Republic of the Philippines

University of Southeastern Philippines

Obrero, Davao City
COLLEGE OF GOVERNANCE AND BUSINESS

A Case Analysis
on PepsiCo’s DiversificationStrategy in 2008

Submitted to:
Ateneo Agui-Po Committee

February 15, 2018

 III. SITUATIONAL ANALYSIS

A. THE ENVIRONMENT

Political

None was indicated in the case for the particular external factor.

Economic

None was indicated in the case for the particular external factor.

Social

 Consumers opting for healthier beverages in the US

In the United States, consumers opt to find healthier beverages. An evidence

which can be cited was that in 2007 the volume of the carbonated soft drink, which was
the most consumed type of beverage in the United States, declined by 2.6. Since then,
PepsiCo had been making efforts in developing natural sweeteners to improve the
nutritional properties of their beverages.

 3 key trends which shaped the snacking industry:

Convenience

Consumers looked for snacks which were more convenient to take along on an
outing which is why manufacturers in the industry started packingthrough smaller
packaging of snacks.
The growing awareness of customers in the nutritional content of snack foods

In most developed countries outside North America, consumers wished to reduce

the consumption of saturated fats, cholesterol, trans fats and simple carbohydrates. To
address the needs of the consumers PepsiCo had been making efforts to produce
good-for-you, better-for-you products. Manufacturers started using healthier oils when
processing chips and had expanded lines of baked and naturally salty snacks to satisfy
the demands of health-conscious consumers.

The emergence of indulgent snacking

Consumers wanted to have snacks that were great tasting with different gourmet
flavors and styles: overall, upscale, restaurant- influenced flavor trends emerged to fill
consumers’ desires to escape from the norm and taste snacks from a wider often
global, palate. As this desire from the consumers existed, most manufactures had
developed new flavors of salty snacks such as jalapeno and cheddar tortilla chips, and
pepper jack potato chips to attract the interest of indulgent snackers.

Technological

None was indicated in the case for the particular external factor.

Legal

U.S. Federal Trade Commission’s 10 year prohibition on Gatorade-PepsiCo’s soft

drinks joint distribution

Despite PepsiCo becoming the successful bidder for Quaker Oats and Gatorade
with an agreement struck in December 2000 the company was still unable to maximize
its profitability due to the FTC ruling. The FTC prohibited the joint distribution of
Gatorade and PepsiCo’s soft drinks because of the company’s possibility in having too
much leverage in negotiations with convenience stores. Which in effect, it might
ultimately force smaller snack food and beverage companies out of convenience store
channels. However, as the ruling is about to expire in about 3 years, the company is
expected to exploit the opportunities there is in being able to jointly distribute PepsiCo’s
soft drinks and Gatorade together in their distribution channels.

Environment

None was indicated in the case for the particular external factor.

B. THE INDUSTRY

FRITO-LAY NORTH AMERICA (Snack Foods Industry)

 Buyer Power

Buyer power is moderate because of the following considerations:

 There is a high customer’s influence to the production of products. Due to the

growing awareness of nutritional content of snack foods and indulgent snacking,
FLNA manufacturers want to create products that answers the desire of the
customers. They had begun using healthier oils when making chips to satisfy the
demands of health-conscious consumers. In 2008, they improved the
performance of their salty brands by developing further health and wellness
products wherein they had eliminated trans fats from all the salty snacks to make
it healthier. The company had also developed new varieties that appealed to
indulgent snackers and were healthier than the traditional.
 Availability of substitutes in the market.
 There is a wide range of consumers since FLNA operates all over North America.
 Supplier Power

Supplier power is low because of the following considerations:

 Due to FLNA’s desire to satisfy the demands of the customers, they want to
make some product innovations by creating varieties of salty brands and new
flavors which can be one of the reason of the company’s dependency on their
suppliers of raw materials.
 Although PepsiCo depends on their suppliers, the bargaining power of supplier
individually is still low because the raw materials they produced are not
considered unique that’s why it will be easy for PepsiCo to shift to other
suppliers.
 Since PepsiCo is considered the leading manufacturer of salty snacks in North
America, it will be a big loss for the supplier if they will lose PepsiCo as their
client.

 Competitive Rivalry

Competitive rivalry is moderate because of the following considerations:

 PepsiCo is the number one manufacturer of salty snack products with a market
share of 21% followed by Kraft Foods with 12% market share
 There are many players in the snack food industry
 The company’s differentiation strategy reduces the threat of rivalry. Customers
that are health conscious will think twice before switching to others.

 Threat of New Entrants

Threat of new entrants is low because of the following considerations:

 FLNA has already build a strong brand image to the customers

  They owned the top-selling chip brand in each U.S. salty snack category and
held more than a two-to-one lead over the next largest snack food maker in the
United States
 The company had already built close relationships with its distributors and
retailers

 Threat of Substitutes

Threat of substitutes is moderate because of the following considerations:

 Substitute products are available in the market. Other companies in the snack
food industry can offer substitutes to the customers that has also health benefits
such as cake, pastries, chocolates, nuts etc.
 PepsiCo’s attempt on making snack foods healthier reduces the threat of
substitutes.

