.05
Size of product
line
0.09 3 0.27 2 0.18 1 0.09
Total 1 2.42 3.21 1.75

Opportunities

1. Increase in international market demand for colas, chips and breakfast foods
2. In 2013, the United States savory snacks market is forecast to have a value
of US$28 billion, an increase of 27.8 percent since 2008 and the compound
annual growth rate of the market in the period 2008–2013 is predicted to be
5 percent
3. Purchase smaller, successful developers of competing products

4. Healthy food snack is on the rise as consumers are shifting to healthy food
5. Teens are less conscious of health issues and still like sweet drinks
Threats

1. Regulation – FDA, Clean Water Act, etc.
2. Foreign exchange rates in current economy
3. Raw materials supplies – clean water
4. Changes in consumer taste
5. Health issues – more consumers are shifting to healthy food
6. Consumers switching to lower cost house brands for both snacks and
beverages
7. Substitute products – other snacks, water, tap water, ready-to-drink, sports
drinks, etc.
8. Decrease in U.S. cola market
9. Reduction in buying power of large retailers
10. Strong direct (Coke) and indirect (Kraft) competition
External Factor Evaluation (EFE) Matrix

Key External Factors Weight Rating Weighted
Score
Opportunities
1. Increase in international market demand for
colas, chips and breakfast foods
0.08 4 0.32
2. In 2013, the United States savory snacks market
is forecast to have a value of US$28 billion, an
increase of 27.8 percent since 2008 and the
compound annual growth rate of the market in
the period 2008-2013 is predicted to be 5
percent
0.08 3 0.24
3. Purchase smaller, successful developers of
competing products
0.06 3 0.18
4. Healthy food snack is on the rise as consumers
are shifting to healthy food
0.08 3 0.24
5. Teens are less conscious of health issues and still
like sweet drinks
0.08 3 0.24
Threats
1. Regulation - FDA. Clean Water Act, etc. 0.06 1 0.06
2. Foreign exchange rates in current economy 0.05 2 0.1
3. Raw materials supplies - clean water 0.07 2 0.14

4. Changes in consumer taste 0.09 2 0.18
5. Health issues – more consumers are shifting to
healthy food
0.08 2 0.16
6. Consumers switching to lower cost house brands
for both snacks and beverages
0.04 2 0.08
7. Substitute products – other snacks, water, tap
water, ready-to-drink, sports drinks, etc.
0.07 3 0.21
8. Decrease in U.S. cola market 0.06 2 0.12
9. Reduction in buying power of large retailers 0.04 2 0.08
10. Strong direct (Coke) and indirect (Kraft)
competition
0.06 3 0.18
Total 1.00 2.53


Positioning Map




Strong
Product
Variety
Weak
Product
Variety
Customer Loyalty
(High)
Customer Loyalty
(Low)
Pepsi
Coke

E. Internal Audit
Strengths

1. Name recognition both domestically and internationally
2. Stronger than industry average in price to cash flow ratio
3. Strong marketing and promotion advertising campaigns
4. Reliable and established distribution channel management
5. Has diverse business units which reduces overall business risks
6. Recent reorganization
7. Owns more bottling companies than 10 years ago
8. Sales increased by approximately US$3.5 billion from 2007 to 2008
9. Increase in net profit for the last consecutive years

Weaknesses

1. Short term liability of US$369 due in 2009
2. Increasing long term debt by US$3.6 billion from 2007 to 2008
3. Increase in other liabilities by US$2.3 billion from 2007 to 2008
4. Decline in carbonated beverages from 2006 to 2008
5. Recent acquisition of companies could cost the company additional acquisition
cost along with some internal negative synergies

Financial Ratio Analysis (December 2009)

Growth Rates % PepsiCo Industry S&P 500
Sales (Qtr vs year ago qtr) -1.50 -0.20 -4.80
Net Income (YTD vs YTD) 2.00 3.70 -6.00
Net Income (Qtr vs year ago qtr) 9.00 -0.70 26.80
Sales (5-Year Annual Avg.) 9.91 4.26 12.99
Net Income (5-Year Annual Avg.) 7.64 14.03 12.69
Dividends (5-Year Annual Avg.) 21.24 10.40 11.83

