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Contents

1) Description

2) Characteristics

3) Examples

3.1 Australia

3.2 Canada

3.3 United Kingdom

3.4 United States

3.5 Worldwide

4) Case studies

4.1 PepsiCo

4.2 Walmart

5) References
Oligopoly

In Economics, an oligopoly ((from Ancient Greek ὀλίγοι (oligoi) "few" + πωλειν (polein)
"to sell") is a market form in which a market or industry is dominated by a small number
of sellers (oligopolists). The word is derived, by analogy with "monopoly", from
the Greek oligoi 'few' and poleein 'to sell'. Because there are few sellers, each oligopolist
is likely to be aware of the actions of the others. The decisions of one firm influence, and
are influenced by, the decisions of other firms. Strategic planning by oligopolists needs to
take into account the likely responses of the other market participants.

Description

Oligopoly is a common market form. As a quantitative description of oligopoly, the four-


firm concentration ratio is often utilized. This measure expresses the market share of the
four largest firms in an industry as a percentage. For example, as of Q42008, Verizon,
AT&T, Sprint Nextel, and T-Mobile together control 89% of the US cellular phone
market.

Oligopolistic competition can give rise to a wide range of different outcomes. In some
situations, the firms may employ restrictive trade practices (collusion, market sharing
etc.) to raise prices and restrict production in much the same way as a monopoly. Where
there is a formal agreement for such collusion, this is known as a cartel. A primary
example of such a cartel is OPEC which has a profound influence on the international
price of oil.

Firms often collude in an attempt to stabilize unstable markets, so as to reduce the risks
inherent in these markets for investment and product development. There are legal
restrictions on such collusion in most countries. There does not have to be a formal
agreement for collusion to take place (although for the act to be illegal there must be
actual communication between companies) - for example, in some industries, there may
be an acknowledged market leader which informally sets prices to which other producers
respond, known as price leadership.

In other situations, competition between sellers in an oligopoly can be fierce, with


relatively low prices and high production. This could lead to an efficient outcome
approaching perfect competition. The competition in an oligopoly can be greater than
when there are more firms in an industry if, for example, the firms were only regionally
based and did not compete directly with each other.

Thus the welfare analysis of oligopolies is sensitive to the parameter values used to
define the market's structure. In particular, the level of dead weight loss is hard to
measure. The study of product differentiation indicates that oligopolies might also create
excessive levels of differentiation in order to stifle competition.
Oligopoly theory makes heavy use of game theory to model the behavior of oligopolies:

I. Stackelberg's duopoly. In this model the firms move sequentially.

II. Cournot's duopoly. In this model the firms simultaneously choose quantities.

III. Bertrand's oligopoly. In this model the firms simultaneously choose prices.

Characteristics

Profit maximization conditions: An oligopoly maximizes profits by producing where


marginal revenue equals marginal costs.

Ability to set price: Oligopolies are price setters rather than price takers

Entry and Exit: Barriers to entry are high. The most important barriers are economies
of scale, patents, access to expensive and complex technology and strategic actions by
incumbent firms designed to discourage or destroy nascent firms.

Number of firms: "Few" - a "handful" of sellers. There are so few firms that the actions
of one firm can influence the actions of the other firms.

Long Run Profits: Oligopolies can retain long run abnormal profits. High barriers of
entry prevent sideline firms from entering market to capture excess profits.

Product differentiation: Product may be standardized, steel, or differentiated,


automobiles.

Perfect Knowledge Assumptions about perfect knowledge vary but the knowledge of
various economic actors can be generally described as selective. Oligopolies have
perfect knowledge of their own cost and demand functions but their inter-firm
information may be incomplete. Buyers have only imperfect knowledge as to price, cost
and product quality.

Interdependence: The distinctive feature of an oligopoly is interdependence. Oligopolies


are typically composed of a few large firms. Each firm is so large that its actions affect
market conditions. Therefore the competing firms will be aware of a firm's market
actions and will respond appropriately. This means that in contemplating a market action
a firm must take into consideration the possible reactions of all competing firms and the
firm's countermoves. It is very much like a game of chess or pool in which a player must
anticipate a whole sequence of moves and countermoves in determining how to achieve
his objectives. For example, an oligopoly that is considering a price reduction may wish
to estimate the likelihood that competing firms would also lower their prices and possibly
trigger a ruinous price war. Or if the firm is considering a price increase it may want to
know whether other firms will also increase prices or hold existing prices constant. This
high degree of interdependence and need to be aware of what the other guy is doing or
might do is to be contrasted with lack of interdependence in other market structures. In a
PC market there is zero interdependence because no firm is large enough to affect market
price. All firm's in a PC market are price takers information which they robotically follow
in maximizing profits. In a monopoly there is quite simply no competitors to be oncerned
about. In a monopolistically competitive market each firm's effects on market conditions
is so negligible as to be safely ignored by competitors.

All "big" business is in the oligopoly form of market. Being a major corporation almost
automatically implies that the company has means of controlling its market.

Examples

In industrialized economies, barriers to entry have resulted in oligopolies forming in


many sectors, with unprecedented levels of competition, fueled by
increasing globalization. Market shares in an oligopoly are typically determined by
product development and advertising. For example, there are now only a small number of
manufacturers of civil passenger aircraft, though Brazil (Embraer) and Canada
(Bombardier) have participated in the small passenger aircraft market sector. Oligopolies
have also arisen in heavily regulated markets such as wireless communications: in some
areas only two or three providers are licensed to operate.

Australia

Phone lines are controlled by Telstra, then rented to other providers and further rented to
customers. Any rate hikes by Telstra are felt by all customers with a phone line no matter
the provider. Most media outlets are owned either by News Corporation, Time Warner, or
by Fairfax Media. Grocery retailing is dominated by Coles Group and Woolworths.

Canada

Three companies (Rogers Wireless, Bell Mobility and Telus) share over 94% of Canada's
wireless market.

United Kingdom

Four companies (Tesco, Sainsbury's, Asda and Morrisons) share 74.4% of the grocery
market.

Scottish & Newcastle, Molson Coors, and Inbev control two thirds of the beer brewing
industry.

The detergent market is dominated by two players, Unilever and Procter & Gamble.
United States

Many media industries today are essentially oligopolies.

Six movie studios receive 90% of American film revenues.

The television industry is mostly an oligopoly of five companies: Disney/ABC, CBS


Corporation, NBC Universal, Time Warner, and News Corporation. Four major music
companies receive 80% of recording revenues.

Four wireless providers control 89% of the cellular telephone market.

There are just six major book publishers.

Healthcare insurance in the United States consists of very few insurance companies
controlling major market share in most states. For example, Calfornia's insured
population of 20 million is the most competitive in the nation and 44% of that market is
dominated by two insurance companies, Anthem and Kaiser Permanante.

Anheuser-Busch and Miller Coors control about 80% of the beer industry.

Worldwide

The accountancy market is controlled by Price Waterhouse Coopers, KPMG, Deloitte


Touche Tohmatsu, and Ernst & Young (commonly known as the Big Four)

Three leading food processing companies, Kraft Foods, PepsiCo and Nestle, together
achieve a large proportion of global processed food sales. These three companies are
often used as an example of "The rule of 3", which states that markets often become an
oligopoly of three large firms. Boeing and Airbus have a duopoly over the airliner
market.

Oligopoly and the market

In the ideal free-market economy of our politicians, every product has an equal chance to
make it big. But in the real world, entrenched forces combat equal opportunity. The
market in most sectors is not a democracy but an oligopoly. Even the Internet, which was
supposed to "change all that" is in danger of becoming still another tool that mostly
enhances the power of the oligopolies that rule major markets.

In many developed market sectors, two or three players now command over 75% of the
total market. Just as Coke, Pepsi, and Cadbury-Schweppes dominate soft drinks, so too so
Budweiser, Miller, and Coors share the American beer market, while Nabisco, Keebler
and Pepperidge Farms are the masters the cookie industry. (Typically enough, Sunshine
Bakeries which used to be number three, was acquired by Keebler in 1996. Keebler in
turn was acquired by Kellogg in 2000. Nabisco is a division of Kraft/Philip Morris and
Pepperidge Farm is owned by relatively minor player Campbell.)

This tendency toward oligopoly is accelerating, as fewer and fewer companies grapple to
control the limited mind space. In the book industry, historically an arena of many small
and mid-sized competitors , there are now far fewer major players, both on the production
and distribution side. A few large conglomerates (Bertelsmann, The News Corporation,
Viacom, and, until it recently pulled out of the book business, Time-Warner) publish
most leading titles, and a few chains (Barnes & Nobles and Borders) dominate retail
sales, along with online shopkeeper Amazon. This state of affairs has been brought about
by a series of mergers, acquisitions, and bankruptcies over the past thirty years.

