CASE SYNOPSIS

BUS 478

Prepared by:
Kei Fung Wong
Vance Wang
Yi Liu
Fan Wu
Sze Nga Ng

Prepared for: Jerry Sheppard

March 14, 2014

Scope
In this case synopsis, the team analyzes the current situation and strategy of PepsiCo, Inc.
However, the complexity of PepsiCos product mix makes it difficult for the team to determine
which industry the company belongs. After detailed discussion, the team determines to focus on
the beverage industry when analyzing the industry environment as PepsiCo, Inc. refers itself as
the part of the beverage industry (PepsiCo, 2014).

History & Background

PepsiCo, Inc. (PepsiCo) was established through the merger of Pepsi-Cola and Frito-Lay in
1965. Pepsi-Cola was created in the late 1890s by Caleb Bradham, a New Bern, N.C. pharmacist. FritoLay, Inc. was formed by the 1961 merger of the Frito Company, founded by Elmer Doolin in 1932;
and the H. W. Lay Company, founded by Herman W. Lay, also in 1932. Herman Lay, former chairman and CEO of Frito-Lay, was chairman of the board of directors of PepsiCo; Donald M. Kendall,
former president and CEO of Pepsi-Cola, was president and chief executive officer (PepsiCo, 2014).
During 1970s - 1990s, PepsiCo had developed a wide variety of brands such as Mountain
Dew, Ruffles and Cheetos. These brands were greatly welcomed by customers and brought
PepsiCo to early success. Since then, PepsiCo had grown globally by acquiring multiple reputable
brands in the snack and beverage industry. For instance, Walkers Crisp and Mug Root Beer are
two of the companies acquired by PepsiCo in the early stage. The acquisitions allowed PepsiCo to
establish and market snack foods around the world rapidly. Besides merely expanding horizontally,
PepsiCo purchased numerous famous restaurants (including KFC, Pizza Hut, and Taco Bell) for
investments and product distributors. Others in the fast-food industry avoided Pepsis products
because buying them would effectively support their competition, so Pepsi spun off the three
brands in 1997. At such rapid growth rate, in 1984, PepsiCo had become the largest company in
1

the beverage industry and its products were available in more than 150 countries (PepsiCo, 2014).
In the 2000s, PepsiCo concentrated on exploring undeveloped second world countries
markets and continued to expand by merging with and acquiring big brands. In 2008, PepsiCo
announced plans to invest US $1 billion in China over the next four years as part of the strategy
to expand in emerging markets and broaden the portfolio of locally relevant products. In 2009,
PepsiCo acquired Wimm-Bill-Dann, Russia's leading branded food-and-beverage company, and
further enhance its market share in Russia (PepsiCo, 2014).
In 2002, in order to maximize PepsiCos efficiency, the firm underwent restructure,
planning to cut about 3% off PepsiCo's global workforce and boost marketing spending for its
brands by USD$600 million. The CEO of PepsiCo, Indra K. Nooyi claimed the action could save
about USD$1.5 billion by 2014 (Bloomberg, 2012). Other than downsizing, in 2009, PepsiCo
attempted to boost efficiency by acquiring Pepsi Bottling Group, Inc. and Pepsi Americas, Inc.,
two anchor bottlers. By completing the acquisitions, PepsiCo took further control of its value
chain and strengthened the leading position in the beverage industry (PepsiCo, 2014).

General Environment
The beverage industry is a maturing, dynamic and fragmented industry. The industry
greatly depends on movements of the external environment. The external environmental factors
affecting the industry are illustrated below.
Global demographic plays a vital role in the beverage industry. The global population is
expected to rise by 2.2 billion to 9 billion by 2050. With the growing demand on food and
beverage, it is predicted the food and beverage supply will increase by 70% (IMAP, 2010).
In terms of the economy, most of the countries are suffering from the global recession
since 2008. Yet, the beverage industry had grown at an incredibly fast rate even in such a harsh

environment for the past years. From 2008 to 2013, the annual global consumer expenditure on
beverages went from USD $327,436 million to USD $425,570 million (Euromonitor, 2014).
With the slowly recovering economy, the industry is likely to bloom in the close future.
Other than economic factors, government policies also greatly affect the beverage
industry. Beverage manufacturing must abide by the regulatory guidelines everywhere they do
business (Epstein, 2008). In addition, in light of the health issues in most first world countries,
numerous governments had raised concern regarding obesity of their citizens. Various policies
against sugar-sweetened beverages have been implemented. In United States, 33 states had
imposed a sales tax on soft drinks in 2009 (Kelly D. Brownell, 2009). In 2012, France followed
and introduced a tax on soft drinks (Sparks, 2011). With this trend, countries are likely to enact
various constraints to reduce the demand of sweetened beverages in the close future.
Although health policies may lower beverage demand, the other advances in technology
may aid the industry. With advances in technology and research, companies in the beverage
industry developed and marketed sugarless beverages in the past decade and became a hit since
they were released. Apart from creating sugar-less beverages, technology has allowed beverage
manufacturers to develop drinks with distinct flavors and explore undeveloped markets. The
advancement of technology also includes wide spread Internet use in the last decade. In one hand,
the World Wide Web allows potential customers to conveniently reach beverage distributors. In
the other hand, companies within the beverage industry can interact with customers via an extra
channel and gather valuable sales information for future development.

