tae Consolidated Statement of Income, PepsiCo (US) and Subsidiaries [5D ~ Fiscal years ended December 30, 1995, December 31, 1994, and December 25, 1993 (millions of US dollars except per share amounis) 1995. 194 1993. (Sdsvecks) —_“(38;weeks) (SA ves) Netsales $8001 S472 25.001 Cosi and expenses, net: Cost of sales (14,886) (313) ai.9i6) Selling, geecal& adminisratve expenses aim) (aaa) (C864) Amortization of intansibleasets G16) 61) (604) Impairment o long-lived assets (520) = Operating posi 52.987 53201 Gin on sek fering by an unconsolidated sta HS 18 Interest expense (643) Inerest income 0 ‘Income before tines & eumulaie eet of 52.664 ‘Accounting changes Provision for income tres 880) Income before cumulative effect of sccouting changes Si78t apa fe of ecuiing cies, ost-employment berets G9 = Pension ase 2 Netincome i958 S158 Income pe share é ‘Before cumulative effect of accounting changes 922 $196 Camilatve effect of accounting changes ost employmeit eels See Soop a Pension acts 003 a Netncome per sare 2.00 218 $196 Average shate oustanding 804 cy 10 Source Genet For 20-5 Devenir, 108,Part 4 Finanéing the Global firm, Grupo Embotellador ce Mexico's (Gemex) Sales, 1995 (thousands of New Pesos) Sales Percent of Volume Soft Drink NetSaler Percent of Brand i (000s cases) Sales Volume (0008 cates) Nev Sales Pepsi Products Pepsi 109,864 567 1,338,093, 487 epsi Light 1,202 06 1973 7 Bepsi Max 2954 12 37815 1 Mirinds 23872 13 315251 “is Seven-Up 121,149 44 Kas 60347 Total 149,398 Tl 1851.88 ‘Mineral Water Products Garel Crespo 16,793 87 0 ‘San Lorenzo 12 i Total 13 Other Soft Drink Products Manzanita Sol 118.023 Suir 166,183, ‘Tian ‘Delaivare Purch Other Toul Total Soft Drink Products Purified Water and Other Products lectropura 32638 Bottled water 3,060 Total 35,498, Other TotalDecison Case. Pepsico in Mexico: Anatomy of an Affilate’s Exposure a Grupo Embotellador de Mexico, $.A. de C.V. (Gemex) Assets, December 31, 195 "(thousands of constant New Pesos) 1995. 19941993 1992199) Cash &e equivalents 50976 63,904 68,347 359534 20614 ‘Trade accounts receivable 167.686. 185,464. 2281026 129,909 ‘Less allowance for doubtful accounts G93) 7482) S ‘Trade accounts feveivable, net 128573 7157.98 228.026 129,909 ther receivables from related companies ae ‘Ailiated companies 47,704 Recoverable taxes Other recevables a ‘Ravy materials 222738 ‘Work in process = — Finished products 61404 70,403, ‘Advaces to suppliers ee = Materials & spare pars 31193 56,290 Merchandise in transit oe as oh Other inventories Suan te eT Se a ‘Total inventories 286,784 357,612 190,622. 115202 Prepaid expenses 45.539 108,900 6.934. __ 5.968 Total Current Assets | 647,692 961,399 507,149 621,807 Other investments 3.437 as ‘nvestment in assovialed companies 50,020 54001 Land 382,935. 328481 98,197 Buildings ; 578227 $36,821 131577 Improvements & additions 86.806. 72,363 211030 ‘Machinery & equipment 1,392,661 1,181,189 432.565 Fumiture & fixtures 204)” 80.352 28.380, Vehicles 1210983 946378 295642 Construction in progress : argos 445/950. 57039 Cases & ote 342,994 441,540. 195,782 ‘Property, plant & equipment, ross 4500.65 4,033/074 1,260,422 ‘Less accumulated depreciation 1,099,838) (937.796) (478,748) (412.356) (3221193) Property, plant & equipment, net 3,408,807 3,095,278 848.006 483,332 Other assets 55455. 51,781 239 5,443 Gondiill net 407,94 400375 124682 Deferred iaxes Total Assets | aens305 1.672507 959,394 Sout Genes Farm 20-8 December 31,19.a Part 4. inancing the Global Fim : oe Inflation Accounting! Jeading results. The US, SEC, recognizing this, does not require at inflation adjustme removed from Mexican financial statements when reconciling them to US, GAAP. Thu ina adjusted Mexican reals maybe direcly compared to those of US, companies witout sb adjustments for infation, e ‘Menicn inflaton accounting practies fall into three basic reas: 1, Fixed assets and imentorie are sealed fo cueat cost Fixed asts and imeiory restated using either replacement value or by application of the National Consumer Price Index (NCPI) published by the Bank of Mexico, The difetence between historic cost and updated values an unrealized hold that isi ciency) in restated equity. “accumulated gain (loss) on nonmonetary asset 5 “holding gain (Joss) on nonmonetary items”). Depreciation and cost ac from the ajusted values. accounts payable Integral co of nani, Daring proof ination, company ih metry ties in exces of monetary asets wil have a gain because labile wl be esos having lover purchasing power, Because lenders incase ‘ate, a firm will oinaily have higher interest expenses in an “combined net interest expense, foreign curency and monetary gai or lst, “the company's rel (is opposed to nominal financing cost a Note tht even in period of high inflation, inctzrig additional debe wil uot neces ly be beneficial Fo example, holding tbe proeeds of a oun teas prodioes an oft monet lr pushing yes rs, Toe let, nepceds mae ve asso tat produce artim eater than inflation, x ‘Note: Mexiean accounting also requires that prior years’ financial stteients be updated ps will purchasing power as ofthe most current balance shest dete. That means thats years il ate Wl ok fleet it is yeas nal pot This ne hat eet ompaisons arent distorted by inflaton "hs sesion das ufo oman rca a are emi ‘Accouning Company ne ded Qetabe 1,191 Map 15,1994 tnd Petri 10,1995 00 a Sone Abed ati fom Acting ne Bs Sa Coney nO 1 9. 194 and etc 10,1988Decison Case Pepsico in Mexico: Anatomy ofan Afiflot's Exposure m | | a] PepsiCo, Ines Operating Profits and Identifiable Assets for "Combined Segments (millions US$) Operating Profit Identifiable Assets | Region 1995 | 9941993 954 1998 Vaited States 52758 sid2is $13,590 Europe 3062-21666 Mexico 995127 Canada 138211364 Other 2196 1615 Total 21813 30512 Unconsolidated Affliates 1,295 Corporate ‘Toa ‘Not The ef enaiand sonentemanacrng operations in Paci Ric ane ave et alloca based un ‘epee sapphic rear) th ia charges upon adopt of SEAS 121 Yeoed combined sepoen open oy 803 (Und Slee" $902 bare S119, Mesion 2, stad S30, Ober—S3). Source PepsiCo, Ine 1K, ap. $40 of eamings in 1993 and 1994, 1995 saw an operating profit which was less than one- third the previous year’s level, and was accompanied by a deterioration in asset value. ‘The 1990s had been eventful for PepsiCo, and Gemex in particular, With all ofthe ‘changes in ownership, product lines, capitalization, currencies, and earnings, ques- tions still mained as to whether PepsiCo was winning any of the country-battles in the Cola Wars Case Questions 1. What went wrong with PepsiCo’s Mexican strategy? 