In the same way, there are far fewer major recording studios than twenty years ago; fewer
and fewer movie chains and movie studios. As for magazines, they are dominated by just
a half dozen companies -- Conde Nast, Time-Warner, News Corporation, Hearst,
Hachette Filipacchi and Bertelsmann.

There are exceptions, true, but even in many relatively de-centralized businesses, such as
hospitals, hotels or commercial printing, the trend to consolidation has unmistakable. For
example, the funeral home industry used to be the quintessentially local, owner-operated
business, but is now dominated by three large chains who quietly bought up many
Catholic, Protestant, and Jewish funeral homes in various municipalities, so that, in many
case, one of them has become the dominant player in many local markets. Commercial
printing was likewise a highly fragmented market with many thousands of local family
businesses, but consolidation over the past decade is gradually changing that picture as
publicly held corporations buy them out or run them out of business. These national
companies have the stature to get serious mind space among potential customers
nationwide.
CASE STUDIES

1. Pepsico

Pepsico, Inc. is engaged in four main businesses, marketing and formulating the
following:

1) Key soft drink brands (Pepsi, Mountain Dew, Aquafina, Gatorade, and others)

2) Fresh juice brands (Tropicana)

3) Salty and, to a lesser extent, sweet snacks (Frito-Lay)

4) Breakfast cereals and related foods (Quaker)

Pepsico also holds miscellaneous food brands in other countries.

Pepsico is the number two soft-drink company in the world. It is the number one snack
food company. It owns five billion dollar brands: Pepsi, Tropicana, Lay's, Doritos, and
Gatorade. That's a record rivaled only by Proctor & Gamble. With income of $25 billion
in 2002, it ranks as 62 in teh Fortune 500.

Over the years it has also dabbled in a number of other areas. At various times it has
owned North American Van Lines, Wilson Sports Equipment, and even imported
Stolichnaya Vodka, all of which it eventually sold. Starting in the 1970s, the company
collected a string of fast-food restaurants. These included Taco Bell, Pizza Hut, Kentucky
Fried Chicken, California Pizza kitchens, East Side Mario's, and D'Angelo Sandwich
Shoppes. In 1997, it discarded all of these units, setting up an independent company
called Tricon (now named Yum! Brands). It also got dissolved a division called Pepsi
Food Systems, a restaurant supplier.

Pepsico does not directly bottle its own soft drinks. Instead it works through independent
bottlers, some of whom bottle drinks from rival Cadbury-Schweppes (Seven-Up, A&W).
Pepsico has worked hard to move those companies over to selling its own competitive
products (Sierra Mist, Mug root beer).

Pepsi owns substantial shares in two of its biggest bottlers. It owns 35% of the Pepsi
Bottling Group, which accounts for 50% of Pepsi's North American sales and 40% of
worldwide sales. Pepsi Bottling Group has sales in 41 US states and in a number of
overseas countries. Pepsico also owns 30% of PepsiAmericas, which accounts for 18% of
US sales, 10% of worldwide sales. PepsiAmericas is the result of the 2000 merger of the
#2 Pepsi bottler (Whitman Corp.) and the #3 one, the original PepsiAmericas.

I. CURRENT SITUATION

A. Corporate Overview and Financial Performance:

PepsiCo, Inc. is one of the most successful consumer products companies in the world,
with 2000 revenues of over $20 billion and 125,000 employees. The company consists
of: Frito-Lay Company, the largest manufacturer and distributor of snack chips; Pepsi-
Cola Company, the second largest soft drink business and Tropicana Products, the largest
marketer and producer of branded juice. PepsiCo brands are among the best known and
most respected in the world and are available in about 190 countries and territories.

In 2000, PepsiCo has a reported net sale of $20,348 and a comparable net sale of $20,144
in comparison to its 1999’s net sales of $20,367 and $18,666 respectively. PepsiCo has
increased its comparable net sale of 8% in 2000 while it had an increase of 15% in 1999.
This reflects the increasing rate is going slower. On the other hand, PepsiCo’s interest
expense declines 39% showing that the company is significantly lower the average debt
level. Back to 1999, the report shows that the company’s interest expense dropped 8%,
which indicates that the company is performing well in managing its financial strategies.
More details about the financial performance of the company will be discussed in the
later part of this paper.

B. Strategic Posture:

1. Mission:

PepsiCo's overall mission is to increase the value of shareholder's investment. They do


this through sales growth, cost controls and wise investment of resources. They believe
their commercial success depends upon offering quality and value to their consumers and
customers; providing products that are safe, wholesome, economically efficient and
environmentally sound; and providing a fair return to their investors while adhering to the
highest standards of integrity.

2. Objectives:
PepsiCo’s overriding objective is to increase the value of our shareholders' investment
through integrated operating, investing and financing activities. Their strategy is to
concentrate their resources on growing their businesses, both through internal growth and
carefully selected acquisitions. Their strategy is continually fine-tuned to address the
opportunities and risks of the global marketplace. The corporation's success reflects their
continuing commitment to growth and a focus on those businesses where they can drive
their own growth and create opportunities.

PepsiCo believes that as a corporate citizen, it has a responsibility to contribute to the


quality of life in our communities. This philosophy is put into action through support of
social agencies, projects and programs. The scope of this support is extensive -- ranging
from sponsorship of local programs and support of employee volunteer activities, to
contributions of time, talent and funds to programs of national impact. Each division is
responsible for its own giving program. Corporate giving is focused on giving where
PepsiCo employees volunteer.

3. Strategies:

As a consumer products company, PepsiCo does not have the major environmental
problems of heavy industry. Their biggest environ-mental challenge is packaging
generated by their products. Packaging is important to public health and a critical
component of the distribution system that delivers products to consumers and commercial
establishments. To meet both consumer demand and safeguard the environment, they
recycle, reuse and reduce packaging wherever possible. Each business is also committed
to responsible use of resources required in manufacturing their products.

Continually fine-tuned to address the opportunities and risks of the global marketplace.
Concentrate our resources on growing our businesses, both through internal growth and
carefully selected acquisitions. Company developed its traditional products and expanded
into low-fat and no-fat snacks as well as salsas and dips.

4. Policies:

• Employee networks to mentor and support minority & female employees.

• Actively and diligently seek out qualified M/WBEs for all possible company
requirements.

• Make every reasonable effort to help qualified M/WBEs to meet company standards.

• Respect the privacy of all visitors who access and use the company’s corporate Web
site

• Treating all customers with respect, sensitivity and fairness, while providing some of
the greatest products on earth.
• We respect individual differences in culture, ethnicity and color. PepsiCo is committed
to equal opportunity for all employees and applicants.

• Corporate program for training employees how to work and manage in an inclusive
environment.

II. STRATEGIC MANAGERS

A. Board:

Roger A. Enrico, 56, is chairman of the Board and CEO. Mr. Enrico was elected as
PepsiCo’s CEO in April 1996 and as Chairman of the Board in November 1996, after
service as Vice Chairman since 1993. Enrico, who once wanted to be an actor,
understands that great marketing is pure theater. In his 29 years at PepsiCo (PEP), he has
staged some of marketing's most spectacular productions. ''Coke's leadership tried to put
us out of business,'' he says flatly. ''But we did not look for a temporary boost or a short-
term gain despite the self-destructive business philosophy by our major competitor.
We've been honed by fire.'' He spun off Pepsi's capital-intensive bottling operations into
an independent public company. He spent $3.3 billion to acquire Tropicana, the leading
orange juice brand.

Indra K. Nooyi, 45, is a Senior Vice President and CFO. She joined PepsiCo in 1994 as
Senior Vice President, Corporate Strategy and Development. Prior to joining PepsiCo,
she was Senior Vice President of Strategy, Planning and Strategic Markets for Asea
Brown Boveri. Nooyi is responsible for corporate staff functions, including legal, human
resources and corporate communications, in addition to her current CFO duties
overseeing finance, strategic planning, mergers and acquisitions, information technology,
advanced technologies and procurement. She is also known in company circles for her
analytical abilities, a key component behind her rise. Nooyi, whose remuneration for
fiscal 1999 totaled more than $1 million, is also believed to be the chief strategist behind
PepsiCo's competition with rival Coca-Cola.

Steven S. Reinemund, 52, is President and Chief Operating Officer. Mr. Reinemund was
elected President and COO in September 1999. He began his career with Pepsi as Senior
Operating Officer of Pizza Hut, Inc.

Peter A, Bridgman, 48, is Senior Vice President and Controller. Prior to assuming his
current position, Mr. Bridgman was Senior Vice President and Controller of The Pepsi
Bottling Group and he was the Senior Vice President and Controller for Pepsi-Cola North
America from 1992 until 1999.

Matthew M. Mckenna, 50, is Senior Vice President and Treasurer. Previously, he was
Senior Vice President, Taxes. Prior to joining PepsiCo in 1993 as Vice President, Taxes,
he was a partner with law firm Winthrop, Stimson, Putnam & Roberts in New York.

