Professional Documents
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PEPSI
http://www.pepsico.com
The “cola wars” refers to the all-out battle between Coke and Pepsi for world cola
domina- tion. Stop now and think of the PepsiCo brand products you might consume in
a typical day. For breakfast you might have a bowl of Quaker Oats, or perhaps Cap’N
Crunch cereal, or perhaps pancakes with Aunt Jemima syrup and a Tropicana juice. As
you left for class you might have grabbed an Aquarian bottled water, or a bottle of
Gatorade, or Propel fit- ness water. For lunch, a sandwich with a bag of Fritos or some
baked Doritos chips makes a fast and enjoyable choice. Later in the afternoon a
SunChips multigrain snack with an AMP energy drink will hold you over until dinner,
when a Rice-A-Roni product accompa- nies your main course. You may be much more
familiar with PepsiCo than you think.
First quarter 2009 PepsiCo’s net revenues of $8,263 million were down $70
million from the same quarter in 2008. However, PepsiCo controlled costs by decreasing
cost of goods sold by $90 million. This resulted in a net profit of $1,141 million, which
is $90 million less than last year’s first quarter. PepsiCo may need to further adjust costs
to reflect continuing eco- nomic troubles as consumers shift to less costly drinks and
snacks. There is also a shift away from bottled water and back to the tap. Second
quarter PepsiCo results continued the down- ward trend with beverage volume down 6
percent, Frito-Lay down 3 percent and Quaker down 4 percent. However, international
volume was up 1 percent snacks and 6 percent in beverages.
PepsiCo opened a new factory in Shanghai in June 2009 and plans to open
another five plants in China over the next two year. PepsiCo’s total investment over
the 2009–2012 period is $1 billion to bolster manufacturing and its sales force
throughout China. Some of PepsiCo’s potato chip brands in China are Beijing Duck,
Cool Lemon, and Lychee. The new plant will manufacture Pepsi-Cola, Mountain Dew,
Gatorade, Tropicana juices, and bottled water. The new PepsiCo plant uses 22 percent
less water and 23 percent less energy than the average Pepsi plant in China.
PepsiCo’s strategy in China is to overtake Coke, which has a 47.3 percent market
share in the country’s cola market versus Pepsi’ 44.5 percent, according to
Euromonitor International. In overall beverage sales, Coke has a 15.3 percent market
share in China ver- sus Pepsi’s 6.2 percent. PepsiCo has pledged to invest $1 billion in
Russia over the next three years, bringing its total investment to $4 billion over a ten-
year time span. PepsiCo will also invest over $1 billion in China over the next 4 years.
This is in addition to contin- ued investments in Japan, India, Europe, Mexico, and
Latin America.
PepsiCo recently offered $6 billion to retake ownership of its two largest bottlers,
Pepsi Bottling Group (PBG) and PepsiAmericas (PAS). Non-carbonated products are
today about 40 percent of Pepsi-Cola volume, versus less than 15 percent 10 years ago.
Pepsi’s desire to own its own bottlers is to spur its non-carbonated health and wellness
products, which are often smaller-volume, slower-moving products. PBG and PAS
distrib- ute nearly 75 percent of Pepsi drinks in the United States, excluding Gatorade.
Today
Although you might have thought of Pepsi as a bottler of soft drinks, the
company produces Mountain Dew, Mug Root Beer, Sierra Mist, Slice,
Aquafina, Dole juices, and SoBe. But these are just under the Pepsi-Cola
brands. You also need to add Lay’s potato chips, Doritos, Tostitos, Fritos,
and Cheetos under the Frito-Lay brand. In addition, PepsiCo includes the
brands of Quaker (the oats company), Tropicana, and Gatorade. And this
is just a partial list of the branded products sold by Pepsi.
PepsiCo, Inc. is indeed a large company and is defined in the 10K
as “a leading global beverage, snack and food company.” Additionally it
“manufacture(s) or use(s) contract manufacturers, (to) market and sell a
variety of salty, convenient, sweet and grain-based snacks, carbonated
and non-carbonated beverages and foods in approximately 200 coun-
tries, with our largest operations in North America (United States and
CASE 24 • PEPSICO — 2009 237
Marketing
Nooyi is leading a worldwide consumer goods manufacturing company
that primarily uses differentiation to attract and hold customers. Although
its major customers are large retailers
(Wal-Mart accounts for approximately 12 percent of total revenues and 18 percent of North
American revenues), PepsiCo must appeal to the ultimate consumer through extensive adver-
tising and promotional activities. This pull marketing strategy is highly dependent on creative
marketing and the development of catchy slogans, along with the continued development of
new and reinvented brands (Pepsi-Cola Brands). As consumer tastes have changed, PepsiCo has
developed liquid refreshment products that are light, calorie free, sugar free, caffeine free,
sports and energy directed, and flavored (Pepsi, Voltage, Aquafina). Snacks now have less salt
and less fat and are baked, kettled, and made with vegetables (Frito-Lay TrueNorth). This
strategy continues into the juice segment (Tropicana) and the Quaker product line as well as
the Gatorade products.
