PepsiCo’s Diversification Strategy

GROUP 3 - EXECUTIVE B-31B

STRATEGYC MANAGEMENT - BM. Purwanto, MBA,
Ph. D.
Dewi Sophiyani Kurniawati, Martono Sapto Yuono,
Nugraha Arief, Tarsis Tinggi
 Content
1. About The Company
2. Strategies for Competing in International Markets
3. PepsiCo VS Peer
4. Corporate Strategy : Diversification and the
Multibusiness Company
5. PepsiCo NOW
About The Company
 Meet the CEO

Mr. Donald M. Kendall Mr. Wayne Calloway Ms. Indra Nooyi

(1971-1986) (1986 – mid 1990s) (2006 – now)

Mission Statement
Vision Statement
“to provide consumers around the world with
“to deliver top-tier financial performance
delicious, affordable, convenient and
over the long term by integrating
complementary foods and beverages from
sustainability into our business strategy,
wholesome breakfasts to healthy and fun
leaving a positive imprint on society and
daytime snacks and beverages to evening
the environment.”
treats.”
 Mature operating,
Acquires a controlling interest in
Life Cycle of PepsiCo Gamesa, Mexico’s largerst cookie
company, 1990.
Introduces fresness dating, Lipton
Middle-aged Green Tea 1991.
operating, Frappuccino, Starbuck, 1994
Frito Lay Cracker Jack Aquafina, 1997.
International, 1973. Acquires Tropicana Product, 1998.
Pepsi Light, with a Agrement with SOBE, South Beach
distinctive lemon Beverage Company, 2000.
Young taste, 1974. Merges with the quicker oats company,
Pepsi-Co acquires 2001.
Operating, Pizza Hut, Inc, 1977. Acquisition of Stacy’s Pita Chips Co,
Diet Pepsi
Tortitos brand crispy, 2002.
1964.
Development Doritos brand
1981. Launches sierra Mist, 2003.
Pepsi free & Diet Acquires Izze beverage company, 2006.
1890, Pepsi- tortilla chips,
Pepsi free, 1982 Performance with purpose 2007.
Concept Cola was
1966
Distributes product Pepsi Greater Chine, 2008.
creation created in China, 1984. Strategic alliance with Calbe Japan ,
Pepsi Co listed on 2009.
sebelum The Tokyo exchange, Completed acquisition Pepsi Bottling,
1890 1986. 2010.
Acquires Walkers R& Strategic alliance with Tingyi Holding
Smith Crisps, 1989 China, 2011. with Mountain Dew,Brisk
and Starbucks Join Portofolio ready to
drink, 2012.
Join Venture with Muller Queker Dairy,
2013
PepsiCo Priorities
Strategies for Competing in
International Markets
 Why Companies decide to Enter Foreign Markets?

International growth opportunities

Six Business divisions : PepsiCo Inc. (PEP) and other major
companies in the food and beverage
1. Frito-Lay North Amarica industry, including The Coca-Cola Company (
2. Quaker Foods North America KO), Monster Beverage Corporation (MNST),
3. Latin American Foods and Mondelez International, Inc. (MDLZ), are
4. PepsiCo Amaericas Beverages looking for growth opportunities in
5. PepsiCo Europe international markets. The growth rates in
6. Asia, Middle East, and Africa developing and emerging markets are
expected to continue to surpass the growth
in developed markets.