B. Top Management:

The top one of fifty most talented executives of the company, Roger A. Enrico,
demonstrates his excellent ability of leadership as representing the company to show the
Wall Street that PepsiCo can deliver superior performance quarter after quarter. One of
Enrico's top priorities is to attract more investors into the stock.

In international markets, Enrico still faces several obstacles in building Pepsi's soda
business; however, he builds up his strategy to place his biggest bets on developing
markets, such as India, China, and Russia. ''The key thing is not to merely plant flags,''
says Peter M. Thompson, CEO of Pepsi-Cola International. ''It's to make sure you build a
business, customer by customer, block by block, day by day.'' In India, where per capita
soft drink consumption is seven servings a year, vs. more than 700 in the U.S., and where
deliveries are often done on three-wheel bicycles, Pepsi finds the most prominent
businessman in each town and gives them exclusive distribution rights, tapping their
connections to drive growth. Over the past five years, volume has risen at a 26% annual
clip. Pepsi has stolen 19 points of market share from Coca-Cola, bringing Pepsi's share to
47%, close to Coke's 52%.

III. EXTERNAL ENVIRONMENT

A. Societal Environment:

1. Economic Factor:

The key elements taken into consideration are the principal market risks, which PepsiCo
is exposed to interest rate, foreign exchange rate and commodity prices. These are
specified as :

(a)Interest rate on PepsiCo’s debt as well as it short-term investment portfolio: PepsiCo


can manage its overall financing strategies in term of balancing investment opportunities
and risks. The company is using interest rate and currency swaps to effectively modify
the interest rate in order to reduce the overall borrowing costs.

(b)Foreign exchange rate and other international economic conditions: Operating in


international markets involve exposure to movements in currency exchange rates, which
typically affect the economic growth, inflation, interest rate, government actions and
other factors. Once these changes occur, they will cause PepsiCo to adjust its financing
and operating strategies. Changes in currency exchange rates that would have the largest
impact on translating PepsiCo’s international operating profit include Mexican peso,
British pound, Canadian dollar and Brazilian real. Through years, macro-economic
conditions in Brazil, Mexico, Russia and across Asia Pacific have adversely impacted on
PepsiCo’s operations. Especially, the economic turmoil in Russia which accordingly
resulted in the devaluation of the ruble in 1998 caused the significant drop in the soft-
drink demand.

(c)Commodity prices that affect the cost of raw materials: PepsiCo is subject to market
risk with respect to commodities because its ability to recover increased costs through
higher pricing will be limited by the competitive environment in which it is operating.

2. Technological Factor:

Development of additives such as sugarless sweeteners, caffeine free products, and new
flavorings enables PepsiCo to provide products that meet changing customer tastes and
preferences. In addition, computerized manufacturing technologies are great
contributions to higher efficiency and quality in bottling operations. For Pepsi, a critical
business challenge is ensuring that the distribution processes can deliver the right
products to the right place at the right time. According to Jerry Gregoire, Vice President,
Information Services, “The competitive advantage will go to the company that can apply
technology to areas such as logistics, getting costs out of the distribution pipeline and
getting products into the stores less expensively while increasing the availability of sales
information.” Pepsi NA’s data communication network is an important element in the
company’s efforts to address sales and distribution challenges with technology.
Connecting nearly 330 manufacturing, distribution, and sale sites around the U.S. and
Canada, the Pepsi NA network transports data help management in controlling inventory.
For instance, sales data helps managers identify regions where certain products are not
selling well, and move any excess inventory to areas where those products are in demand.
Sales data also helps Pepsi’s managers make decisions about products before they reach
the freshness date and must be pulled from the shelf and discarded.

3. Political/Legal Factors:

(a)The Human Right Issue: Few years ago, PepsiCo did business in Burma (Myanmar)
under the brutal SLORC regime, the State Law and Order Restoration Council. As the
SLORC moved to attract international investment, two millions people have been forced
to work for no pay under brutal conditions to rebuild Burma’s long neglected
infrastructure. What PepsiCo did at the time was patronizing the SLORC regime in what
they called “rebuild the country’s infrastructure”. PepsiCo also said it helps the economy
by buying "products such as mung beans, sesame seeds and rattan from small, local
farmers." The issue addressed is whether these products were made by forced labors. In
fact, PepsiCo must export their products for hard currency because it cannot use Burma's
nearly worthless currency to buy imports of supplies for its bottling plants. As the result,
PepsiCo had lost contracts at Harvard, Stanford, Colgate and other universities because it
refuses to name the sources of these farm products.

(b)FDA Regulation: As a food product manufacturer, PepsiCo is under the control of the
Food and Drug Administration. For example, the FDA tests and certifies new ingredients
such as high-intensity sweeteners before they are allowed to be used in soft drink
production.

(c)Waste Management and Public Concerns: Growing environmental awareness is


leading to increasing legislation. The company’s operation is affected by federal
legislative proposals that address the four objectives:

-Minimize the quantity of packaging material entering the nation’s solid waste system

-Minimize the consumption of scarce natural resources

-Maximize the recycling and reuse of packaging materials

-Protect human health and the natural environment from adverse effects associated with
the disposal of packaging materials. For example, Connecticut has already passed a law
that regulates packaging to increase its recyclability.

4. Socio-cultural Factor:

Consumers today are not as much joyous to cola products as they were before. Age and
ethnicity are two main characteristics that affect consumer preference for soft drinks and
alternative beverages. With age, health concerns become more of a factor when choosing
a beverage. To illustrate, some studies show that cola products or soft drink in general
may cause kidney stones and other related diseases. In contrast to older consumers,
younger consumers—particularly teens and those in their twenties—have less attention
spans for products and are more likely to prefer products that seems to be fun and
different . Although PepsiCo is the number one seller in carbonated beverages, it lost is
market share in 2000 as consumers seek for alternative beverages. As the matter of fact,
PepsiCo switches to non-cola products such as bottle-water, ready-to-drink tea and sports
drinks. In turn, bottled water gained the market share up to 12.8% in unit sales.

B. Task Environment:

1. New Entrants:

It is important when PepsiCo can identify what costs potential entrants to enter the soft
drink industry. The production technologies required for manufacturing soft drinks is
widely available for the potential entrants. However, competing on a national or global
scale requires the ability to manufacture and distribute a well-recognized brand.
Therefore, not only PepsiCo is the one who have to spend a tremendous fund on
advertising campaigns, other companies such as Coca-Cola and Cadbury Schweppes
have to go on the same path. According to the Beverage Industry, PepsiCo had a great
number of commercials during the super-bowl. Coca-Cola Co., PepsiCo, and Cadbury
Schweppes spent a total of $469.1 million on media advertising in the U.S. market
between January and September 1996. Will new entrants be able to spend a tremendous
amount to advertise themselves, or in other words, to create their “big names” in order to
deprive the market shares from PepsiCo or Coca-Cola.
Another aspect is the distribution challenging in some Asian countries such as China,
Indonesia and India, where poor road conditions and other infrastructure problems may
prevent the effective delivery by trucks. The question is whether PepsiCo can have a
competitive advantage to overcome these difficulties, then it will be difficult for the new
companies who want to distribute their products.

2. Existing Companies:

The U.S. and global soft drink industries are quite concentrated. Long dominated by two
companies, Coca-Cola Co. and PepsiCo, the industry saw the emergence of a third
significant player when Cadbury Schweppes acquired the Dr. Pepper and 7UP brands in
1995. Table below shows that the top three firms accounted for 90% of the U.S. soft
drink market in 1998 vs. 2000. The top one is still Coca-Cola with market share of 44%
in 2000, next would be PepsiCo with 30.9% share. Dr.Pepper & 7UP goes down slightly
in 2000 at 14.4%. There are some changes on market shares to other companies but the
changes are not significant.

As discussed in Social-cultural Factor part, consumers’ tastes change over the time.
Instead of drinking cola products, consumers switch to water or fruit juices. Competitors
may take this advantage to market their products. One example is the agreement between
Ocean Spray Cranberries Inc. and Beijing Huiyuan Beverage Group, which is the largest
juice company in China. Ocean Spray grants a ten-year license to Huiyuan manufacture,
market and distribute its products.

3. Trends:

The market for soft drink is expected to grow at a slower rate in the next four years,
according to a series of new global soft drink reports published by Beverage Marketing
Corporation. The industry had a five-year compound annual growth rate (CAGR) of 5.0%
between 1993 and 1998. But for the five-year period from 1998-2003, the CAGR is
estimated to drop to about 4%. Although colas are the most important soda flavor on the
market, the strongest growth in the industry is in the non-cola segment.

IV. INTERNAL ENVIRONMENT

A. Corporate Structure

PepsiCo owns its corporate headquarters buildings in Purchase, New York. The company
is engaged in the snack food, soft drink and juice businesses. Each product category is
further divided into North America segment—US and Canada—and international
segment. (PepsiCo 2000 Annual Report).