Price Ratios PepsiCo Industry S&P 500
Current P/E Ratio 18.3 18.3 26.7
P/E Ratio 5-Year High NA 11.7 16.6
P/E Ratio 5-Year Low NA 5.2 2.6
Price/Sales Ratio 2.22 1.71 2.25
Price/Book Value 6.16 5.16 3.48
Price/Cash Flow Ratio 14.00 13.10 13.70


Profit Margins % PepsiCo Industry S&P 500
Gross Margin 53.2 26.5 38.9
Pre-Tax Margin 16.6 13.0 10.3
Net Profit Margin 12.3 9.7 7.1
5Yr Gross Margin (5-Year Avg.) 54.9 46.8 38.6
5Yr PreTax Margin (5-Year Avg.) 18.7 13.5 16.6
5Yr Net Profit Margin (5-Year Avg.) 13.7 9.8 11.5

Financial Condition PepsiCo Industry S&P 500
Debt/Equity Ratio 0.52 0.92 1.09
Current Ratio 1.3 1.2 1.5
Quick Ratio 1.0 0.9 1.3
Interest Coverage 47.5 20.5 23.7
Leverage Ratio 2.5 3.0 3.4
Book Value/Share 9.81 8.52 21.63
Adapted from www.moneycentral.msn.com

Avg P/E Price/ Sales Price/ Book
Net Profit
Margin (%)
12/08 20.60 2.02 7.00 11.9
12/07 20.00 3.24 7.17 14.3
12/06 18.30 3.00 6.67 16.0
12/05 23.30 3.10 6.87 12.5
12/04 21.20 3.07 6.45 14.2
12/03 21.60 3.00 6.67 13.2
12/02 27.70 2.96 7.53 11.8
12/01 34.60 3.77 9.93 10.2
12/00 28.80 3.97 11.33 11.4
12/08 20.60 2.02 7.00 11.9


Book
Value/
Share
Debt/
Equity
Return on
Equity (%)
Return on
Assets (%)
Interest
Coverage
12/08 $7.80 0.68 42.5 14.3 21.1
12/07 $10.74 0.24 32.8 16.3 32.0
12/06 $9.38 0.18 36.7 18.9 27.2
12/05 $8.61 0.37 28.6 12.9 23.1

12/04 $8.05 0.26 30.9 14.9 31.5
12/03 $6.96 0.19 30.0 14.1 29.3
12/02 $5.53 0.29 31.5 12.8 24.1
12/01 $4.94 0.35 27.7 11.1 16.6
12/00 $4.38 0.42 33.2 12.3 14.0
12/08 $7.80 0.68 42.5 14.3 21.1
Adapted from www.moneycentral.msn.com

Internal Factor Evaluation (IFE) Matrix

Key Internal Factors Weight Rating Weighted
Score
Strengths
1. Name recognition both domestically and
internationally
0.09 4 0.36
2. Stronger than industry average in price to
cash flow ratio
0.06 4 0.24
3. Strong marketing and promotion advertising
campaigns
0.08 4 0.32
4. Reliable and established distribution channel
management
0.07 3 0.21
5. Has diverse business units which reduces
overall business risks
0.08 4 0.32
6. Recent reorganization 0.08 4 0.32
7. Owns more bottling companies than 10 years
ago
0.07 4 0.28
8. Sales increased by approximately US$3.5
billion from 2007 to 2008
0.07 4 0.28
9. Increase in net profit for the last consecutive
years
0.06 3 0.18
Weaknesses
1. Short term liability of US$369 due in 2009 0.07 1 0.07
2. Increasing long term debt by US$3.6 billion
from 2007 to 2008
0.09 1 0.09
3. Increase in other liabilities by US$2.3 billion
from 2007 to 2008
0.06 2 0.12

4. Decline in carbonated beverages from 2006 to
2008
0.05 1 0.05
5. Recent acquisition of companies could cost the
company additional acquisition cost along with
some internal negative synergies
0.07 1 0.07
Total 1.00 2.91