Industry Analysis - Five Force Analysis

The competition within the beverage industry is great and vigorous, mostly because of
the race between PepsiCo and its nemesis, Coca-Cola Company (Coca-Cola). PepsiCo has been

competing with Coca-Cola over prices, suppliers, spokespeople, retail space and customers
changing needs over years (BHASIN, 2011). The attacks and responses between the two leading
firms have created a great tension and high standards on products within the industry. This has
forced other rivals to follow, differentiate their products, or exits the industry.
Subject to the competition between the Coca-Cola and PepsiCo, the two companies have
created great entry barriers. New entrants require tremendous capital investments and explicit
research on beverages customer demands to begin their business. Yet, the two companies have
developed tremendous beverages and patented most of their existing products. Despite the entry
barriers, the production, distribution, and sales of beverages are also subject to environmental
laws and governmental regulations in most countries, making the new entrants difficult to enter
the beverage industry (Vulpala, 2007).
The level of threats posed by suppliers, buyers and substitutes are near to the ground.
Common ingredients of most beverages are usually sugar, water and common chemicals such as
caffeine and carbonic acid. These materials are sold by plentiful of suppliers. Furthermore,
products from different suppliers have minimal differentiation. Firms in the beverage industry
can easily change suppliers.
Buyers in the soft drink industry are mainly wholesalers or distributors. Their bargaining
power was supposed to be higher than the suppliers. However, the rapid development and
differentiation of products in the beverage industry has attracted more buyers and thus, lowered
their bargaining power.
Lastly, the beverage industry has almost no substitutes since it covers most edible liquids.
Products such as soup or congee can hardly be classified as substitutes because those products have
different functionality and are usually recognized as meal alternatives, rather than drinks.

Current Situation
As of 2013, PepsiCo Inc. is the second largest food and beverage multinational company
in the world (MarketLine, 2013). PepsiCo manufactures and sells twenty-two major brands of
beverages and snack foods in more than 200 countries and territories (PepsiCo, 2013), each
generating over $1 billion in sales each year (MarketLine, 2013). Brands under PepsiCo such as
Pepsi-Cola, Lays Chips, Mountain Dew and Gatorade allow the firm to dominate a decent
portion of the food and beverage industry.
However, PepsiCo is in fact slowly losing its market share and competitiveness to its
rivals in the industry every year. In 2012, the PepsiCos sales amounted to $65,492 million
worldwide (PepsiCo, 2012). Although PepsiCo was performing exceptionally, it recorded a fall
of 1% in net revenue compared to its performance in 2011. PepsiCos market share in the soft
drink industry had also dropped from 10.3% to 9.9% in 2012 (Euromonitor, 2014).
PepsiCo is also facing pressure from its stock price. PepsiCos stock had gone nowhere
since Nooyi became CEO, while Coca-Colas stock price had increased by about 40% (Colvin,
2012). The fall on stock price began the day PepsiCo announced not to spin off its drink business
in spite of the market share problems in North America; PepsiCo Inc.s share price fell by 2.21%
that day (Abrams. 2014).

Current Strategy
Business Strategy-Integrated Cost Leadership/differentiated Strategy
.Integrated cost leadership/differentiated strategy allows PepsiCo to minimize production
budgets and seize market share at low cost. PepsiCo is currently implementing the Hybrid
Every Day Value strategy. By simply cutting down the discount on holidays but lower prices all

through the year, the strategy aims to eliminate customers habit on buying soda only when its
on sale (Reuters, 2013).
Corporate Strategy-Brand Portfolio Strategy
PepsiCo is using brand portfolio strategy to achieve synergistic benefit through economies of
scope and market power. PepsiCo categorizes its products into three different portfolios: the Fun-forYou brands, the Better-for-You brands, and the Good-for-You brands. The Fun-for-You brands cater
to global and regional flavors, such as Lays, Doritos, Cheetos, and Pepsi, etc. The Better-for-You
brands include snacks with lower fat content and whole grains, and beverages with fewer or zero
calories and less sugar. Good-for-You brands are comprised of nutritious foods and beverages that
include fruits, vegetables, whole grains, and low-fat dairy like Tropicana, Quaker; and also healthy
products with functional benefit, like Gatorade (PepsiCo Inc., 2014).
Creation of a new Global Nutrition Group
Complementing the Corporate Level strategy, PepsiCo launched Global Nutrition Group
(GNG) in 2010 as a long term strategy growing the Good-For-You portfolio, the GNGs work
focuses on innovation and brand development on the products within the portfolio. PepsiCo
dedicates itself to offer consumers with a wide range of healthy products with the reduction of
sodium, sugar, and saturated fat content (Kanter et. al, 2012).
Global Strategy-Strategic Alliance Strategy
PepsiCo deliberately invests in market development in the Asia, Middle East and Africa
(AMEA) region. Katty Lam, chairman of PepsiCo Greater China Region, describes China is one
of the important emerging markets in PepsiCos global strategies. Katty highlights PepsiCo's
success in China lies in developing products suited local customers preferences and tastes
(Qindexing, 2013).