ØFrito-Lay North America (FLNA)


Frito-Lay North America manufactures, markets, sells and distributes salty and sweet
snacks. Products manufactured and sold in North America include Lay’s and Ruffles
brand potato chips, Doritos and Tostitos brand tortilla chips, Cheetos brand cheese-
flavored snacks, Fritos brand corn chips, a variety of branded dips and salsas and Rold
Gold brand pretzels. Low-fat and no-fat versions of several brands are also manufactured
and sold in North America.

ØFrito-Lay International (FLI)

Frito-Lay International manufactures, markets, sells and distributes salty and sweet
snacks. Products include Walkers brand snack foods in the United Kingdom, Smith’s
brand snack foods in Australia, Sabritas brand snack foods and Alegro and Gamesa brand
sweet snacks in Mexico. Many of our U.S. brands have been introduced internationally
such as Lay’s and Ruffles brand potato chips, Doritos and Tostitos brand tortilla chips,
Fritos brand corn chips and Cheetos brand cheese-flavored snacks.

Principal international snack markets include Mexico, the United Kingdom, Brazil,
Spain, the Netherlands, Australia and South Africa.

ØPepsi-Cola North America (PCNA)

Pepsi-Cola North America manufactures concentrates of brand Pepsi, Mountain Dew,


Mug, Slice, Fruitworks, Sierra Mist and other brands for sale to franchised bottlers.
PCNA also sells syrups to national fountain accounts. PCNA markets and promotes its
brands. PCNA also manufactures, markets and distributes ready-to-drink tea and coffee
products through joint ventures with Lipton and Starbucks and licenses the processing,
distribution and sale of Aquafina bottled water. In addition, PCNA manufactures and
sells Dole juice drinks for distribution and sale by Pepsi-Cola bottlers.

ØPepsi-Cola International (PCI)

Pepsi-Cola International manufactures concentrates of brand Pepsi, 7UP, Mirinda, KAS,


Mountain Dew and other brands internationally for sale to franchised bottlers and
company-owned bottlers. PCI operates bottling plants and distribution facilities in
various international markets for the production, distribution and sale of company-owned
and licensed brands. PCI markets and promotes its brands internationally.

Principal international markets include Mexico, China, Saudi Arabia, India, Argentina,
Thailand, the United Kingdom, Spain, the Philippines and Brazil.

ØTropicana

Tropicana produces, markets, sells and distributes its juices in the United States and
internationally. Products primarily sold in the United States include Tropicana Pure
Premium, Season’s Best, Tropicana Twister and Dole brand juices. Many of these
products are distributed and sold in Canada and brands such as Fruvita, Looza and
Copella are also available in Europe.

Principal international markets include Canada, the United Kingdom and France.

B. Corporate Culture

PepsiCo, Inc. has been systematically changed over the past two decades from passivity
to aggressiveness in order to avoid stagnation and to adapt to changing competitive
threats and the changing economic or social environments.

•Once the company was content in its number two spot, offering Pepsi as a cheaper
alternative to Coca-Cola. But today, a new employee at PepsiCo quickly learns that
beating the competition, whether outside or inside the company, is the surest path to
success. In its soft-drink operation, for example, Pepsi's marketers now take on Coke
directly, asking consumers to compare the taste of the two colas. The culture of the
company now is based on the goal of becoming the number one of soft drinks.

•Managers are pitted against each other to grab more market share, to work harder and to
wring more profits out of their businesses. Because winning is the key value at Pepsi,
losing has its penalties. Severe pressure was put on managers to show continual
improvement in market share, product volume, and profits. All Employees know they
must win merely to stay in place— and must devastate the competition to get ahead.

•To keep everyone on their toes, "creative tension" is continually encouraged among
departments at Pepsi. The staff is kept lean and managers are moved to new jobs
constantly, which results in people working longs hours and engaging in political
maneuvering just to keep their jobs from being reorganized out from under them.

C. Corporate Resources

1. Marketing:

• Pepsi has now beaten Coke in the domestic take-home market, and it is mounting a
challenge to Coca Cola overseas. Pepsi has been making inroads: Besides monopolizing
the Soviet market, it has dominated the Arab Middle East ever since Coke was ousted in
1967, when it granted a bottling franchise in Israel.

• The company’s products are transported from manufacturing plants to its major
distribution centers, principally by company-owned trucks. The company utilizes a direct
store delivery system, whereby its sales force delivers the products directly from
distribution centers to the store shelf. This system permits the company to work closely
with retail trade locations and to be responsive to their needs. The company believes this
form of distribution allows it to have a marketing advantage and is essential for the
proper distribution of products with a short shelf life.
• PepsiCo has developed the national marketing, promotion and advertising programs that
support the its many brands and brand image, oversee the quality of the products; develop
new products and packaging, and coordinates selling efforts.

2. Finance:

PepsiCo, Inc. manufactures, markets and sells soft drinks and concentrates (Pepsi-Cola,
Mountain Dew, Slice, etc.), snack foods (Frito-Lay) and Tropicana branded juices. For
the 12 weeks ended 3/24/01, net sales increased 8% to $4.54 billion. Net income
increased 18% ($498 million). Revenues benefited from volume gains across all
divisions. Net income also reflects an increased gross profit due to higher effective net
pricing. Even though sales of PepsiCo were going down slightly on the last three years
but they still have very high profits on that years. On the Ratio PepsiCo just only 33% on
debt/equity ratio and profit margin is 10.9 compare with industry just only 8.10%. On the
first quarter of this year net sales advance 8% to over $4.5 billion with earnings per share
increasing 17% to $.34. PepsiCo is very strong revenue growth.

• EPS grows 15% in the 16-week quarter to 38 cents, and 17% for the 52-week year to
$1.45

• Each division boosts Q4 volume, and gains market share for the year

• Net sales advance 8% to over $6 billion for the quarter, annual sales grow 8% and
exceed $20 billion

• Every division posts double-digit operating profit growth in the quarter, annual
operating profits advance 13% to $3.5 billion

• Operating cash flow grows 33% to $2.7 billion

• Return on invested capital (ROIC) improves to 23% -- a 250 basis point increase

• 2001 outlook for continued double-digit earnings growth

3. Operations:

• Most of the sales are through the company’s own direct store distribution (DSD)
systems, where they actually take the products to stores and put them on the shelf. These
systems reach hundreds of thousands of outlets, from the tiniest liquor stores to the
mightiest club store. The DSD systems give the company the ability to merchandise its
products for maximum appeal to consumers.

• PepsiCo has been adding new platforms for growth, which strengthen the company’s
portfolio and enhance its vitally important innovation capabilities. For example, in
January 2001 the company acquired a majority of the South Beach Beverage Company,
whose SoBe line of drinks adds to the Pepsi-Cola portfolio some of the fastest-growing
brands in the fastest-growing segment of the industry, non-carbonated beverages.

• Another example is the planned merger with the Quaker Oats Company, which is
expect to complete in the second quarter of 2001. This is without question the biggest
step to ensure a bright future of growth for PepsiCo. The merger will make PepsiCo an
even more effective competitor in the expanding market for convenient foods and
beverages. It will add two very powerful brands to its portfolio, Gatorade and Quaker,
and create new opportunities for every PepsiCo division. The combined enterprise will
rank among the world's five largest consumer product companies.

• PepsiCo bought $383 million worth of goods and services from minority-owned and
women-owned suppliers in the year of 2000. The Women's Business Enterprise National
Council named the company among America's Top Corporations for Women's Business
Enterprise. PepsiCo minority and women business development programs were rated
among the top-10 nationally by the National Minority Supplier Development Council.

• We were named by Fortune magazine to its list of America's "50 Best Companies for
Minorities," by Hispanic magazine to its list of "The Hundred Companies Providing the
Most Opportunities to Hispanics," by Latina Style magazine to its list of "The 50 Best
Companies for Latinas," and by Minority MBA magazine to its list of "Ten Top
Companies for Minority MBAs."

The company encourages conservation, recycling and energy use programs that promote
clean air and water and reduce landfill. Last year, the Occupational Health and Safety
Administration named two more PepsiCo facilities to its top "STAR" status as part of the
agency's Voluntary Protection Program.

4. Human Resources:

• The company has a wealth of talent across the corporation. It starts with its exceptional
frontline team, the people out there serving the customers 365 days a year, and it extends
to our corporate staff. The company not only has great opportunities, but the skills,
experience, dedication and intellectual horsepower to make the most of them.

• The company’s continued growth has created outstanding career opportunities for
talented professionals in a variety of specialized fields, such as information technology,
treasury, tax, human resources, law, accounting, public affairs, audit. All successful
applicants share a commitment to PepsiCo's goals and an ability to thrive in a fast-paced,
results-oriented environment. In exchange, the company offers a highly competitive
compensation and benefits package.