F. SWOT Strategies

Strengths Weaknesses
1. Name recognition both
domestically and
internationally
2. Stronger than industry
average in price to cash
flow ratio
3. Strong marketing and
promotion advertising
campaigns
4. Reliable and established
distribution channel
management
5. Has diverse business
units which reduces
overall business risks
6. Recent reorganization
7. Owns more bottling
companies than 10 years
ago
8. Sales increased by
approximately US$3.5
billion from 2007 to 2008
9. Increase in net profit for
the last consecutive
years
1. Short term liability of
US$369 due in 2009
2. Increasing long term debt
by US$3.6 billion from
2007 to 2008
3. Increase in other
liabilities by US$2.3
billion from 2007 to 2008
4. Decline in carbonated
beverages from 2006 to
2008
5. Recent acquisition of
companies could cost the
company additional
acquisition cost along
with some internal
negative synergies

Opportunities S-O Strategies

W-O Strategies
1. Increase in international
market demand for colas,
chips and breakfast
foods.
2. In 2013, the United
States savory snacks
market is forecast to
have a value of US$28
billion, an increase of
27.8 percent since 2008
1. Continue international
expansion (S1, S3, S7,
O1)
2. Purchase smaller
companies offering
healthy products (S2, S4,
S5, O3, O4)
3. Consolidate bottling
operations (S4, S6, O3)

1. Promote “healthy” snacks
and drinks (W4, O4)

and the compound
annual growth rate of the
market in the period
2008-2013 is predicted to
be 5 percent
3. Purchase smaller,
successful developers of
competing products
4. Healthy food snack is on
the rise as consumers are
shifting to healthy food
5. Teens are less conscious
of health issues and still
like sweet drinks


Threats S-T Strategies

W-T Strategies
1. Regulation – FDA, Clean
Water Act, etc.
2. Foreign exchange rates in
current economy
3. Raw materials supplies –
clean water
4. Changes in consumer
taste
5. Health issues – more
consumers are shifting to
healthy food
6. Consumers switching to
lower cost house brands
for both snacks and
beverages
7. Substitute products –
other snacks, water, tap
water, ready-to-drink,
sports drinks, etc.
8. Decrease in U.S. cola
market
9. Reduction in buying
power of large retailers
10. Strong direct (Coke) and
indirect (Kraft)
competition
1. Sponsor programs to
teens and younger
generation to through
virtual Facebook, Twitter,
and such (S1, S2, S3,
O5)
1. Sell off non-producing
product lines and then
pay off the long term
debt (W1, W2, W3, T8,
T9)
2. Reorganize further and
use the excess cash to
buy companies with
healthier products (W4,
W5, T5, T6, T7)











G. SPACE Matrix


Financial Stability (FS) Environmental Stability (ES)
Return on Investment
5 Unemployment -4
Leverage
5 Technological Changes -3
Liquidity
5 Price Elasticity of Demand -4
Working Capital
5 Competitive Pressure -5
Cash Flow
4 Barriers to Entry -4

Financial Stability (FS) Average

4.8 Environmental Stability (ES) Average -4

Competitive Stability (CS) Industry Stability (IS)
Market Share -2 Growth Potential 5
Product Quality -2 Financial Stability 4
Customer Loyalty -2 Ease of Market Entry 3
Competition’s Capacity Utilization -1 Resource Utilization 3
Technological Know-How -3 Profit Potential 3

Competitive Stability (CS) Average

-2 Industry Stability (IS) Average

3.6

Y-axis: FS + ES = 4.8 + (-4.0) = 0.8
FS
CS
ES
IS
6 5 4 3 2 1
Conservative Aggressive
Competitive Defensive
1
2
3
4
5
6
7 -2 -3 -4 -5 -7 -1 -6
7
-7
-6
-5
-4
-3
-2
-1

X-axis: CS + IS = (-2.0) + (3.6) = 1.6


H. Grand Strategy Matrix




1. Market development
2. Market penetration
3. Product development
4. Forward integration
5. Backward integration
6. Horizontal integration
7. Related diversification

Weak
Competitive
Position
Quadrant II
Quadrant I
Quadrant IV
Quadrant III
Strong
Competitive
Position
Rapid Market Growth
Slow Market Growth