Favorable factors
Growing populations, rising disposable incomes, and higher standards of living
in emerging economies are some of the favorable factors that will facilitate
the demand for food and beverages. The per capita consumption of
nonalcoholic beverages is still quite low in emerging economies such as India
and China compared to the Unites States. This gives significant growth
opportunity for PepsiCo’s beverage business.
Balanced Geographic Footprints
PepsiCo VS Peer
PepsiCo Inc. (PEP) is the market leader in the US snack food business. The company
derived 52%, or $34.5 billion, of its 2013 revenues from its food business. Information
Resources, Inc. (or IRI) estimated that PepsiCo held 36.6% market share of the US
savory snacks retail sales in 2013, way ahead of competitors like Kraft Foods Group Inc.
(KRFT) and Mondelez International, Inc. (MDLZ).
Global brands
The industry includes companies that enjoy huge popularity all over the globe. Brand consultancy
Interbrand ranked The Coca-Cola Company (KO) as the world’s third-most valuable brand, with a
value of $81.6 billion. Coca-Cola’s closest competitor PepsiCo, Inc. (PEP) ranked 24th, with a brand
value of $19.1 billion.
PepsiCo’s higher ROE
Despite Dr Pepper Snapple’s higher return on assets, PepsiCo’s ROE is greater due to the presence
of higher financial leverage. Financial leverage, which is computed as average assets divided by
average equity, indicates the extent to which the company uses debt to finance its assets.

PepsiCo’s ROA lower than Dr Pepper Snapple’s

A company’s ROA can be expressed as a function of its net profit margin and asset turnover.
PepsiCo delivered lower ROA of 8.5% in 2014 compared to Dr Pepper Snapple’s 8.9%. This is
because PepsiCo’s profit margins are lower due to higher costs. But now PepsiCo is implementing
productivity measures to bring down its costs.
PepsiCo’s nonalcoholic beverage peers Coca-Cola (KO), Dr Pepper Snapple (DPS), and Monster
Beverage (MNST) were trading at 12-month forward PEs of 22.9x, 21.5x, and 37.0x, respectively,
as of July 8. Monster Beverage’s high PE multiple is due to high sales and earnings growth
expectations, driven by a strong demand for its energy drinks.
Beverage in 2014

Snack in 2014
 Corporate Strategy
Diversification and the
Multibusiness Company
 What is PepsiCo’s Corporate Strategy ?
PepsiCo’s corporate strategy had DIVERSIFIED the
company into:

In 2014
1. Salty and sweet snacks
2. Soft drinks 1. Purified and functional waters
3. Orange juice 2. Isonic beverages
4. Bottled water 3. Hot and ready-to-eat breakfast cereals
5. Ready-to-drink teas and coffees 4. Grain-based product
5. Breakfast condiments

For added long-term economic value for shareholders

 When to consider Diversifying?
PepsiCo has diversified business model with a strong presence in food and beverage products. In a
scenario where carbonated soft drinks have been continually declining, PepsiCo’s significant
presence in the snack food category gives it an edge over its closest rival, The Coca-Cola
Company (KO), which is heavily dependent on sparkling or carbonated beverages. In 2013,
PepsiCo’s food business accounted for 52% and its beverage business accounted for 48% of the
company’s $66.4 billion revenues.

competitors
PepsiCo competes with global, regional, and In the nonalcoholic beverage industry, The
private companies across the food and Coca-Cola Company (KO) is PepsiCo’s
nonalcoholic beverage space. In the food closest rival. Other peers in the beverage
industry, the company’s rivals include industry include Dr Pepper Snapple Group,
ConAgra Foods, Inc. (CAG) Kellogg Inc. (DPS), Cott Corporation (COT), Red
Company (K), Kraft Foods Group Inc. Bull GmbH, and Monster Beverage
(KRFT), Mondelez International, Inc. Corporation (MNST).
(MDLZ), Snyder’s-Lance, Inc. (LNCE), and
Nestlé S.A. (NSRGY).
Impact of declining volumes
Carbonated soft drinks (or CSD), which form a major part of PepsiCo’s beverage
business, declined for the ninth straight year in 2013. PepsiCo’s 2013 CSD volumes
declined at a double rate compared to Coca-Cola’s. According to Beverage
Digest, PepsiCo’s CSD volumes declined by 4.4% in 2013, whereas the volumes for
Coca-Cola and Dr Pepper Snapple Group declined by 2.2% and 2.4%, respectively.