• Pepsi executives are expected to be physically fit as well as mentally alert: Pepsi
employees four physical-fitness instructors at its headquarters. It is an unwritten rule that
to get ahead in the company a manager must stay in shape. The company encourages one-
on-one sports as well as interdepartmental competition in such games a soccer and
basketball.

5. Information Systems:

• In responding to market demands for efficient 24-hour "order-to-delivery" process for


customer orders, PepsiCo has installed a computer system that links an effective wide
area network that allows immediate transmission of customer orders.

• The outcome has been to integrate with a wide area network, transmit accurate,
complete customer order data, allowing the company to more efficiently load trucks,
schedule deliveries and save man-hours.

V. ANALYSIS OF STRATEGIC FACTORS

A. Key strategic factors are:

1. Recyclability of Containers

Due to the liquid nature of Pepsi’s product, it is necessary that a solid and non-porous
container be used to store the product. This fact leads to the use of plastics, aluminum,
and glass as materials for the containers that Pepsi is stored in. These materials work very
well for the purpose of their use, however these materials do not biodegrade easily. Every
day, 93 million empty soft drink bottles and cans are thrown away, rather than recycled.
In November 2000, the boards of Pepsi and Coke passed resolutions for future container
recycling targets. The resolutions call upon management to establish recycling targets and
prepare a plan to achieve them by January 1, 2005. There are two goals: (1) achieving an
80 percent national recycling rate for bottles and cans; and (2) making plastic bottles with
an average of 25 percent recycled plastic. The implementation of these resolutions will
have a future effect on the cost basis of Pepsi’s product, and a positive environmental
impact if the recycling targets are met.

2. Continued growth to other segments, decline of cola interest

The beverage industry is moving towards the alternative drinks sector. Although in recent
times, mainstream beverages have been making a revival, it is obvious that alternative
drinks will continue to grow. Pepsi can utilize its excellent brand recognition and
reputation to invest in and capitalize on growth in this area, and increase it market share
against Coca-Cola at the same time.

3. Increased use of exclusivity agreements with restaurant chains and college campuses

Coca-Cola has a majority of exclusivity with restaurant chains including McDonalds and
other major fast food chains. The benefits of exclusivity agreements give Coca-Cola a
major advantage in channel distribution. The major reason Taco Bell was purchased by
Pepsi was to create a new channel for Pepsi to be sold in restaurants. In addition to
restaurants, soft drink manufacturers are willing to engage in "cola wars" to win the
rights to supply all the machines in a given school in return for a commission. The funds
go to support financially starved school programs that could range from buying new
library books to beefing up the computer lab.

4. Coca-Cola’s market dominance

The dominance of Coca Cola in the soft drink market has always been considered a major
factor for Pepsi management. As long as Coca Cola continues to retain a dominant
market share, Pepsi should continue to aggressively acquire Coca Cola market share.

5. Excessive work pressure resulting in exodus of Pepsi management

The “creative tension” which is constantly being placed on Pepsi management has
resulted in a number of management leaving the company for Coca Cola. Coca Cola has
consistently been able to acquire the “Pepsi Tigers”, or very good managers, away from
Pepsi.

B. Evaluation of the current mission and objectives

1. Mission

The overall mission of PepsiCo is to increase the value of shareholder's investments. This
is achieved through sales growth, cost controls and wise investment of resources.
PepsiCo believes that their commercial success depends upon offering quality and value
to their consumers and customers; providing products that are safe, wholesome,
economically efficient and environmentally sound; and providing a fair return to their
investors while adhering to the highest standards of integrity.

2. Objectives

a. Concentration of resources on growth of businesses through internal growth and


carefully selected acquisitions.

PepsiCo has adopted a plan for growth by continually addressing the opportunities and
risks associated with the global marketplace. The corporation's success reflects their
continuing commitment to growth and a focus on those businesses where they can drive
their own growth and create opportunities.

b. Contribute to the quality of life in communities

PepsiCo believes that as a corporate citizen, it is responsible to contribute to the quality


of life in the communities it serves. This policy is implemented through support of social
agencies, projects, and programs. The company also supports employee volunteer
activities through contributions of time, talent, and funds. Each PepsiCo division is
responsible for its own giving program with corporate giving focused on supporting
employee volunteer activities.

VI. STRATEGIC ALTERNATIVES AND RECOMMENDED STRATEGY

Out of the many strategic alternatives that PepsiCo could choose to follow, we have
chosen to endorse one that fosters continued growth and diversification. Although their
over-diversified portfolio has hindered their International Growth, these strategies
strengthen their overall corporate worth and market presence domestically.

As consultants for PepsiCo, we are making the following recommendations:

• Pepsi should focus on increasing sales globally to compete effectively with Coke. They
have been beaten badly in some markets, and need to focus more on "un-tapped" areas.

• Continue to diversify their beverage selection through acquisitions. This will enable
PepsiCo to combat the decreased interest in cola. Going along with this, PepsiCo needs to
ensure that they can properly manage all of these acquired companies and should divest
those that show limited potential.

• Increase the use of exclusivity agreements to boost their sales in key markets. This may
make it harder to keep costs low but will ensure added revenues. Another reason why
Coke has continued to beat Pepsi is through its exclusivity agreements with restaurant
chains, sports and entertainment complexes, and college campuses. More attention in this
area will help to battle Coke's dominance.

• Capitalize on their aggressive corporate culture in overseas dealings. This can help to
combat the weakness of their current international strategies.

Industry brief : Beverages

Carbonated soft drinks

At the core of the beverage industry is the carbonated soft-drink category. The dominant
players in this area (Coca Cola, Pepsi, and Cadbury-Schweppes) own virtually all of the
North American market’s most widely distributed and best-known brands. They are
dominant in world markets as well. These companies’ products occupy large portions of
any supermarket’s shelf space, often covering more territory than real food categories
like dairy products, meat, or produce.

As with many mature retail industries, the beverage giants have a problem – growth in
the sales of their flagship carbonated products are at a near standstill in the key U.S.
market, with 1% growth or less. After years of rapid growth, it seems that the average
American can’t drink any more flavored, fizzy soda water. To remedy that, these three
companies are rapidly expanding both globally as they enter and promote new markets
for existing products and locally, as they add products from adjacent beverage categories
in the supermarket, in categories that are still expanding. We'll talk about these areas in
a later posting.

The prototype of all marketing and branding struggles, the “Cola Wars” keep expanding.
The Pepsi and Coca Colakeep rolling out the big guns: dueling pop stars, and new
branded products in the form of “Vanilla Coke” and “Pepsi Blue.” . They are fighting
on the TV, in the fast-food restaurants, and in the supermarkets; they are also dueling in
the schools. One of the biggest pushes of the last few years has been convincing school
districts, universities, and other institutions to go all-Coke or all-Pepsi, in return for a
(small) cut of the gross sales.

Selling costly sugared water and building an increasing demand for it, even in Third
World countries, involves marketing in its purest form, unsullied by any preexisting
need or local tradition. Markets in Eastern Europe, China, India, and Mexico, among
others, are expanding fast, and both Coke and Pepsi are finding local partners (bottlers) in
these countries to keep extending their reach. And while the American market may be
mature, there’s still an opportunity worldwide to replace hot beverages like coffee and tea
that require some preparation with these cold, iconic. ready-to-drink brands.

All this worldwide activity can’t disguise an unpleasant core reality for the vendors: U.S.
carbonated soft drink sales increased only 0.5% in the year 2002. Although total sales for
the industry was up slightly, per capita consumption was down for the third year in a
row In other words, domestic soft drink growth is not keeping pace with population
growth.

Overall soda market

In fact, Coke and Pepsi have a third major rival on the bottled soft drink shelves, namely
Cadbury-Schweppes. The big three carbonated beverage makers now exist in a stable
oligopoly that changes only by small increments and which controls over 90% of the
market. Over the years, Cadbury-Schweppes (the result of a merger between a British
candy company and a British beverage company) has improved its position by acquiring
key brands in the US, namely Dr. Pepper and SevenUp, along with A & W and Canada
Dry.

In past decades, the carbonated beverage section had been the beneficiary of an
amazing record of growth, where consumption has more than doubled over the past 25
years. Americans consume twice as much soda as they did 25 years ago, up from 22
gallons per person per year to over 56.

In 2000, these three companies had almost exactly the same share of the U.S. market they
had in 1999, namely:
Company Percentage Brands

Coca Cola 44.1% Coke, Sprite, Barq, Fanta, Mello Yello, etc.

Pepsico 31.4% Pepsi, Mountain Dew, Mug, Slice, etc.

Cadbury/Schweppes 14.7% Seven-Up, Dr. Pepper, Schweppes, A &


W, Canada Dry,Sunkist, Squirt, etc.

While individual flavors go up and down, the relative market share of the big three
changes at a glacial rate. The next biggest North American soda company, the Canadian-
based Cott Beverage company, had only a little over 3% of the market, and that company
specializes in supplying private label soda to supermarkets and other chains.