I. The Internal-External (IE) Matrix

The IFE Total Weighted Score



Strong
3.0 to 4.0
Average
2.0 to 2.99
Weak
1.0 to 1.99
High
3.0 to
3.99
I




II

PepsiCo Beverages

III



Medium
2.0 to
2.99
IV

PepsiCo International
IV

PepsiCo

VI
Low
1.0 to
1.99
VII VIII IX

















The EFE
Total
Weighted
Score

J. QSPM


Continue
international
expansion
Purchase
smaller
companies
offering
healthy
products
Key Factors Weight AS TAS AS TAS
Opportunities

1. Increase in international market demand
for colas, chips and breakfast foods
0.08 4 0.32 1 0.08
2. In 2013, the United States savory snacks
market is forecast to have a value of
US$28 billion, an increase of 27.8 percent
since 2008 and the compound annual
growth rate of the market in the period
2008-2013 is predicted to be 5 percent
0.08 4 0.32 2 0.16
3. Purchase smaller, successful developers
of competing products
0.06 1 0.06 3 0.18
4. Healthy food snack is on the rise as
consumers are shifting to healthy food
0.08 1 0.08 4 0.32
5. Teens are less conscious of health issues
and still like sweet drinks
0.08 1 0.08 3 0.24
Threats
1. Regulation – FDA, Clean Water Act, etc. 0.06 --- --- --- ---
2. Foreign exchange rates in current
economy
0.05 3 0.15 1 0.05
3. Raw materials supplies – clean water 0.07 1 0.07 3 0.21
4. Changes in consumer taste 0.09 1 0.09 3 0.27
5. Health issues – more consumers are
shifting to healthy food
0.08 1 0.08 3 0.24
6. Consumers switching to lower cost house
brands for both snacks and beverages
0.04 --- --- --- ---
7. Substitute products – other snacks,
water, tap water, ready-to-drink, sports
drinks, etc.
0.07 1 0.07 4 0.28
8. Decrease in U.S. cola market 0.06 4 0.24 2 0.12
9. Reduction in buying power of large
retailers
0.04 --- --- --- ---
10. Strong direct (Coke) and indirect (Kraft)
competition
0.06 1 0.06 4 0.24
TOTAL 1.00 1.62 2.39
Strengths

1. Name recognition both domestically and
internationally
0.09 4 0.36 1 0.09
2. Stronger than industry average in price to
cash flow ratio
0.06 --- --- --- ---
3. Strong marketing and promotion
advertising campaigns
0.08 --- --- --- ---

4. Reliable and established distribution
channel management
0.07 2 0.14 4 0.28
5. Has diverse business units which reduces
overall business risks
0.08 --- --- --- ---
6. Recent reorganization 0.08 --- --- --- ---
7. Owns more bottling companies than 10
years ago
0.07 1 0.07 3 0.21
8. Sales increased by approximately US$3.5
billion from 2007 to 2008
0.07 --- --- --- ---
9. Increase in net profit for the last
consecutive years
0.06 1 0.06 3 0.18
Weaknesses
1. Short term liability of US$369 due in 2009 0.07 --- --- --- ---
2. Increasing long term debt by US$3.6
billion from 2007 to 2008
0.09 --- --- --- ---
3. Increase in other liabilities by US$2.3
billion from 2007 to 2008
0.06 3 0.18 1 0.06
4. Decline in carbonated beverages from
2006 to 2008
0.05 1 0.05 3 0.15
5. Recent acquisition of companies could
cost the company additional acquisition
cost along with some internal negative
synergies
0.07 --- --- --- ---
SUBTOTAL 1.00 0.86 0.97
SUM TOTAL ATTRACTIVENESS SCORE 2.48 3.36


K. Recommendations

Purchase smaller companies that offer healthier drinks and snacks. Utilize the
existing distribution channel for promoting the new line and use penetration pricing
strategies to gain market share rapidly and against the competitors.




