2, What role did capital play, and what role did business relationships play, in the process of building and expanding PepsiCo's presence in Latin America? 3. How did the peso interact with the structure of Gemex’s operations to impact Geimex’s competitiveness in the Mexican marketplace? 4. What would you have done differently than Pepsi in the Mexican market?ee SEC filings, however, Gemex sought to “optimize ity mix of US. dolla and peso detominsted debt and it may in the future Consider entering into hedging and other aangements considering the then relevant risks, costs and otherfacors!"? Pahoa: Market Share, Although profits run businesses, market sare drives consumer pint fins like PepsiCo, The botom line in the Cola Wars had alvays been marke! share According to the latest data, however, Coca-Cola was kicking PepsiCo’s ca Exhibit 10 sllustates, Coca-Cola seemed tobe enjoying a vey srang affensi Gemex's total sot drink market share was at a three-year low, Coke was set records, PepsiCo's umaround arts, Steve Lavirence, hd already been cea Gemex o Pepsi-Cola Mexico, ae ‘The Latin Cola Wats had, in the eyes of many, heen either won by Coca-Colt by PepsiCo. It appeared that Chris Sinclai’s go-forbroke expansionist sz filled —PepsiCo's major bottlers across Latin America were going broke aid Si ‘yas sacked inthe summer of 1996, eee < In August of 1996, PepsiCo's anchor bottler in Caracas, Venezuela, owned by the Cisneros family, vas oso Coca-Cola Ina overnight coup, the Cisneros Group sald out 50% ofthe boter’s ownership to Coca-Cola for approxinitely $500 million. wring ‘encase’ ingest Pepsi Cola ote and distr nto Cos Coll aret baled é distributor ina male of ous. The wunabout was eportedl achieved cut of Cisnrod Pepsi's and Coca-Cola's Respective Market Shares in the Mexico City Are Cola Segment Flavored Soft Drink. Foie Market ae Year Gener Femsa Gomer Fens Gener Fase 1991 489. Sia WT ea 452 1992 500) 500 196 68 BIT | 1993, 407 323 281 61 40 1994 480 520 299 87 497 1995 440 560 334 174 398 US, evn apron 3 of Caea-Con MSA Soa: Gees Fer 20 Decener 31,1095 p24 : Goc Cola FEMSA, SAC iste Conpany’s rai eompettr nthe Metco Cy Ard The Cos cola Cua *Gemex, Form 20-F, December 31, 1995, p30, Referring of course tothe article in Fornune ‘magazine, October 28, 1996, entit Klcking Pepa’ Can? g “ore mageine reported tat Coc Cola fered tothe negation process ih Venez as “Project Swan label dered om the Cateosfanly name line mezning von ce Spice Many within Pepi efeto tas Roger co's penis : = aPart Financing the Global firm Grupo Embotellador de Mexico, 8.A. de C.V. Liabilities and Net Worth, December 31, 1995 (thousands of constant New Pesos) 199519941983 Notes payable to banks 77499735791 | 35.88 Creat portion of leng-tem debt ansssi 181009 44086 ‘Trade secounts pyable 13085215057 45.698 Acsrued income tx & expensed Iasi tiga 70.559 Income tax payable a ig oid Enployee statutory proSt sharing dais 10267 ‘Aflistedcompenies 6093 92257 ‘ocalcureatabilies $05,744 1195226 218,379 ‘Long-ecm debt 125861 1135566 485,985 Senority beneis 1870, 3581712182 Detered aes payable _tese 18973 ‘ Toul bilites Wane 2371 716546 Common stock 402359 MD,Iek 180,17 ‘Additional pin capt 18 R51 7086S 2ST Retsinedeamings 2aizas 361.51 4620032 Resenes : 05118 151206 35.461. Exces investementofsoek's equity 120541620260 _92.951 Toal stockholders’ equity === «2842196 2.237.695 1063 00” (508205 4,608,858 “oa abies tcl equip 7, paid 10.75% semi-annually (May oe : and November 90) ‘OnDecenber 31, 1995, thelba3 rte isa had USS110,000 000, outstanding (NPS847,000,000)25 The issue's covenants require the frm to maincin engage in any hedging fits fosigh eurenc- denominated exposures, and did nen ‘nto any transactions relaied fo the management of the foreign curteney or interest rate risks of the company. According to statements filed in conjunction 2the December 31, 1995 financials were valued (marked-to-market) at an exchange sate of NPS? 7018S E e eoDecision Case PepsiCo in Mesica: Anatomy of an AMliat’s Exposure 10 Raw materials ‘Sugar Concentrate Packaging. Other ‘Toial raw materials Labor Overhead ‘Tal cost of sales (oscar 193 and 1904 ow ef ete fon PepsiCo wc hn agen a 195 st 9 thse PepsiCo nee fed NPL Sona NPT ilo, ‘Spon Osher 95 Sour: Ges, For 20.F Dec 1993 300817 333.303 41/941 1152772 811.393 35983 _la1246 028.563 1985,p 2 ‘Gemex’s Cost of Sales, December 31, 1995 (thousands of constant New Pesos) 1994 1995 352,900 334397 406225 315,330. 23171 3491909 143'800 150,459 1134,656 1150295 43981 238.713 1407.350 3425032 16S niseing tpenly Fin 165 Cola for over $0 years. In 1995, approximately 42% of Gemex’s Pepsi products were sold ‘netirable glass bottles, 16% in plastic returnable bole (PRBs), and 42% in nonretarn- able bottles and cans. The actial proportion of sales volume in nonretumable botles increased in 1994 and 1995, however, as a result of consumer preferences, Financial Structure and Costs, Gemex’s debt stricture changed drastically in the early 1990s in order to support the bottler’s rapidly expanding operational goals. The long- term debt structure on December 31, 1995, was composed of the following four elements (Gee Exhibit 9 fora detailed description): * Financial leases. The firm was'a party to financial lease obligations totaling 'NP$201,677,000, payable in U.S. dollars, with interest payments of LIBOR plus 225% 28 ‘Credit lines. The Company possessed two major credit lines totaling NPS296,$30,000, ayable‘n US, dotlacs, with interest rates of IBOR plus 0.85% and LIBOR pls 1.35%, *Momingstur research report, June 13, 1996, p: 1105, 2Gemex first used plastic reternable bottles (PRBs) in 1991 in the LS liter size. The company ‘stimates that PRBs can be reused approximately twenty times before being recycled, Market Studies conducted by Gemex indicate that PRBS are increasingly popular with consumers bectuse of their lighter weigh, lager size, higher durability, and lower cost per ounce of soft drink LIBOR, the London Interbank Offer Rat, the interest rte at which high eredltworthy banks lend ‘smnongs themselves in the Loidon marke, serves a the base rate for many loan