In 2001, however, Cadbury acquired moribund RC Cola, giving it a cola drink to battle
against the big guys. This gave the company more shelf position and immediately gave
the RC Cola brand, long a distant also-ran with weak marketing muscles, more sales and
market presence. Pepsi gave itself a small boost because of the popularity of newly
introduced Mountain Dew Code Red, a hyper-caffienated soda. Coke’s numbers declined
slightly. The market share figures in 2001:

Company Percentage

Coca Cola 43.7%

Pepsico 31.6%

Cadbury/Schweppes 15.8%

It’s pretty indicative of this mature market that the only major move in market share
comes through a takeover. Moreover, the takeover targets that are left are so small that
the biggest remaining brand doesn’t make more than 1% difference in total volume.
2. Wal-Mart

Overview of Industry

Sam Walton opened the first Wal-Mart discount store in Rogers Arkansas back in 1962,
and 47 years later, Wal-Mart operates 8,159 units in 15 countries. Wal-Mart is currently
the world’s largest retailer and according to the Forbes top 500 businesses lists for 2009,
Wal-Mart ranks second in the nation and third in the world (behind Royal Dutch Shell
and Exxon Mobil) - with a total annual sales of 405,607 million. Wal-Mart employs over
2.1 million people worldwide, making them one of the largest private employers in both
the US and Canada, and the largest private employer in Mexico. Even in the midst of a
recession it’s estimated that Wal-Mart stores’ retail market share has raised markedly³
and they are seeing sales gains for 2009.4 Wal-Mart has a dramatic story of success from
its humble beginnings to its transformation into an industry leader; one can only wonder
what the future holds for this corporate giant.

Wal-Mart officially incorporated in 1969 and began selling shares of stock in


1970. In 1971 they had their first 100 percent split at $47, then again the following year
for $47.50 (after being listed on the New York stock exchange). Their 11th and most
recent 100 percent stock split occurred in 1999 at $95.

One aspect of Wal-Mart’s structure that has given them a competitive edge is
their efficiency in logistics. Beginning in the early 1970’s, Wal-Mart utilized a warehouse
distribution strategy facilitating bulk purchasing and streamlined distribution processes
enabling them to dramatically minimize distribution costs. Today Wal-Mart has 147
distribution centers with the average facility serving 75-100 stores. Their truck fleet
travels about 800 million miles a year and they move over 5.5 billion cases of products.
A Wal-Mart distribution center can have up to twelve miles of conveyor belts and about
500-1,000 employees.

Wal-Mart has also been able to gain competitive advantage with their
embracement of technology. In 1987, Wal-Mart completed a $24 million investment in a
satellite network - the largest private network at that time. This network included voice
and video communication which streamlined the company’s communication and
facilitated the flow of sales and inventory information to the corporate headquarters in
Bentonville, Arkansas. During a period of slower growth in the early 21st century, Wal-
Mart made substantial technology investments that were successful in gaining more
inventory control and improving company performance.

In addition to their technological competitive edge, Wal-Mart continues to make


smart strategic decisions to exploit potential new revenue sources as they continually to
expand into new markets. Wal-Mart opened their first Sam’s Wholesale Club in 1983
marking the inception of Wal-Mart’s second division of operations which now consists of
over 700 stores. Later, Wal-Mart devised and opened the first Wal-Mart Super center in
1988. Wal-Mart Supercenters include the normal discount retail store and many extras.
They include a complete super-market, garden center, pet shop, pharmacy, tire and lube
express, optical center, photo processing center, and some additional smaller shops
ranging from hair, nail, video, and fast-food outlets. Today there are over 2,700
supercenters in the US. By 1998 they introduced the Neighborhood market concept
which catapulted them into becoming the largest US food retailer by 2001.

By 1991, Wal-Mart began its international expansion with the introduction of its
first store into Mexico. Two years later they formed Wal-Mart International - their
rapidly growing third division. Today, Wal-Mart has a total of 3,859 international
locations and operates in Argentina, Brazil, Canada, Chile, China, Costa Rica, El
Salvador, Guatemala, Honduras, India, Japan, Mexico, Nicaragua, Puerto Rico, the
United States and the United Kingdom. Wal-Mart is now planning on expanding their
operations in Brazil and China even further.

Some innovative products and programs Wal-Mart has created have contributed
to their popularity and profitability. “Sam’s Choice” marked the launch of the first Wal-
Mart brand product in 1991, and today Wal-Mart has over 30 different product lines
encompassing an astounding variety of products in food, apparel, homeliness and hard
lines. In 2006, Wal-Mart began its $4 generic prescription program - an astounding
savings from the $29 average price of generic prescription drugs. Wal-Mart began its site
to store program in 2007 which offers free shipping to a local store for purchases on their
website walmart.com.

Wal-Mart’s signage and logo have recently evolved; in 2007 they revised their
long time slogan ”Always Low Prices, Always” with the current “Save Money Live
Better” motto and in 2008 they unveiled a new company logo using an unhyphenated
“Walmart” with stylized yellow “spark.” Wal-Mart has been updating many of their store
layouts and they are increasing the pace of their remodels in the next year.

This year, Wal-Mart has rolled out plans for a National wireless service and has
announced plans for providing consumer electronics support and installation services
which would compete with Best Buy’s “Geek Squad”. CEO Raul Vasquez said last
month that they want to become the biggest and most valued online retailer which
suggests plans for Walmart.com expansion and that could cause some concern at
Amazon.com.

Walmart’s three Basic Belief’s and Values are: “Respect for the individual,
Service to our customers, and Striving for Excellence.” These long-standing belief’s
haven’t stopped them from becoming the source of some controversy and damaging press
over the past decade including involvement in multiple lawsuits involving questionable
business practices. Notably, there have been multiple allegations of sexual
discriminatory practices and cases involving unpaid wages. In 2006 a controversial movie
debuted, “Wal-Mart, the high cost of low price.” This movie highlighted the various
recent lawsuits and pointed to the effects of Wal-Mart’s alleged low wages on the usage
of public assistance by Wal-Mart employees - stating that Wal-Mart is costing taxpayers
over 1.5 billion dollars to support its employees. Currently, Wal-Mart is spending
millions of dollars each year to support and improve its public image through public
relations, media firms, and political consultants.

To achieve a greater understanding of Wal-Mart Stores, Inc., it is important to


analyze the industry, market structure, and supply and demand conditions affecting Wal-
Mart, and by examining their past financial performance we might offer a glimpse as to
what one should expect in their future performance as a company.

Market Structure

We all know Wal-Mart, the industry giant that often headlines the news with jaw
breaking prices that out-perform other retailers in the industry. It is important to discuss
the industry structure to truly understand the Wal-Mart edge and authority in the
retail/electronic and consumer industries. Wal-Mart accounts for 29.9% of the global
general merchandise stores sector, Target, Wal-Mart’s industry counterpart accounts for a
mere 5.10%. Shortly after entering the grocery business, Wal-Mart now accounts for 10%
of the grocery market. It is predicted by some that Wal-Mart will soon hold the top spot
of the grocery chain, leading by 16.6% by 2010.12. Wal-Mart is the largest retail
company in the world; it successfully operates retail stores in various formats including
supermarkets, discount stores and neighborhood markets. By the end of January 2008,
Wal-Mart had over 2,447 supercenters, 132 neighborhood markets and 591 Sam’s Club’s
in the US alone. Internationally, it operates in Argentina, Brazil, Canada, Costa Rica, El
Salvador, Guatemala, Honduras, Japan, Mexico, Nicaragua, Puerto Rico, the UK and
China.13 Wal-Mart has annual sales of $405,607.00M and employs 2,100,000
employees. Target currently operates 1,698 stores in 49 states. Target has annual sales of
$64,948.00 M and employs 351,000 employees. K-Mart has annual sales of $16,219.00M
and employs 8,500 employees. Based on this data it is easily determined that Wal-Mart is
the leading retailer trailed by Target and K-Mart. Wal-Mart has a broad range of
competition in the industry, particularly Target and K-Mart. All three stores emerged in
the early 1960’s following the success of grocery store chains. Interactive analysis of the
three giants has determined that Wal-Mart prefers to enter markets that consists of lower
retail wages and more households with vehicles and children but is more or less
concerned with income wages. Target has the exact opposite dimensions while K-Mart is
more or less like Wal-Mart just less systematic. Wal-Mart strength comes directly from
its ability to weather competition to a greater extent than its rivals. Even as a monopolist,
Target requires a substantially larger population than Wal-Mart to succeed, making its
campaign to overpower Wal-Mart virtually impossible. Wal-Mart can succeed over
Target and K-Mart even when entering their territory. Due to these findings, Wal-Mart
can be deemed the ultimate player of the industry. Wal-Mart also operates a much greater
percentage of Superstores (stores that feature deli’s and grocery departments) and thus
has a competitive advantage as a one stop shop over Target and K-Mart. However, it does
need to be addressed that Wal-Mart services not only the merchandise industry but also
the electronics and grocery industry as well. Therefore, competitors also include Grocery
chains (King Soopers, Albertsons and Safeway in Colorado), as well as Electronics
Superstores. Another unlikely competitor of Wal-Mart is Costco (the counterpart to
Sam’s Club which the Wal-Mart corporation runs). Costco operates as a wholesaler, and
ultimately offers the same products as Wal-Mart just in bigger quantities and perhaps
greater quality. The important thing to note here is that consumers may not wish to
purchase all merchandise in bulk. Nonetheless, Costco holds a 25.90B market cap as
compared to Wal-Mart’s 197.66B. By providing merchandise, electronics and groceries,
Wal-Mart offers a one stop shop that often exhibits lower prices than the leading grocery,
electronics and retail stores. Because of this attribute Wal-Mart exhibits fierce
competition to not only its industry rivals but also local chains that offer one type of
product (King Soopers for groceries or Best Buy for electronics).