L. EPS/EBIT Analysis

US$ Amount Needed: $500 million
Stock Price: US$61.37
Tax Rate: 26.8%
Interest Rate: 5%
# Shares Outstanding: 1.6 Billion

Common Stock Financing Debt Financing
Recession Normal Boom Recession Normal Boom
EBIT $7,000,000,000 $8,000,000,000 $9,000,000,000 $7,000,000,000 $8,000,000,000 $9,000,000,000
Interest 0 0 0 25,000,000 25,000,000 25,000,000
EBT 7,000,000,000 8,000,000,000 9,000,000,000 6,975,000,000 7,975,000,000 8,975,000,000
Taxes 1,876,000,000 2,144,000,000 2,412,000,000 1,869,300,000 2,137,300,000 2,405,300,000
EAT 5,124,000,000 5,856,000,000 6,588,000,000 5,105,700,000 5,837,700,000 6,569,700,000
#
Shares 1,608,147,303 1,608,147,303 1,608,147,303 1,600,000,000 1,600,000,000 1,600,000,000
EPS 3.19 3.64 4.10 3.19 3.65 4.11

70 Percent Stock - 30 Percent Debt 70 Percent Debt - 30 Percent Stock
Recession Normal Boom Recession Normal Boom
EBIT $7,000,000,000 $8,000,000,000 $9,000,000,000 $7,000,000,000 $8,000,000,000 $9,000,000,000
Interest 20,000,000 20,000,000 20,000,000 5,000,000 5,000,000 5,000,000
EBT 6,980,000,000 7,980,000,000 8,980,000,000 6,995,000,000 7,995,000,000 8,995,000,000
Taxes 1,870,640,000 2,138,640,000 2,406,640,000 1,874,660,000 2,142,660,000 2,410,660,000
EAT 5,109,360,000 5,841,360,000 6,573,360,000 5,120,340,000 5,852,340,000 6,584,340,000
#
Shares 1,605,703,112 1,605,703,112 1,605,703,112 1,602,444,191 1,602,444,191 1,602,444,191
EPS 3.18 3.64 4.09 3.20 3.65 4.11























M. Epilogue


PepsiCo continues to make strong growth moves on both the national and
international stage, even in the struggling economy. First quarter results for Pepsi
Bottling show it has been very profitable due to price increases and stronger U.S.
sales of carbonated soft drinks. This helped offset the declining demand for pricier
beverages such as bottled water. In the United States, PepsiCo’s major move has
been a bid to buy the remaining shares of Pepsi Bottling. PepsiCo currently owns 33
percent of Pepsi Bottling. Pepsi Bottling has rejected this bid as being too low;
however, it is expected that PepsiCo will continue with its bid to buy the remaining
shares of the bottling company.

To further improve its international operations, PepsiCo has made a bid to buy
PepsiAmericas. Basically, this would consolidate control of the Americas operations.
Additionally PepsiCo has pledged to invest US$1 billion in Russia over the next three
years, bringing its total investment to US$4 billion over a ten year time span.
PepsiCo will also invest over US$1 billion in China over the next 4 years. This is in
addition to continued investments in Japan, India, Europe, Mexico and Latin America.

For the first quarter ending 3/21/09, PepsiCo’s net revenues of US$8,263 million are
down US$70 million from the same quarter in 2008. However, PepsiCo has also
controlled costs by decreasing cost of goods sold by US$90 million and decreasing
sales, general and administrative expenses by US$9 million (same quarter
comparison). This has resulted in a net profit of US$1,141 million, which is US$90
million less than last year’s first quarter. PepsiCo may need to further adjust costs to
reflect continuing economic troubles as consumers shift to less costly drinks and
snacks. Second quarter results continued the downward trend with beverage volume
down 6 percent, Frito-Lay down 3 percent, and Quaker down 4 percent. However
international volume was up 1 percent in snacks and 6 percent in beverages.

The first quarter balance sheet shows that cash is up slightly whereas current
liabilities are down slightly; long-term debt has climbed US$1,393 million to a total
of US$9,251 million. Part of this increase may well be due to aggressive expansion
activities throughout the world.

Second quarter for PepsiCo shows better than expected profits based on cost cutting
and growth in developing countries such as China and India. However, growth in the
U.S. market continues to remain weak with a 1 percent decrease in volume.