agreements worldwide.Part 4 Financing the Global Firm ‘Net income for Gemex had nov been negative for two full years. With profitshaving peaked in 1993 at about NPS232 million, 1994 and 1995 witnessed losses of NPS163, million and NP$140 million, respectively. Given the significant drop in operating income and the rising costs of financing, it appeated that structural changes in Gemex might be in order, Operating Costs. Soft drinks ace produced by mixing water, concentrate, and sweetener, and then injecting carbon dioxide gas 10 create carbonation. Cost of sles is therefore. dominated by two components, sweetener and the cost of concentrate. As partof is fran ‘hise agreement with PepsiCo, Gemex is obligated to purchase all concentrate and syrup {or the production of soft drink products from the franchisor (PepsiCo), Gemex pur- chases aie mide (om Boba Cola MaticanS'A de C:V./404 URN ones oE 1GEa Or We ‘wholesale price (net of value-added taxes) of the finished product. ‘Gemex bays all of its sugar fom Consorcio Industrial Escorpion S.A. de CV. — (Escorpi6a), a company owned and controlled by Mr. Enrique Molina. Bscorpi6n Agcounted for 45% of Metico's ital refined sugar production in 19952! Escorpi6n's agreement with Gemex staes that it “has agreed to supply the Company with sugar, at a price no less favorable than that charged by Escorpidn to third parties, for as long'as scorpion and the Company remain ander the common control of Mr. Molina and intnediate family" “An overview of Gemex's cost of sales for the 1993-1995 period is provided i "Exhibit 8. Asa percentage of sales, Cost of sales were 42.0%, 45.0%, aid 51.3% in 1993, 1994, and 1995, espectively. Cost of sales increased substantially from 1993 t0 1994.as a result ofthe acquisition of Eletropura (bottled water). From 1993 to 1994, Gemex partici _ pated in a marking arrangeinent with PepsiCo, in which PepsiCo reimbursed Gemex for, all: marketing costs above 16.54 of the wholesale price paid by the company for concen ‘ate for the year following a price increase for soft drinks in Mexico, if Gemex tein ‘ested the proceeds of the reimbursement in fixed assets. The mrketng acrangemient expired in October 1994. * Geek. lke PepsiCo, markets i. products predominantly in-nomeéumable plastic hottes. Although plastié bole production and sale constitutes nearly half of Gemex’s cur= ‘ent revenues, the boitles are more expensive than the returnable glass botles used by Coca. Sugar priceshaye long been controlled on wold markets and within national boundaries The gov- ‘emtent of Menico regulated the price of sugar with pice contols and import duties until August 1995, Prior fo Apc 1983 sugar pres in Mexico were adjused monthly according t the rate of inflaton i the United States an the oficial devaluation of the peso by the governmest. In April 1093 tis price control Was eliminated, and an allowed 9.0% increase Was set fo# the reminds of ‘he year (1993) Following price adjusiments allowed were 6.0% in January 1994, 15% in February 1995, 98% in May 1995, and 10.8% in August 1995, Price contols were then eliminated following the August 1995 adjustnent, The total increase in Sugar prices for 1995, fr all price adjustments and exchange rate changes, was 60.7%, Although price controls Kept sugar costs for Gemex under control in 194 and 1995, it was expected that subsequent costs might ris significantly 28Gemex, Form 20-F, December, 1995, p. 19,SENTERO Pelton Cate PepsiCo in Meso: Aston ors araiaige Basa necaa B85 ADRs logge Neteales 214589) 3.14965. LSet681 iato98S Gri zaS Othe revenues 34438 “ago 3g03 gS SS Tal revenues 2m809 Siusem Téli6se Tay4aes Gea Lass costo les (1425082) (ainasq) (6n6686) (60119) Gamat Les selling, GRA expences (361230 Ganka. (Sraein) assay QiO0MD Less administatve opens GILT) Gaga) 28 ne ee {es deprecation &amertaion 183200) 033129) 6991) _ 095) _caiass Foam iMoomintcpencs < (egshmmo) assay (Iz0818) Glistaeh, GREY Operetng income 86129 390019 3.892 >s7019 L1G 032 Intee/inncial income 25959 4010 oe Les interest expense 10589) dant) oS Foeign exchange ess (G7148) Gogaa)) Se Moneiety positon gain TSA | een cal ee [Regal em os of foaming mt 220766) GH7319) hae) Cae) UTR [ror berenrovions &cxrard tone. (34.69) stato) aaa sess he Provision focicome and estes Bet 45299 (43.499) Gio Enployee statuary pot hasae sit)’ 630) “cnn “G8 Oley Foviien friinete A employe potia Gai)" G35, Gua) Gast, CESS Income befor equity loses in ‘ssoeated conpaice 140.285). (163250) 226396 179.463 asap Equi in ncome doses of ncated companies a es 2 cons, Income afer equity inelsions Ga0288) "GGa30) ~m6396 ros Gs 5ey ‘Thx elution fom operating loss cenyforward = $78 nas Recovery a ese chara in pio years = 79a Ginotacusin rte = ee es aA 758 ‘Toul excortnay ime a = 5516 180 306 Net consolidated income (oss Gs0285) 06829) 25m tists“ ogase Sice: Genes, Foon (0K, Desens ihe integral cost of financing indicates the impact of the peso's devaluation on the firm's capital structure; toal integral cost of financing had risen from NPS24.4 sail, lion in 1993 to NPS5473 inion in 1994—imme .plinge—remaining high in 1995 at NP§220.8 mill devastating: NPS508 million in 1993 and ontinved to rise, nearly tripling from 1994 1994 (December), most of the actual dol not fully felt until 1995, lion. Foreign exchange losses were NP$671 million in 1995. Interest expenses 'o 1995, Because the peso’s fall was late in lar-denominated interest payment impact wasosm Part Financing the Global Fim ‘hares in the trust was divided into two separate phases. In Phase I, from October 1995 to December 2002, Mr: Molina would continue as Chairman and CEO of Gemex, and | ‘would have the right to vote all of the B shares and ordinary participation certificates. (CPOs) in the Trust (over 50% of the voting control of Gemiex), During Phase Il, com. ‘mencing in January 2003, PepsiCo would acquire the sole power to direct the vote ofall 5 shares and CPOs in the Trust. PepSiCo would thereafter control the company a$ long 4 the Trust held the majority of the outstanding B shares. Although PepsiCo now hel only 26.74% ofthe tot shares in Gemes, itheld 51.5% of the voting shares (B shares) According tothe agreement, however, PepsiCo would not exercise its voting rights un the end of 2002, " jn August 1995, Gemex continued its recapitalization efforts, successfully refinane. ‘ng USS85 million in