Based on these observations, it can be determined that Wal-Mart is an Oligopoly. The


industry is mostly dominated by Wal-Mart, Kmart, and Target. They all produce
homogeneous or unique products (clothing vs. electronics, ect). There are blockades to
entry/or exit because these large corporations dominate the industry in a way that makes
it virtually impossible for any firm to penetrate the market. There does exist an imperfect
dissemination of information, buyers are not informed of cost, price and product quality.
And these firms do have opportunities for economic profits. While there are a few firms
in the industry, it can be deemed that Wal-Mart is the largest firm leading its industry.
However, another important factor to note is that while Wal-Mart sees competition in
Target and K-Mart, their presence does not severely impact Wal-Mart sales. In fact, both
Target and K-Mart find markets in which a Wal-Mart is present as unattractive. The
effect experienced by Target as a result of Wal-Mart’s presence is much larger than the
converse. It can be noted that for both Target and Kmart, the implied effect of a Wal-
Mart is more than twice the reverse effect of those firms on Wal-Mart. These findings
would point to the ideology that Wal-Mart is an Oligopoly that monopolizes the industry.
Through its presence it prevents entry into the market based on geographical location and
Target as well as Kmart focuses on locations where a Wal-Mart is not yet present.
Companies that operate in the merchandise industry offer a variety of product in order to
appeal to a number of consumer tastes and preferences. This type of diversity increases
the customer base of companies, while reducing overall buyer power. With this said
suppliers will enter into contracts with major players and reduce overall entry into the
market. Supplier power here is strengthened in that manufacturers and distributors are not
generally “wholly reliant” on merchandise stores for their revenues. Supplier power is
weakened by the fact that players have a great deal of bargaining power. The fall of
tariffs, particularly in the US has allowed retailers to source goods produced in areas of
low cost labor, and for Wal-Mart has ultimately meant outsourcing directly to China.
Wal-Mart has huge economies of scale as they purchase quantities to supply all of their
stores. The nature of the buyer supplier relationship is often defined by the buyer’s power
in the industry. Based on Wal-Mart’s large size and huge demand for products, Wal-Mart
dominates the buyer scene. Because of its sheer size and extraordinary buying power,
Wal-Mart is able to pressure suppliers in offering rock-bottom prices as these suppliers
depend on Wal-Mart for a high percentage of their sales. An example of this type of
relationship is the Dial Corporation Supplier, who sells 28% of its manufactured goods to
Wal-Mart annually. In order to replace Wal-Mart’s sales, it would have to double sales to
its next nine customers in order to eliminate Wal-Mart from its buyer list. Chairman of
the Board of Wal-Mart and son of the founder often defines the supplier relationship as
“supplier-partners.” Walton also states that Wal-Mart wants to offer good value to
customer through low prices and therefore does not accept slotting fees, display
allowances or deal money from suppliers. Typically speaking, by shopping around for the
lowest bidder, Wal-Mart is able to pass along the deal breakers to consumers. Walton
also contends that long-term relationship sustainability with supplies is a practice that
benefits small and medium sized supplies. Wal-Mart has the power, as an industry giant
to either hurt or help the suppliers in their concessions. Past data has determined that
Wal-Mart’s suppliers that hold a small share of their respective markets do not perform as
well as other small share suppliers that do not identity Wal-Mart as a primary customer.
However, large share suppliers perform much better when listing Wal-Mart as a primary
customer. This implies that suppliers have the power to benefit from the successes of
Wal-Mart, rather than become victims. Due to these supplier relationships Wal-Mart
continues to dominate the global market, with its transition to online retail; Wal-Mart
now dominates internet commerce as well. Wal-Mart continues to dominate the market,
superseding the current economic situation that encompasses most nations. Ultimately,
Wal-Mart has become corporate America's recessionary resource in a time when it's most
needed. 22 Demand for Wal-Mart is analytical. It is deemed that over 200 million
shoppers visit the Wal-Mart US stores each year. They use over 60,000 suppliers and
have 55+ countries in their network, the demand for while Wal-Mart has made the
company the largest company in the world. And because Wal-Mart holds its position as a
power buyer in the industry it is able to effectively and efficiently supply the demand for
its products, as the economy worsens, more individuals turn to money saving deals and
thus to Wal-Mart. Net sales are on a gradual increase ($344,759 in 2007, $374,307 in
2008 and $401,244 in 2009 in millions) and therefore demand is also on the rise. Wal-
Mart is able to meet demand with its abundant supply of merchandise that they are able to
obtain at low prices due to their supplier relationships. By overpowering the suppliers in
this industry, Wal-Mart has a competitive edge that is unattainable by most companies.
This can be related back to the discussion of Wal-Mart holding a monopoly over the
industry. Because they are able to maintain discretion over suppliers they can virtually
control the market and create entry barriers. Therefore, Wal-Mart is able to meet demand
as it comes up and has outsourced suppliers to China and India, where labor is much
cheaper. Unfortunately, this also makes Wal-Mart susceptible to currency changes, ie; the
value of the dollar drops as compared to Chinese Yuan, when the dollar weakness as
compared to the Yuan, the price of imports rises for Wal-Mart.

Foreign competition is prevalent for Wal-Mart particularly since their entry into foreign
lands with both retail and grocery chains. Wal-Mart has three major foreign competitors;
Wal-Mart's major international competitors are Britain's Tesco, France's Carrefour, and
Germany's Metro, all three companies have a strong presence in China, Wal-Mart’s top
supplier. Tesco has annual sales of $98,327.00M and employs 470,000 employees. It was
founded in 1924, roughly 40 years before Wal-Mart made its debut. Carrefour has annual
sales of $124,353.00M and employs 490,000 employees. It was founded in 1965 and
therefore has the same senior standing as Wal-Mart. Metro has annual sales of
$10,153.60 and employs 281,455 employees. It was founded in 1879 and has the senior
standing of the three foreign companies. With these competitors in tow and with their
selling power it goes to show that Wal-Mart will not monopolize foreign territory. In
order to truly understand the foreign market we must also discuss the entry and exit of
Wal-Mart on other foreign soils. Wal-Mart entered the United Kingdom in 1999 through
its take-over of Britain’s third largest retailer, Asda. Through its entry into the foreign
market Wal-Mart inevitably exerted downward pressure on market forces and therefore,
on market price. Wal-Mart also has supplier benefits in foreign territory, as a leading
industry giant and therefore poses as a threat to local competitors, in terms of supplier
relations. Unfortunately, Wal-Mart was not so lucky in the South Korean market. Wal-
Mart ventured onto South Korea’s soil in the late 1990s in hopes of further expanding
territory and revenue. Wal-Mart left South Korea in 2005 as the American way of doing
marketing did not translate well in Korea. Korean consumers had significantly different
tastes and preferences than American consumer and the everyday low price concept did
not translate well in Korean. Wal-Mart’s competitive advantage of low cost and low price
was not suitable for the Korean market and consumption context. The case here shows
that even Wal-Mart is susceptible to competition, more so in the foreign markets. The
same situation presented in Japan. We also need to discuss Wal-Mart’s entry into foreign
markets with grocery ventures. Wal-Mart entered the German market through acquisition,
which proved unsuccessful because of the problems associated with integrating two
disparate chains with different organizational cultures and a different variety of stores.
The highly competitive atmosphere present in the German grocery market has precluded
Wal-Mart from reaching its full value chain goals and from realizing a key element of its
global strategy, which is everyday low prices concept. The countries discounters maintain
a competitive advantage over the Wal-Mart name and thus strive in environments that
Wal-Mart has chosen to enter on their soil. As discussed earlier, Wal-Mart was much
more successful in the UK with its acquisition of Asda. This was good strategic fit for the
company and the UK has embraced aspects of the Wal-Mart retail proposition and
corporate culture, prior to the 1999 acquisition. The entry of Wal-Mart has restructured
the UK grocery market with low prices and value for the consumer’s money. It can be
seen through these examples that in some instances Wal-Mart not had the same successes
it exhibits here in the US. Some cultures embrace Wal-Mart for value savings deals and
one stop shop appeal, other cultures repeal the giant for the same reasons. In the future, it
would be in Wal-Mart’s best interest to research the cultural aspects of the territory prior
to making its official launch onto foreign land.