Profitable food business

PepsiCo’s diversified business model appears to be its strength. The food business,
which contributed  52% of the company’s 2013 revenues, has been able to offset the
decline in CSD volumes. As discussed in a previous part of this series, PepsiCo’s
presence in the complementary food and beverage categories is a key revenue driver.
Also, the company’s snacks business is more profitable than beverages.
The non-alcoholic beverage industry is facing challenges. Carbonated beverage volumes
are falling, primarily in developed markets. Beverage Digest indicates a 3% fall in 2013
overall carbonated soft drink (or CSD) volumes in the US, making it the ninth straight
year in which demand has declined. Previously, US CSD volumes declined by 1.2% and
1% in 2012 and 2011, respectively.
 The food industry is highly affected by changes on consumers’ preferences which includes
taste, lifestyle and social trends. Consumers are increasingly health conscious and place
greater importance on environmental sustainability, mostly in developed countries “but more
and more in emerging markets” (McKinsey & Company, 2015).
Porter’s Generic Competitive Strategies
 How ?
TEST OF CORPORATE ADVANTAGE
1. The industry attractivess test

Well-Positioned in Attractive Categorized

 TEST OF CORPORATE ADVANTAGE
2. The cost of Entry test

PepsiCo has a flexible distribution network

• Products are brought to the market through vending distribution networks,
direct store delivery, and broker-warehouse. So the cost of entering the
target industry not so high
• Global name brand recognition of PepsiCo helped introduced its snaks
business around the word

Threat of new entrants  LOW

• High exit barriers due to the money invested for machineries and equipment

3. The better-offtest

Synergy
PepsiCo McKinsey 7S framework explains how important elements of businesses can be
aligned to increase the overall effectiveness. According to McKinsey 7S framework,
strategy, structure and systems are hard elements, whereas shared values, skills, style
and staff represent soft elements of businesses. The essence of the framework can be
explained in a way that a change in one element causes changes in others.
PepsiCo NOW
2016 Performance
PepsiCo is focused on innovating healthier products across its food and beverage business to
cater to the shift in consumer preferences toward healthier products. Declining carbonated soft
drink volumes in the North America region have made the company focus on low- or no-
calorie variants as well as grow categories such as bottled water and energy drinks. In 2013,
nine of the top 50 food and beverage innovations in the United States belonged to PepsiCo.
 Business Model Canvas of PEPSICO
Key Partners Key Activities Value Customer Customer Segments
 Distributors Propositions Relationships  Enterprises
 Bottling
 Food and  Distribution  Nutritional  Healthy snack  Young worldwide
beverage  Producing foods and and beverage  Common people
Manufacturers  Marketing beverages provider  Athletes
worldwide Key Resources   Channels
 International  
Food &  Product  Advertisements
Beverage  Brand  Global Sales
associations  Employees
 Customers  Partner & Retail
 Media Network
Companies

Cost Structure Revenue Streams

 Marketing tools  Product Sales
 Designing of products  Bulk sales
 Ingredients and materials
 SWOT ANALYSIS
Strengths Weaknesses
1. Over-dependence on Wal-Mart
1. Product diversity 2. Low pricing
2. Extensive distribution channel 3. Questionable practices (using tap
3. Corporate Social Responsibility water but labeling it as mountain
(CSR) projects spring water)
4. Competency in mergers and 4. Much weaker brand awareness and
acquisitions market share in the world beverage
5. 22 brands earning more than $1 market compared to Coca-Cola
billion a year 5. Too low net profit margin
6. Successful marketing and
advertising campaigns
7. Complementary product sales
8. Proactive and progressive
 SWOT ANALYSIS
Opportunities Threats
1. Growing beverages and snacks 1. Changes in consumer tastes
consumption in emerging markets 2. Water scarcity
(especially BRIC) 3. Decreasing gross profit margin
2. Increasing demand for healthy 4. Legal requirements to disclose
food and beverages negative information on product
3. Further expansion through labels
acquisitions 5. Strong dollar
4. Bottled water consumption 6. Increased competition from
growth Snyder’s
5. Savory snacks consumption
growth
VALUE-CHAIN MODEL
Thank You