short-term debt in two tranches. One tranche was financed through private lacement arranged by Chemical Bank (US), while the second was a commercial Paper issue sponsored by the Weston Group (US). Both were denominated in US, dollace On October 12,1995, Gemex and PepsiCo confirmed the consummation ofthe joint ‘ale agement. In a press release, Gemex’s President Enrique Molina noted the int ‘enture's primary advantage to Gemex: “It strengthens our balance sheet, reduces our {pterige and opens greater access for Gemex in capital markets’ On October 18,1995, Gemex announced a 3-for-1 stock split ofits CPOs listed on the Mexican botsa,}9 Ag part. ofthe new Nenfue sructire, Steve Lawrence was named President and Chief Operating Off, and Would report to Gemex's CEO and Chairman, Enrique Molina ® Lawenee Was considered a turn-around artist, and was another indication of PepsiCo’s commit ‘nent {9 not only make the new venture work, but to revitalize Gemex’s anchor boiler Position. ‘The question for Lawrence was; what to do? z Status 1996: The Cola War in Mexico DY ite sumer 1996, PepsiCo’ strategy in Mexico had bepun to unravel, A review by Teer Col Tilematonal of Gemex's operations and performance to dae vas unsetting. | ‘he fll impact ofthe damage ofthe peso’s devaluation could now be accurately assessed Operating Income aid Integral Cost of Financing, Exhibit 7 provides an overview in Constant peso of the Company's profiblity forthe years 1991-1995. The rapid expan, jaar aret sacs and bisiess lines inthe early 1090s had more than tripled operat {ng Income from NPS117.0 million in:1991 to NP§390.0 million in 1994. In. 1995, jSlevtng the fall of he peo andthe resurgence of competition from Coca-Cola, operat ‘ng income fell to NP$86.1 million, Operating income was in many ways a measure of the business's basic competitiveness independent of financing expenses, nAlttough thes sae CPOs ae the underlying security forthe ADRs (or GDR) traded onthe NepeYork Stock Exchange, iid not affect the valuation ofthe ADRs due toa ratio change ot the ‘underlying shares from 2:1 to 6, itt Lawrence ttd most recently served as Senior VP. of Pepsi-Cola, Europe, and President end (CEO of PepsiCo International, Spain,Deason Case. PepsiCo in Mexico: Anatomy ofan Atte’ Exposure ass Ownership of the Share Capital of Gemex, April 26, 1996 Total B Shares D Shares L Shares Questing Ouner Hine iB Nanbee ce Manes ge agp Enrique C. Molina Sobrino 344,351,117 928,926,889 | 97.3% 328,095,880 97.40% 71 bq Pepsico, 3750001831 a DOR Otome danas Allotheroficers & diectors _” 9'234'152 2284152) 27%. 9234157 ioe tone 729,486,100 F38I6L081 1000% T38.i6i0s1 10000% — iooGne Molina/PepsiCo Shares Trust ‘ Molina Family Wooo ese S7AO8TI4 | 1O0R s7468715 too 13 26— Pepsico 315900831 86.7% 0.0% = 00% 264e TOSS 100% S7A6RTI4 iO SIa687i4 10loe —socue Sate: Listed on he Mencan Stock Exchange 6ymbol GGEMEX), fected a 3 oe stock split on October 1005: According tothe Company's amended and testaled bylaw; 50% Gr more of Series B shares, On March 9, 1994, D Shares: Entitled to ¥ote only in mited circumstances and to receive an ‘nual cumulative dividend of $% of Tay ens et beta 3 1 suck spon Oxeers, [es Sens aca ca Ne SMM et lle Bost by Coos tox yeas on ne ae occa og ‘de Mekico S.A. a8 CPO Trustee. The CPOs ate listed ‘on the Mexican Stock Exchange for ten years, afler which Sart) ane fo be tected CPOs of maybe renoved famine CRG faa separa Sie Dares may sot beens font he CPO Tun i lent nese the sue fe ad RE Slo in tet eunances an ligitonpetrece sale Sees B ne Be Eid il Efe 43 for | sock sion Ocinber 6,199. Seria Ushnes canton fndvidalty Cee Tp etrserlet 8) CEOs yr othe ate oft, wine Berea Mo ee te Tn cro Mild Il on ie Mesiem Stock Exot ov ca ams she eae may con May BOLTS TEE A OPO 1 ay te roteye fom ie ChO Taran trded see oe ‘my ol be witraw fom th CPO Trust ui he tenth aniversary of tie ea : Se Mois Weta Company De ep ot Grape Entrees 8A de 9i Part Fiancing the Global Fi Gemes's bottling subsidiaries operating inthe Southeast area of Mexico for NPS4.6 mil Jion, On July 27, 1995, PCT announced that it would be moving in principle to acquire « 256 interest in Gomex for cash and ownership of several other Pepsi-Cola bottling — enterprises in Mexico, The purpose of PepsiCo's movement was to establish Gemex 4s—officaly and fiancilly—Pepai's anchot bottler in Mexico, Market analysts now — estimated that Gemex could soon account for over half of Pepsi's sales in the entire | country, and PepsiCo’s senior management felt that it was eritical to inject new life, and ew capital, into its major Mexican bottler!” Enrique Molina had previously rebuffed PepsiCo’s advances, but now conceded that his company's dependence on U.S. dollar. enominated debt left it ite choice in the wake of the peso’s fall, ‘The investinent by PepsiCo in Gemex contained five basic features | 1, Pepsi would contribute US$217 million in cash directly to Gemex; Pepsi would transfer its company-owned bottling operations in several north central cities 19 Geme 3. Pepsi would transfer its 10% equity stake in Gemex’s southeastern bottling opera tions to Gemex; 4. Gemex would be granted botling rights io white territories (i, ateas where Pepsi ‘was not curently distributed) and wonld have the option to acquire all other fran- chises which became available; 5, Pepsi would participate in key Gemex management decisions, ‘ ‘There was oue other notable feature of the transaction, ‘The founding Molina family of Gemex was to maintain operational control for seven Yeats, At the end of the seven years, the Molina family would sell al of its voting shares 10 PepsiCo.!" PepsiCo agreed ‘o pay a premium of USS50 nillion to the Family for Gontroling interest. : ‘The testructuring of corporate control was complex (see Exhibit 6). According to the joint venture agreement, Mr. Molina, PepsiCo, and PepsiCo’s Mexican subsidiaries formed the “Molina/PepsiCo Gemex Shares Trust" a Delaware stetutory business trust. Alter all participants contributed their specific shares to the trust the management ofthe PepsiCo’s motivations ate clea in light of several public statements since that time. For exam- ple, Roger Enrico, CEO of PepsiCo, recently stated, “The financial crisis in Mexico brought things to a head, If there was ever a time to invest and show confidence in Mexico and Gemex, it was then" (Financial