One issue facing Wal-Mart today is that the consumer’s opinions, needs and goals
are ultimately changing. The lowest price is no longer the only demand to attract
consumers. Wal-Mart is now encountering problems that have long plagued its rivals
such as Kmart; clustered stores, unattractive merchandise and ultimately poor service are
just a few of the problems. Target, which is significantly smaller, is able to unionize the
store in such a way that the aisles are attractive and organized for consumers. Wal-Mart is
failing to bring in products that attract today’s consumers, particularly in apparel, home
furnishings and consumer electronics, while Target is bringing designers into the apparel
department to attract higher income consumers. The current economy has also hurt the
Wal-Mart stores. With rising gas prices and job uncertainty, lower income consumers are
spending less on average. Employee and consumer morale for the Wal-Mart brand is not
as high as it once was because Wal-Mart has had to defend itself from unions and
community activist groups. These groups contend that Wal-Mart takes advantage of
workers and hampers competition. Wal-Mart has also found itself in highly publicized
lawsuits, some of which contended that underage workers operate dangerous machinery
and others that the cleaning contractors had hired illegal immigrants. Another major issue
facing Wal-Mart is the continued allegations of gender discrimination. Lastly, another
issue currently facing Wal-Mart, as mentioned earlier, is its high dependence on Chinese
suppliers. This makes Wal-Mart susceptible to currency changes and ultimately price
uncertainty. This goes hand in hand with the ideology that because Wal-Mart is so
dependent on foreign suppliers, it is also susceptible to tariffs and taxes on foreign
imports. If taxes are increased, price increases will be turned over to the consumers.

Wal-Mart has taken over America. With its financial and structural standing in the
consumer community, Wal-Mart has taken the industry by storm. Its history and current
standing with suppliers, consumers and competitors Wal-Mart leads both intellectually
and financially. The following is a discussion of Wal-Mart’s financial status.

Wal-Mart’s Financial Performance for the last 5 years

Wal-Mart Stores, Inc. (NYSE: WMT) is the world’s largest retailer by sales and in
the U. S. it is responsible for 7.5% and 21% of consumer’s total annual expenditures on
retail goods and groceries, respectively.

In 2008 Wal-Mart’s sales revenue was almost 406 billion dollars. Wal-Mart has a strong
reputation as a discount store, providing merchandise and services at every day low
prices (“EDLP”). The biggest chunks of Wal-Mart’s revenue are groceries, health and
beauty products and Wal-Mart’s mark-ups are small. Therefore, Wal-Mart is driving its
high sales numbers by encouraging consumers to buy from them due to low prices.

In 2008 Wal-Mart ranked #2 in Fortune 500; previous year ranking was #1.

Wal-Mart may have fallen to second place, but with credit-crunched consumers looking
for bargains, Wal-Mart has emerged as a rare recession buster while consistently growing
same store sales at the expense of Target and other higher priced rivals.

Wal-Mart earned 401.2 billion in revenue during 2009 (Wal-Mart recognizes its fiscal
year as the 12 month period ending January 31), a 7.2% increase from 2008. Wal-Mart
has 3,000 stores in international markets where the average annual growth rate has been
around 30% between 2005 and 2009.

Wal-Mart stores segment (domestic stores), is responsible for 63.7% of revenues and
79.6% of operating income in 2009. During 2009, Wal-Mart stores enjoyed a 3.5%
increase in store sales compared to 1.6% growth in 2008, 2% in 2007, 3.4% in 2006 and
3.3% in 2005. The slowdown in 2008 spending can be attributed to the economic
slowdown.

Sam’s Club is responsible for 11.7% of revenues and 7.4% of operating income in 2009.
Sam’s Club generated 46.8 billion in total sales during fiscal year 2009 which represents
a 5.6% increase from 2008.

Wal-Mart’s international segment is responsible for 24.6% of revenues and 21.7% of


operating income in 2009. Wal-Mart International generated 98.6 billion in revenues in
2009 which represents 9.1% increase from 2008.

Furthermore, in fiscal year 2009 Wal-Mart’s sales were 401.2 billion which represents a
43% increase since 2005. The increase in revenues is attributed to global store expansion
as well as positive annual comparable store sales growth for the last 10 years. In 2009
Wal-Mart had 23.7% gross margin, up slightly from 23.5% in 2008 and 23.4% in 2007.

Cash Flow

Cash flow from operations has been steadily increasing in the five year period provided
for analysis. In all five years presented cash flow from operations has exceeded net
income. Wal-Mart has been investing in international operations and the amounts
invested are increasing steadily while making payments for property, equipment, etc. Net
cash used in investing activities has decreased since 2008. The amounts of cash used in
financing activity have been increasing steadily in the time frame presented but Wal-Mart
has decreased commercial paper amounts, paying of long term debt, paying dividends
and has a large stock repurchase program.

Although we see net decrease in cash and cash equivalents in fiscal 2008 (2,198
million), which was mostly due to large amounts spent on the stock repurchase and
payment of long-term debt, cash and cash equivalents amounts are positive at the end of
each of the five years presented for analysis.

Forecasts

"As goes General Motors, so goes the nation," was the old adage followed by
investors. That could easily be replaced now by "As goes Wal-Mart (WMT), so goes the
nation."

Now when almost every neighborhood has a Wal-Mart or two, the company has to
get more creative in finding ways to reach new markets and new customers. When a
company gets this massive, it becomes increasingly difficult to grow.

Wal-Mart foresees sales increases of 1% to 2% this fiscal year, lower than its
prior 5% to 7% forecast. Analysts expected revenue to be up 1.1% over that same period.

But the company expects a more robust 4% to 6% growth next year. Wal-Mart
also said it plans to boost its square footage growth rate to 4% this fiscal year and next.

In 2009 75% of new stores are being opened outside the United States. The most
growth occurred in Mexico, China and Central America. About 76% of Wal-Mart’s
planned stores for 2010 will be outside the United States.

Wal-Mart Stores Inc. is a large-cap value company in the consumer services sector.
The term “large-cap” is used by the investment community to refer to companies with a
market capitalization value of more than $10 billion. Large cap is an abbreviation of the
term "large market capitalization". Market capitalization is calculated by multiplying the
number of a company's shares outstanding by its stock price per share. Wal-Mart’s stock
is expected to outperform the market over the next six months with very low risk.

Wal-Mart purchases approximately $27 billion of its inventory directly from China
every year. As a result of its dependency on Chinese manufacturing, Wal-Mart is
vulnerable to fluctuations in the value of the dollar compared to the Chinese Yuan. If the
dollar weakens compared to Yuan, the price of Wal-Mart’s Chinese imports will rise.
Therefore Wal-Mart would either have to raise its prices or would have to settle for
narrower gross margins which would reduce its profitability.

Wal-Mart is faced with considerable pressure from number of politicians, labor


groups, and lawsuits attacking the company on issues such as employee wages, benefits,
discrimination and negatively impacting communities and small businesses. These
actions affect Wal-Mart’s reputation, which in turn could affect Wal-Mart’s ability to
expand into new areas or attract new customers.

Wal-Mart has enjoyed steady growth in the last 5 years. All financial ratios didn’t
fluctuate much and the 2008 recession changed everything. Wal-Mart’s competitors such
as Target and K-Mart have declining sales making 2008 the hardest year for those
retailers so far. On the other hand, Wal-Mart’s sales are increasing. Wal-Mart's 2008
bottom line rose 5.9% to $ 13.5 billion while Target and K-Mart have been getting
trounced.

Wal-Mart has an insatiable appetite for growth and although the company is faced with
numerous challenges and pressures, we believe that the company will thrive.

Safeway, Kroger, and Wal-Mart are part of a grocery oligopoly to shoppers. To food
producers and food brokers, they are oligopsonies. In turn, as we have shown elsewhere,
food brokers act as oligopolies to the supermarkets. To the small food producers, they act
as oligopsonies. The whole system is a tiered oligonomy. And we can extend that. The
few vendors, say, that provide ice cream are an oligopsony to dairy farmers, and an
oligopoly to the supermarkets.
REFERENCES

http://en.wikipedia.org/wiki/Oligopoly

http://www.123oye.com/job-articles/business-corporates/oligopolistic-market.htm

http://www.echeat.com/essay.php?t=31117

http://www.strategicedsolutions.org/page.php?ID=48

http://www.oligopolywatch.com/2007/08/25.html

http://www.oligopolywatch.com/2003/08/04.html

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