To further understand Chinese preferences, PepsiCo formed a partnership with Tingyi

Holding Corp. - a Chinese Food and Beverage Company. Meanwhile increasing its market share
and enhance its brand leadership in the AMEA region. By creating the largest alliance in the
Chinese beverage industry, the two companies are leading the second largest competitor by about
1.6% of relative market share (Sosland, 2012).
Besides from expanding in the AMEA region, PepsiCo is also actively growing in other
regions. In 2010, PepsiCo acquired Lebedyansky and the Wimm-Bill-Dann to expand its market
in Russia. About the same period, Pepsico also acquired Mablel cookies and Lucky snakes in
Brazil, and Dilexis cookies in Argentina to further enlarge its product range (PepsiCo Inc., 2014).
Main Strategic Challenges
1. Resistance on increasing Beverage Market Share
PepsiCos third quarter result in 2013 indicates the organic revenue of PepsiCo Americas
Beverage has declined by 1.5% (PepsiCos Report, 2013). The main origin to the drop is the lack
of innovation within PepsiCo. Even though PepsiCo has launched new products to the market, it
is no match to Coca-Colas hugely successful Coke Zero and attention-grabbing bottle and can
designs (Colvin, 2012). Currently, Coca-Cola is dominating the market with a market share of
15.4%, while PepsiCos only has a share of 8.9% in the global soft drink market (Euromonitor,
2014). Even if PepsiCo is performing well on the beverage industry and in the future, PepsiCo is
unlikely to catch up the difference.
2. Challenges on making Profit on PepsiCos Nutrition Business
The Chief Executive Officer of PepsiCo, Nooyi, adjusted the focus of the company from
the fun for you product portfolio to the good for you portfolio. She projected the revenues of
good for you product lines would contribute to the companys revenue by 10% more (Reingold,

2011). However, the fact remains that good for you products were not as profitable as the
branded carbonated beverages (Colvin, 2012). With such miscalculation, from 2010 to 2013, the
companys return on capital had dropped from 22% to 11% (Hooper, 2014). Investors expecting
high returns on investment capital were greatly disappointed and demanded PepsiCo to restore
emphasis on profitable product lines instead.
3. Challenges on expanding to Overseas Markets - Financial
Since current markets are saturated, international markets are great platforms for PepsiCo
to widen its profit margin. Yet, the global strategy creates transitional challenges while
implementing. Actions such as the forming partnership with Tingyi and exiting the Mexican
bottling operations have increased reintegration and restructuring costs (Trefis Team, 2013). The
global expansion strategy requires tremendous investments in order to develop new markets and
please new target customers. Hence, it is challenging for PepsiCo to convince its investors to put
more money to establish new markets.
4. Challenges on expanding Overseas Markets Sociocultural & Political
With the current global strategy, PepsiCo focuses on developing the AMEA region.
Without a doubt, the AMEA region has great market potential. However, expansion here comes
with great political risk. Unlike any first world countries, countries in the AMEA region have
relatively poor hardware and policies to support the establishment of international firms like
PepsiCo. For example, copyright infringement is common in most second world countries like
China. In addition, their local governments do not usually have well-developed laws and
regulations in these matters. As a result, PepsiCo may suffer from a loss on profit margin. Even
worse, the plagiarized goods may damage PepsiCos reputation when consumers realize the
existence of the pirate goods and stop purchasing any PepsiCo products.