Times, November 27, 1996, p. 14) ‘According to PepsiCo's 1996 10-K filed with the U.S. SEC (p. 44), “In 1095, PepsiCo issued a ‘seven-year put option in connection with the foriation ofa joint venture withthe principal share- holder of GEMEX, an unconsolidated franchised botling aiflliate in Mexico. The put option allows the principal shareholder to sell up to 150 milion GEMEX shares to PepsiCo at 66 2/3 cents pee share, PepsiCo accounts for this put option by marking it to market with gains or losses recognized curently as an adjustment to equity in net income of uiconsolidated afiliates, which is included in selling, general and administrative expenses in the Consolidated Statement of Income, The put option liability, which was Valued at $26 million atthe date of the original trans- ‘ction, increased to $30 million by year-end, resulting in a $4 million charge to earings!" Saree an RT OT EE |Petison Case “Pepsico in Mesico: Anatomy ofan Affiit's Exposure a oS Brice increas in mid-March but, given the timing of suc increase, the net sales igure for this quarter does nat reflect the favorable fect we expect such increase ta have onthe net sales figure inthe next quarter 16 : ‘To date the passthrough of exchange rate-elated costs and losses to customers had ot sustained the firm's profitability. In the following months, Gemex’s actual sales vo. lume fella. result of pice increases, Second quarter rests indicated a decrease in the Sales volume of soft drink products of 5%; however, 21% increase in the sales volume ‘of purified jug water sales buoyed firm eamings. But PepsiCo’s and Gemex’s relation- fi Was about to change, and the result would hopefully allow Gemex to recover some, thing of ts former glory, : The Joint Venture Agreement with Pepsi : Fhe next major step in Gemex’s evolution oecurred before the dust fromm the pesos fall had setled. In January 1995, Pepsi-Cola International (PCL) purchased a 10% tnesest in '6Gemex, April 28, 1995, =Decison Case. Pepsico in Mexico: Acton ofan Ail’ Exposure 41 Hished limits resulted in direct open market intervention by Banco de México—typically a buying of New Pesos on the open market with hard currency reserves such as the U.S. dollar. The New Peso became incresingly overvalued, and contibuted toa rapid growth in Mexico's curent account deficit. In 1994 a number of events led to. crisis in the New Peso’s value. The Mexican cur- ent account deficit rose to 8% of Mexico's Gross Domestic Product (GDP), At the same time, U.S, dollr-denominated interest rates began rising due to the implementation of a relatively tight monetary policy by the U.S. Federal Reserve, making it more attractive {0 move out of New Pesos into U.S. dollars, Finally, political events within Mexico, such a the armed insurgency in the southern Mexican state of Chiapas, led interna¢ional investors to fear forthe stability of the government, On December 22, 1994, the New Peso was allowed to float it sank) from NP$3.45/USS 1o NPS4.65/USS (sce Exhibit 4), ‘The Mexican government's policy, which alloyed the New Peso to fall only a pre- seribed daily amount, had not Kept the peso in lin With economic fundamentals such a8 the consistently higher Mexican inflation rate and the continually escalating merchan. ise trade deficit! The fll ofthe New Peso—in the eyes of many currency analyste_ ‘was inevitable, ‘The devaluation of the peso was devastating for Gemex, as it as for most multina: tional firms in Mexico, Gemex shares on the NYSE plummeted from a high of neurly $830 per share in mid-1994 to under $8 in January 1995, The fall in Gemex share values reflected not only the lower US. dollar-value of Gemen’s Mexican peso-based earnings, but also the fallen expectations for the Mexican economy and the purchasing power of the Mexican consumer, bot factors leading toa downward revision in Gemen’s earning expectations, : On January 20, 1995, Gemer released a statement attempting to respond to numer- ous investor inquiries regarding how ithad been impacted bythe fal of te New Peay’ * The company’s debt. Noting that the firm had switched the currency of denomina- tion of the majority ofits debt in 1992, Gemex now had U.S. dollar- denominated «debt totaling $264 million or 78% of total lables. Although offering no current Strategies to manage the exposure, the company noted that jt possessed significant adsitonal debt eapacity (bank lines and an open Euro-Commercial Paper program) to assure liquidity, * Capital expenditures. The increase in the firm's debt had been used primarily for expansion and modernization of fixed assets. Alhough further future capital expen. tres would obviously be reduced, the frm fel that these assets Would aid Ih ita ability to maintain its competitiveness, ‘Evenly on January 1, 1996 the New Peto Was renamed the peso, without any’ changin its vale, ooaripe Embotelador de Mexico, S.A, de C.V, Addresses Financial Condition. January 20, 1995, Mexico CityPart Financing the Global Fm The Fall of the Peso : ‘The value of the Mexican peso had fallen throughout the 1980: as Mexico continua fought high domestic inflation. Beginning in 1982, the value ofthe peso was allowed float by the government within a narrow band, the “controlled rate,” which allowe urencys ilu to depreit slowly rather han fall rey. Tis exchange rae cont system allowed Mexican residents and companies to purehase foreign currency equired them to sell foreign currency earned, atthe oficial exchange rate estab daily bythe Banco de Meteo, But the pesos vai sil el continuously thougho 1980s, approaching 3,000 pesos tothe dollar inthe early 1090s, Final 11, 1991, after years of hardship and costly austerity measures, the Ve ] and inflation rae stabilized sficienly to allow the removal ofthe controled rate, On January 1, 1993 the Mexican government replaced the peso (Bs) withthe New Peso (NP) and revalued it, with one New Peso now equaling 1,000 pesos. The New Peso was allowed to lucttate over a relatively nar following to years. Although the Mexican governme itt depreciate, the New Peso’s value was nt allowed to change proportionately in valu tothe domestic ft of natn Mein. Any cto i the New P's alee it th BP ot oe "Mexican consumer vies rose 11.9% in 1902, 80 in 193,718 in 194, an ‘According to Purchasing Power Parity, a country's eureney ¥ shoul charge in proportion io elativeiflatin aes. IF