PepsiCo works closely with its bottlers and retailers in promoting and advertising its
entire range of products around the world. In 2006, PepsiCo spent approximately
$10.1 billion on sales incentives and discounts; in 2007, it spent $11.3 billion, and in 2008,
$12.5 billion was spent. This does not include advertising expenses, which were
$1.8 billion in 2008 and 2007, and $1.6 billion in 2006. Although these numbers may seem
excessive, the level of worldwide competition (particularly Coca-Cola, which spent some $2.9
billion on advertising alone in 2008) requires extensive advertising and promo- tion to remain
in the minds of the ultimate consumer. PepsiCo uses all available media to promote its
products and attempts to attract younger consumers through Web-related media such as
YouTube, and having appealing Web pages with the latest ads and product- related games.
Advertising for both Pepsi and Coca-Cola has generally been built around short,
memorable slogans to attract and hold the attention of consumers. Of the more than 40 slo-
gans and songs created since 1939, some of the more successful slogans for Pepsi have
included: “Twice as Much for a Nickel” (1939–1950), which allowed Pepsi to grow during the
depression; “Have a Pepsi Day” (1961–1963); “Pepsi Now! Take the Challenge” (1983–1984)
was one of the most successful; “Drink Pepsi. Get Stuff” (1995–1996); “For Those Who Think
Young” (1999–2000); “Pepsi Stuff” (2008) Super Bowl commercial; and today’s “Refresh
Everything” and “Every Generation Refreshes the World” (2009).
Industries
PepsiCo is a global company operating in the non-alcoholic beverage industry, the salty or
savory snack food industry, and the breakfast food industry. Although these industries may be
seen as concentrically related, they are analyzed separately.
$20,000
In million US$
$15,000
Chips/crisps
$10,000 Tortilla/corn
chips Pretzels
$5,000
$0
2003 2004 2005 2006 2007 2008
Competition
Coca-Cola
Coca-Cola, the brand known around the world, is the largest producer and distributor of dark colas in the
world and as such is PepsiCo’s major competitor. With net revenues of
$31.944 billion and net profits of $5.807 billion in 2008 as seen in Exhibit 8, the Coca- Cola Company
continues to expand even in the current monetary crises. The financials for Coca-Cola show a strong cash
position of $4.979 billion and long-term debt of only $2.781 billion. Coca-Cola has also invested in
purchasing bottlers and streamlining its operations. “Rather, our entire Coca-Cola system is focused on
what critically matters to our business: investing in our brands enhancing our communications to the
customers who sell our beverages and the consumers who invite us into their lives each day; and
streamlining our operations” (President’s letter, 2008 Annual Report). Coca-Cola seems to be following a
very concentrated strategy by focusing almost exclusively on nonalcoholic beverages with little, if any,
tendency to diversify. This strategy is enhanced by extensive advertising ($3 billion expense in 2008)
CASE 24 • PEPSICO — 2009 240
through the bottling and distribution network and toward the ultimate consumer. Additionally, as the
demand for dark colas has diminished, Coca-Cola has continued to strengthen their juice, ready-to-drink
tea and coffee products, water and
sport drinks along with the introduction of Truvia as a sweetener.
Coke generates most of its operating revenue outside the United States with interna- tional
concentrate sales accounting for 77 percent and U.S. sales 23 percent. Coke is a strong, well-known
competitor and spent, in addition to advertising, $4.4 billion in promo- tion to bottlers and resellers in
2008. This amount of spending on promotion and advertis- ing has led to volume growth in Eurasia of 7
percent, Europe of 3 percent, Latin America of 8 percent, and the Pacific of 8 percent. However, in the
North America market volume growth was down 1 percent. This follows the global trends of a mature and
declining mar- ket in North America with growth in other parts of the world.
Advertising for Coca-Cola is similar to Pepsi in that they also rely heavily on short catchy slogans,
songs, and celebrity endorsements. Since 1886 Coke has been successful with such slogans as “Delicious and
Refreshing” (1904), “The Pause That Refreshes” (1929), “Things Go Better With Coke” (1963), “It’s the
Real Thing” (one of the most successful: 1969), “Have a Coke and a Smile” (1979), “Life Tastes Good”
(2001), and currently “Open Happiness” (2009).