References
Abrams, R. (2014, February 13). Pepsico Declines to Spin Off Beverage Unit. The New York Times.
Retrieved from http://dealbook.nytimes.com/2014/02/13/pepsico-declines-to-spin-off-beverage-unit/
Brownell, K. D., Farley, T., Willett, W. C., Popkin B. M., Chaloupka, F. J., Thompson, J. W., & Ludwig,
D. S. (2009, October 15). The Public Health and Economic Benefits of Taxing Sugar-Sweetened
Beverages. The New England Jornal of Medical. Retrieved from
http://www.nejm.org/doi/full/10.1056/NEJMhpr0905723
Bhasin, K. (2011, November 2). COKE VS. PEPSI: The Amazing Story Behind The Cola Wars.
Business Insider. Retrieved from http://www.businessinsider.com/soda-wars-coca-cola-pepsi-historyinfographic-2011-11?op=1
Colvin,G. (2012, February 13). Pepsis CEO faces her biggest challenge. CNN Money. Retrieved from
http://management.fortune.cnn.com/2012/02/13/pepsi-indra-nooyi-earnings/
Epstein, M. J. (2008). Making Substainability Work. Berrett-Koehler Publishers.
Euromonitor. (2014). Consumer Expenditure on Mineral Waters, Soft Drinks, Fruit and Vegetable Juices.
Retrieved from
http://www.portal.euromonitor.com.proxy.lib.sfu.ca/Portal/Pages/Search/SearchResultsList.aspx
Euromonitor. (2014). Soft Drinks. Retrieved from
http://www.portal.euromonitor.com.proxy.lib.sfu.ca/Portal/Pages/Search/SearchResultsList.aspx
Hooper, M. (2014, February 26). Is There An Opportunity in PepsiCo. The Motley Fool. Retrieved from
http://www.fool.com/investing/general/2014/02/26/is-there-an-opportunity-in-pepsico.aspx
IMAP. (2010). Food and Bevergae Industry Global Report-2010. Retrieved form
http://www.imap.com/imap/media/resources/IMAP_Food__Beverage_Report_WEB_AD6498A0
2CAF4.pdf
Kanter, R. M., Khurana, R., Lal, R., & Baldwin. E. (2012, January 30). PepsiCo, Performance with
Purpose, Achieving the Right Global Balance. Harvard Business School. Retrieved from
http://www.bordbia.ie/industryservices/information/publications/CorporatePublications/Pathways
forGrowth2012/4%20PepsiCo.pdf
MarketLine (2013, January 25). PepsiCo Inc. Retrieved from
http://www.ebscohost.com/academic/business-source-complete
PepsiCo. (2014). Our History. Retrieved from http://www.pepsico.com/Company/Our-History
PepsiCo Unveils Global Nutrition, Environment and Workplace Goals. (2010, March 22). PepsiCo.
Retrieved from http://www.pepsico.com/PressRelease/PepsiCo-Unveils-Global-NutritionEnvironment-and-Workplace-Goals03222010.html
PepsiCo. PepsiCo Annual report. (2011). Retrieved from http://www.pepsico.com/annual10/letter/sixbusiness-imperatives.html
PepsiCo. PepsiCo Annual Report. (2012). Retrieved from http://www.pepsico.com/annual12/#financialhighlights
PepsiCo. Reports Third Quarter 2013 Results. (2013). Retrieved from
http://www.pepsico.com/PressRelease/PepsiCo-Reports-Third-Quarter-2013Results10162013.html

Reingold, J. (2011, October 5). The lastest Pepsi Challenge: Purpose. CNN Money. Retrieved from
http://management.fortune.cnn.com/2011/10/05/the-latest-pepsi-challenge-purpose/
Reuters (2013, May 22). PepsiCo rejiggers pricing strategy to lure customers. Chicago Tribune. Retrieved
from http://articles.chicagotribune.com/2013-05-22/business/chi-pepsi-price-pepsi-adjustingprices-to-lure-customers-20130522_1_pricing-strategy-soda-prices-holidays
Sosland, L. J. (2012, October 29). Looking for a Pepsi rebound. Food Business News. Retrieved from
http://www.foodbusinessnews.net/News/News%20Home/Features/2012/10/Looking%20for%20a
%20Pepsi%20rebound.aspx?cck=1
Sparks, I. (2011, October 6). France to impose fat tax on sugary drinks such as Coca-Cola and Fanta. Mail
Online. Retrieved from http://www.dailymail.co.uk/news/article-2045980/France-impose-fat-taxsugary-drinks-Coca-Cola-Fanta.html
Stanford, D. D. (2012, February 9). PepsiCo to Cut 8,700 Jobs, Spend More on Marketing Brands.
Bloogberg. Retrieved from http://www.bloomberg.com/news/2012-02-09/pepsico-to-cut-8-700jobs-even-as-it-spends-600-million-more-on-marketing.html
Trefis Team. (2013). PepsiCo Pre-Earnings: Snacking On Emerging Markets Growth. Forbes. Retrieved
from http://www.forbes.com/sites/greatspeculations/2013/02/12/pepsico-pre-earnings-snackingon-emerging-markets-growth/
Vulpala, L. G. (2007, October 18). Cola Wars : Five Forces Analysis. Retrieved from
http://goutham.wordpress.com/2007/10/18/cola-wars-five-forces-analysis
Xing, Q. D. (2013, December 11). PepsiCo's strategy wins market share. Ecns.cn. Retrieved from
http://www.ecns.cn/business/2013/12-11/92097.shtml

10