Mercasinflaion rate as a the U.S inflation rate in 1993 and 1994 sit was, the peso should hve fallen in Value relative the dll ould probly ae fin gradual alowed tale ely.ican eeonomy grew only 0.4% in 1993, the beverage dnd botiled water market grew Gemen’s sale i of eee oh itis. pleasure to infor you thatthe anual inc a prea ti ‘* perativ innobile Tons, Sis 3 CV)a plac ble ellary Pcie Bh oe G0} cone "aistribution subsidiary (Serviagua S.A. de C.V).SS i 458 Patt Financing the Global Firm Grupo Embotellador de Mexico (Gemex) Gemes is & holding company which produces, distributes, and sells botted soft drinks, mineral water, retumable plastic bottles, and a variety of other packaging materiale through its various subsidiaries. The Company's flavored soft drink products include. Pepsi Col*, 7-Up®, Clearly Canadian’, Seagram's Mixers, Squit®, Mirinda’, in addi. tion to two mineral waters, Garci Crespo* and Electropura®, With its head office in Mex. ico City, Gemex owns and operates 97 soft drink warehouses and 23 bottling plans in famous forts natural waters), Acapulco, and Cuernavaca, The Company employs mire than 13,000 people throughout Mexico, and holds the exclusive rights tothe bottling and distribution of Pepsi products in these four regions.5 : Grupo Embotellador de Mexico was established on December 21, 1981, under the name Grupo Troika, by Enrique Motina and family. In 1984 Mr, Molina acquired the exclusive right to produce and distribute PepsiCo soft drink products in the Mexico City area, In late 1991 the namie of the Company was officially changed from Grupo Troikato Grupo Emboteliador de Mexico (Gemex). Over the following decade, the company. Sequired a number of soft drink and beverage bottlers and distributors throughout Me ‘co, Gemex jas listed on the Mexico City stock exchange on December 17, 1991. One. 3a tert as ie The London Stock Exchange via Global Depoiny Shaves (GDSs) and the New York Stock Exchange (symbol GEM) through American Depositary Receipts (ADRS)? Gemex’s growth was rapid in the 1990s, In 1993, the company signed two new exclusive agreements which expanded product lines and market areas, The frst was with Seagrams & Company, giving Gemex the exclusive right to produce, distribute, and sell Seagrams’ products throughout Mexico. The second was with Natural Beverage Com: ay; in which Gemes obtsined the rights to exclusively distribute the Cleary Canadian beverage line. Gemex’s competitive postion against athec soft drink producers, such as SGemex has exclusive sighs tothe following four regions: |, Mexico City Aten, which consists of Mexico City and portions of th sates of Hidalgo and. «Mexico; 2, Southwest Area, which consists ofthe states of Guerrero and Morelos; : 3. Southeast Area, which consists ofthe sales of Campeche, Quintana Roo, and Yucatan; 4. Notth Cenral Area, which consists ofthe slates of Aguascalientes, Durango, and Zacatceas, Sinn operating subsidacies of the Company had previously been formed or aye by Me ‘Molina btven 1964 and 198) {AtiAmercan Depositary Receipt, or ADR. i a certificate of ownership issued by aU.S, bank rep fesenting a claim on underlying foreign securities (auch as shares of Gemex). Fimms which ae incorporated and traded on foreign stock exchanges wishing to have theit shaes listed on US sok exchanges ae typically trded via ADRs. Inthe case of Gem, each ADR (simultaneously (ered a Global Depositary Receipt or GDR) was equal to three Onlinary Participating Cerf «ates (CPOs), which in turn was a combination of one B share, one D share, and one L share fn ‘Gemex (described in Exhibit 6) — ss ee ieDecison Case. PepsiCo in Mexico: Anatomy of an Afiat’s Exposure a ppackaiges—the returnable gles bottle. The logic was simple, the returnable package was the cheaper delivery vehicle for the product. But if Mexico was industrializing rapidly, and more OF its high soft drink consuming populace grew increasingly affluent; the desire of the affluent for convenience would grow. The convenient package was the slightly higher cost, nonretamable package, the nonretumable plastic bottle. Pepsi was thinking plastics. Grupo Embotellador de Mexico (Gemex) was PepsiCo's largest botler outside of the United States, serving Pepsi's largest market outside the United States. Gemex had grown from a small boitling operation in the city of Acapulco in 1964 toa major player in one of the world’s largest metropolitan areas, Mexico City. Gemex. was owned and ‘operated by Fnrigue C, Molina Sobrino and the Molina family. Gemex was considered the most successful of PCI’s Mexican operations, with a 1992 soft dein market shate in the Mexico City area estimated at 50.8%, as compared 10 Coke's 49.2%. This made Gemex exceptionally successful compared to otfier major PepsiCo botlers, inside and outside of Mexico, ‘Agral was a joint venture of Grupo Protexa (51%), the sixth largest constcuction ‘company in Mexico, and Pepsi-Cola International (49%). This Was PCT's largest equity interest in any ofthe regional bottlers, and reflected Pepsi’s grand ambitious for its mar~ kot, Agral currently held a 20% market share in the Monterey market of northern Mex- co, the third largest city in Mexico. Monterey’s prospects centered on is ranking as one of the bighest per capita consumption regions for soft drinks in the country. Unfortu- nately, it was also one of Pepsi’s weakest markets, Although Agral's prospects Were con- sidered good, Grupo Protexa itself was a USS1.2 billion conglomerate with a multitude of interests, including telecommunications, rail transportation, petochemicals, and heavy construction. Its commitinent to expanding PepsiCo's interes’s in the region had been hotly debated both in northern Mexico and northesn New York, ‘The other regional bottlers were enjoying only modest destees of success agiinst the historical dominance of Coca-Cola. Grupo Reilo was the bottler and distributor in ‘Toluca and Tlanepantla, rapidly expanding suburbs of Mexico City. Although success- ful, many suspected that it would be eventually absorbed into Gemex. Grupo Embotel- ladoras Unidas, located jn Guadalajara, Mexico's second largest metropolitan are, was also a joint venture partner with PCI, but was suffering flac growth in sales, ‘With PCT's Chris Sinclair af the helm, PepsiCo was determined to launch'a vital ized attack on Coca-Cola throughout Mexico, Sinclait