Coca-Cola will continue to concentrate on its cola business but expand its water and juice sales
and continue growth in international markets. However, the North American market generates
25.7 percent of revenue, and Coke will continue to spend heavily on pro- motion and advertising
in this market. Interestingly, Coke’s recent purchases of bottling facilities account for 27 percent
of revenues. Europe is the second largest market; it con- tributes 15 percent to revenues and it
should also see continued promotional activity.
Kraft
Kraft Foods is currently in the process of reinventing itself by restructuring the
organiza- tion into two major divisions, North America and International. The North
American divi- sion is composed of Beverages, Cheese & Foodservice, Convenient
Meats, Grocery, and Snacks & Cereals. The International division consists of
European Union and Developing Markets. Additionally they have brought in new top
management and six new independent board directors. These changes are designed to
strengthen the position of Kraft in the highly competitive and dynamic markets in
which it currently operates.
The Kraft financials in Exhibit 9 for 2008 show a 13.32 percent increase in net
rev- enues over 2007 to $42.201 billion. This growth is a continuation of increasing
growth from 2007. Growth from 2004 to 2006 was relatively stagnant with growth
rates of 3.76 percent, 6.02 percent, and 0.71 percent, respectively. Kraft’s new
strategies seem to be pay- ing off in increased revenue and possible future growth.
The North American Snacks and Cereals division produced $5.025 billion in
revenues in 2008, an increase of 3 percent over 2007 revenue of $4.879 billion. This
divi- sion’s products include Oreo, Chips Ahoy!, Newtons, Nilla, Nutter Butter and
SnackWell’s cookies; Ritz, Premium, Triscuit, Wheat Thins, Cheese Nips, Honey
Maid Grahams, Teddy Grahams and Kraft macaroni and cheese crackers; Nabisco
100 Calorie Packs; South Beach Living (under license) crackers, cookies, and snack
bars; Planters nuts and trail mixes; Handi-Snacks two-compartment snacks; Back to
Nature granola, cookies, crackers, nuts, and fruit and nut mixes; and Balance
nutrition and energy bars.
As Kraft continues to improve in the coming years, it should become a stronger com- petitor in all
divisions. However, with long-term debt of $18.5 billion (LTD to common equity of 83.73 percent), debt
coverage could slow its progress.
CASE 24 • PEPSICO — 2009 241
Future Direction
Pepsi and Coke have fought the cola wars for decades, and Coke has generally beaten out Pepsi for
market share. However, today we see that PepsiCo is a larger and more diversified company than Coca-
Cola with numerous opportunities and directions for growth. Although the market for colas nationally may
be somewhat stagnant, the international markets for colas and snacks continue to grow. In some countries,
these have increased in double-digit figures. Additionally, PepsiCo has continued to expand in noncola
foods that seem to enhance the opportunities for synergy between colas and salty snacks, water and
sports drinks, and breakfast and juices. These combinations and promotions allow PepsiCo’s bot- tlers
enhanced ability to gain retail shelf space. However, the proliferation of products for specific market
segments (light, sugar free, caffeine free, etc.) and the increasing use of house brands by retailers will
continue to force PepsiCo to innovate new products and at
the same time reevaluate current product offerings.
PepsiCo spent $650,000 in the second quarter of 2009 to lobby on sugar, food safety, food labeling,
patent reform, energy, taxes, and other issues. Besides Congress, PepsiCo lobbied the Agriculture
Department, Executive Office of the President, and other entities, according to a report filed July 20,
2009, with the House of Representatives clerk’s office in Washington, D.C.
In late 2009, PepsiCo acquired Amacoco Nordeste Ltda and Amacoco Sudeste Ltda, Brazil’s largest
makers of packaged coconut water drinks. PepsiCo is expanding its presence in South America’s largest
nation. These Brazilian companies make the Kero Coco and Trop Coco drinks.
Also in late 2009, PepsiCo acquired and combined its two largest independent bottlers for $7.8
billion–PepsiAmericas and the Pepsi Bottling Group. This forward integration strategy has been a major
initiative of PepsiCo for many months.
Develop a clear three-year strategic plan for PepsiCo
Questions:
Develop a BCG Matrix showing relative industry growth rate and market share each of PEPSI
product division. Based on the data given in this case, highlight the quadrant where each of the
products falls.
Devise and Suggest relative Market Growth strategy for each product division