moved swiftly in 1993, acquiring 220% equity interest in Grupo Rello. With the lone exception of Agral in northern Mex- co, it appeared from the start that Sinclair intended to lead his attack throught Gemiex But the Molina family, the owners of Gemex, had rebuffed suggestions by PCI that it take an equity interest in the other bottler ‘$Coca-Cola, infact, believed that there was no consurer goods package more eritical toa product, ‘more reengnizabe to its consumers, than Coke's contour Battle. Coke was determined 1 stay with the returnable glass bot.Detison Case PepsiCo in Mexico, Anatomy ofan AMiiate’s Exposure 5 ‘Argentina. Pepsi-Cola Intemational (PCD) moved in October 1993 to gein a 26% equity interest in a number ofits key botlers across Latin America. In the late 1980s, a group of investors led by Charles Beach had gained control of bottlers and distributors, frst in Puerto Rico (1986), ‘then in Argentina (1989). Buenos’ Aires Embotelladora S.A (Baesa), the firm for which Beach served as CEO, had been Pepsi's greatest success story in the carly 1990s, as the local Argentine bottler had expanded market share and influence to Brazil, Chile, and eventually Uruguay, Beach had increased Pepsi's market shate in Buenos Aires from about 1% 0 39% by 1992. In exchange for several existing Chilean and Uruguayan botling operations, PCI pumped $35 million in cash into Baesa, ‘Bacsa Was also guaranteed contol over several expirnig Brazilian Yollers, most notably franchises in Rio de Janeiro and Porto Alegre (1994) and Sao Paulo (1996), Baesa under took d massive expansion and recapitalization of its production facilities throughout South America, raising over half billion U.S, dollars between 1992 and 1994, Venezuela. Hitde Venezuela, PCI's primary botling operation in Venezuela, was owned and operated by the Cisneros Grotip. Headed by Guastavo Cisneros and his brother Oswaldo the Cisneros Group was highly diversified financial empire involved in busi. ‘nesses ranging from sporting goods to telecommunications products and services, ‘The Cisneros family, iriends of PepsiCo’s President Roger Enrica and the holders of 1 franchise for over 50 years, was actively negotiating with PCI to sell the parent com: ‘pany a sizable equity share inthe Venezuelan bottler, Although Veneruela vas the only country in South America in which Pepsi held a larger share of the market than Coct, (Cola, the Cisneros Group believed that in order to continue to hold, and possibly ‘expand, their market dominance, a sizable capital injection would be necessary. Negotiations ‘ith Pepsi had proceeded sloily however, as PepsiCo was not comfortable with some ‘of the Group's ambitions to expand outside the Venezuelan borders into other mackets, Mexico. In March 1993, concurrent with the adoption process of NAFTA, Chris Sinclair announced that PepsiCo was undertaking a $750 million investment initiative in Mexico ‘The $730 million would be used over the next five years fo bolster bottling and market. ing efforts, recaptalize operations, and update bottlers with the latest technology.? The Purpose tas clear: to cut into Coca-Cola’s dominant Mexican market share. Coca-Cola had also been busy of late, tiking a 30% interest in Fomento Economica de Mexico (Femsa), and naming it Coke's anchor bottler in Mexico, ‘takes at least three Diet Pepsis-Peps Lights, actually —to down your plate of tacos al asior the deleeiable house specialty at El Tizoncito. Pepsi has pouring rights at this popular hain, which brings seasoned proficiency to fastfood throughout Mexico Cit) and \pities {The Cisneros Group held controlling interest in a number of U.S. and South Arresican businesses including Spalding (sport equipment), Evenflo (baby produc), Galaxy Latin America (satelite ‘TV services), and Pueblo (supermarkets), 2th first phase ofthe initiative was a USS11S million equity interes in nee Mexican bottlers: 296 interest in Grupo Embolelladoras Unidas, a 49% interest in Grupo Protesa's bottling sub: Sidiary,Agral, and 20% interest in Grupo Rello.-4 ee ‘Soft Drink Market Shares in South America, 1993-1994 Coke Part. Financing the Global Fim = Coury Pepsi Other: ‘Argentina STA 36.0% 66% Bolivia, saa 183% 213% Brazil 549% 8.0% 37.1% Chile 641% 180% 119% Colombia 36% 11.29% 452%, Beuador 355% 174% 21% Mexico 610% 210% 18.0% Pens 1% 235% 34.405 Venezuela 116% 420% 46.4% Uruguay 610% 303% 27% Sout A ge Detain Leave Pop Fat inet Hoan Choice IPDS rane, WAP. markets via a two-sage presence. Fist, the soft drink syrup concentrate was sold in- ‘country via a local affiliate. This local affiliate was frequently wholly owned or majority- controlled by the soft drink parent, Access to the consumer, however, was through a Second level of local botlers and distributors. These companies had traditionally been local franchisees in which the soft drink originator (e-g., Coca-Cola or Pepsi had no real equity inleres. They were cooperative joine ventures, not equity joint ventures, These botlers and distibutors were granted exclusive regional rights, and operated indepen- dently in their own markets. ~ Tihs lack of control was frustrating forthe strategists back in the home offices of the ‘major soft drink powers (Atlanta, Georgia, for Coca-Cola; Purchase, New York, for Pep- siCo). In 1993 both Coca-Cola and PepsiCo had moved to gain additional management ~control-over their Latin American markets via a chosen anchor bottler (Coca-Cola) ot super botiler (PepsiCo). Both Pepsi and Coke had decided that if they were (0 effectively, take market share from the other, they would need a single voice in the regional maskct. le was hoped that through: a single representative, the product would be able to gain mar- ‘ket preferences from local retail distributors, as well as present a singular image to the ‘consuming public. The anchor bottler strategy was dependent on two critical components. First, the ‘chosen botler needed the resources to implement the strategy, a strategy which was often a combination of technology, packaging, distribution, and marketing. Secondly, the bottler must have the product focus to see the strategy through in a highly competi- tive marketplace. PepsiCo was now moving quickly to put both components in place, By taking an equity interest in these local bottlers, the soft drink makers intended to hhave direct managerial and financial control in the implementation of their strategic ‘goals. The equity injections associated with these joint ventures were to provide much of the badly needed capital to upgrade the production and distribution facilities needed to compete in an emerging Latin market. So venture they did. What PepsiCo—and specifi- cally Chris Sinclair—did not anticipate, however, was the role that personalities and, families would play in the development of their Latin American strategy.Global Market Share Comparison of Coke and Pepsi Tp 10 Countries Cote Unite Ses ra Mesico oie Jipan “4 Baa Si% Bas.Cenal Puope ae Germany 508 Canada ie Middle Fast 23% China 208 Bain 28 She: Fong, 120886, p78 (Aitew Cora, rn Sen The Latin Cola Wars Pepst 31% 21% 10% 1% 5% 34% 38% 10@, 126 In 1993 PepsiCo was the second largest soft drink company in the world, with a 21% world market share to Coca-Cola's 46%, PepsiCo, however, was deternined to change that. Many of ‘the world’s industrial-country markets for soft drink products were already mature, but the host of emerging-country markets represented immense potential, Countries such as China and India were only in the first stages of consumer product growth—the war would be ‘waged in their markets for decades to come. But the markets of Latin America, already some of the world’s largest soft drink consumers, were thought to stil contain substantial potential for growth. With rising per eapitn incomes and s proven proctivity for soft drink consumption, Latin America was ripe fora cola war: In addition to cola drinks, an added feature of the Latin American market was the growing popularity of flavored drinks, The flavored drink segment was thought to be still in its infancy in Latin America, and both Coke and Pepsi had recently been expanding their soft drink product lines. Thankfully, sales of flavored drinks did tot eannibalize cola drink markets, only the marke of other flavored drinks. Pepsi saw Latin America as prime fenitory fora major initiative. With the exception of Venezuela, however, Pepsi yas tailing Coke in every major country market in Lain Amer- ica. Pepsi's marketshare ranged from as low as 8% in Brazil, oa high of 42% in Venevuela (Gee Exhibit 2), With the exceptions of Argentina and Uruguay, Pepsi's market share was not only trailing Coke"across the southem, hemisphere, it was often third to other soft drinks. Late in 1993, the reality was that Pepsi—at best—was a distant second to Coke PepsiCo’s Latin American initiative Was spearheaded by PepsiCo's Chief of Inter- national Operations, Chris Sinclar, Sinclar had taken over Pepsi-Cola International (PCD), the intemational side of PepsiCo, Ine.. in March of 1990 ith the express purpose of doubling PepsiCo’s overseas business during the 1990s, Sinclair pursued a * go-for-broke expansionist strategy, altacking Coca-Cola head-on in evety major market Sinclair would be PepsiCo’s standard-bearer in the Latin cola wer, But a cola war is not easily won. The frst problem was the structure of the market, Soft drink conipanies like Coca-Cola and PepsiCo had traditionally serviced country42 5 & Parts nancing the Global Fem DECISION CASE PepsiCo in Mexico: Anatomy of an Affiliate’s Exposure : Citi and Pepsi Squabble Over a Loan Gone ‘No Deposit, No Ret South ofthe Border Welcome to the Latin American debt crisis redux—or at lesst a nasty litle aftereffect of i ‘With the 1980s and mid-1990 crises stil being felt, Citicorp, which led the world’s banking ‘community into Third World lending in the mid-1970s, is fighting to recover a bam $20 mil Jion loan to a Mexican soft-drink bottler. Normally, sueh ¢ loan by the nation’s second-largest bank wouldnt make much of ripple inside or oitside Cisibank: ‘This was no ordinary boiler, however. ILs a joint venture parly ovmed by PepsiCo Ine, which is trying to make a big push into emerging markets, especially Latin Anterica. Pepsi is fefusing fo cover not only the $20 million Citi oan, which was made for bottle purchases, but another $50 million in credits and leasing agreements extended by other banks and supplies Source: BusinessWeek: Sepiember 23,1996, p. 134 ‘The Latin Cola Wats between Pepsi and Coca-Cola began in eamest in September 1993 ‘Working with ts bottlers in Argentina, Mexico, Puerto Rico, and Venezuela, PepsiCo was determined to win the early battles. PepsiCo's leadetship had concluded that success would only come if the company took more control ofits boilers’ operations in-country, ‘while simultaneously injecting substantial capital into their operations. Pepsi could gain « larger shate of some of the world's most promising soft drink mackets, but only by accept ing lower margins atthe cost of substantial new investments. The company’s turn on capital employed, however, was not going to be prety, However, all had not gone according to plan, In only three years—by September 1996—it appeared that PepsiCo's entire Latin American initiative was on the brink of failure, Instead of gaining market share, Pepsi was facing a net loss of market share Sout OF the equator. Roger Enrico, PepsiCo's Chief Executive Olficer since April of 1996, surveyed the company's competitive position and performance and found ltl to brag about, Traditional arch-rival Coca-Cola and its charismatic Teader, Mr. Robert Guizeta, was retaking much of the market share lost previously to Pepst in the opening day’ of the war, Margins were down across Latin Americ, and econormie conditions had only served to empliasize the weaknesses in PepsiCo’s strategy, which senior manage- ‘ment was only now beginning fo admit Pepsi also now had a second enemy—the Mexi- an peso—in addition to its old nemesis Coca-Cola, Mexico, the Second largest soft drink market in the world, had been a major front in the Latin Cola wars. By the fall of 1996, however, it appeared the war was lost Pepsi's ‘market share bad dropped fo litle more than 21%, down from 26% in 1995, Pepsi stil trailed Coca-Cola in all but one ofthe top ten cola markets in the world (see Exhibit 1) Roger Enrico now pondered wher the war had been lost, and what was to be done ‘This case was prepared by Michael H. Moffett and Tomas Soio for the purpose of classroom di: cussion oly and noto indicate either effective or ineffective management. Copyright © 1996 Thunderbird, The American Graduate School of International Management. Al rights reserved ee