PEPSICO BEVERAGES NORTH AMERICA (Beverage Industry)

The PBNA is divided into two categories which is carbonated and noncarbonated
beverage business.

PepsiCo’s Carbonated Soft Drink Business

 Buyer Power
Buyer power is moderate because of the following considerations:
 Like FLNA, the rising consumer health and wellness concern also affect
PepsiCo’s production of beverages to make it less unhealthy. Their soft drink
innovation focused on improving the nutritional properties of soft drinks.
PepsiCo wanted to develop new types of sweeteners that would lower calorie
content of nondiet drinks.
 One reason of buyer power is the Power of One program whereby retailers
could share their views on consumer shopping and eating habits. This helps
 PepsiCo develop new products using the consumer information from the
summits like SoBe Life Water and Lay’s potato chips cooked in sunflower oil.
 There is also a large number of consumers because PepsiCo is operating all
over North America

 Supplier Power
Supplier power is low because of the following reasons
 PepsiCo’s attempt to develop new types of sweeteners for carbonated soft
drinks can be a factor of the company’s dependency on suppliers for its raw
materials. However, like FLNA, the individual bargaining power of supplier is
low because the products they produced are not unique so PepsiCo can shift
to other suppliers whenever they want.
 PepsiCo is considered the largest seller of liquid refreshments in the United
States which can also be a factor for dependency of its supplier’s sale on
PepsiCo. It would be a big loss on the part of the suppliers if they lose
PepsiCo as their client wherein the company’s order is in large volume since
they are operating all over North America.

 Competitive Rivalry
Competitive rivalry is high because of the following considerations:
 Although PepsiCo has strengthened its position in the U.S carbonated soft
drink industry, it’s 31.1% market share during 2007 was considered lesser
than Coca-Cola’s 2007 market share of 41.6%.
 There are other players in the industry that can offer same products as
PepsiCo and Coca-Cola

 Threat of New Entrants

Threat of new entrants is low because of the following considerations:
 PepsiCo is widely known for its carbonated soft drinks which will be difficult for
the new entrants to compete with.
  The company had already built close relationships with its distributors and
retailers which can discourage new players.

 Threat of Substitutes
Threat of substitutes is moderate because of the following considerations:
 Carbonated soft drinks were the most consumed type of beverage in the
United States, with a 48% of share of the total beverage market, but
carbonated soft drink volume declined by 2.6% in 2007 as consumers
searched for healthier beverage choices. The decline of market share
resulted from the shift of consumer’s preference to healthier drinks. In
contrast, flavored and enhanced water products by 30.6%, energy drinks
grew by 24.7%, ready-to-drink tea grew by 15% and bottled water grew by
6.9% in 2006 and 2007.The beverages that were mentioned were
considerably substitutes of PepsiCo’s carbonated soft drinks.
 However, the first statement can reduce the threat of substitute because of
PepsiCo’s initiative in improving the nutritional properties of soft drinks. They
attempted to develop sweeteners that would lower the calorie content of
nondiet drinks which helps attract health conscious consumers.

PepsiCo’s Noncarbonated Beverage Brands

 Buyer Power
Buyer power is moderate because of the following considerations:
 The product lines for its water business were developed around customer
type and lifestyle. This can be a factor to consider in determining the buyer
power because it states the consumer’s ability to influence the seller’s
production. It was stated that the company’s strategy is to offer a continuum
of healthy beverages from unflavored Aquafina to nutrient-rich Gatorade.
 There is also a large number of consumers because PepsiCo is operating all
over North America
 Availability of substitute products
 Supplier Power
Supplier power is low because of the following considerations:
 Gatorade’s volume had grown by 21% in 2005 and 12% in 2006. This had
come about through PepsiCo’s introduction of new flavors and formulations.
This clearly shows that PepsiCo also depends mainly on their suppliers for its
raw materials on noncarbonated beverages but supplier power is still low
because their products are not considerably unique.
 PepsiCo is a big client for any suppler because they purchase in large volume
which gives them the power over their suppliers.

 Competitive Rivalry
Competitive rivalry is moderate because of the following considerations:
 There is a threat of rivalry especially with Coca Cola because in every
category, there’s always a corresponding product that directly competes with
PepsiCo.
 However, the threat of rivalry reduces because of the following reasons: (1)
PepsiCo made it the leader in RTD area and RTD coffee categories (2)
PepsiCo’s 39.5% market share in RTD areas was four times greater than the
10.7% market share held by Coca Cola’s Nestea RTD (3) Tropicana was the
number one brand in the orange juice industry with 30% market share
compared to 25% of Coca Cola’s Minute Maid (4) In 2007, Gatorade, Propel
and Aquafina were all number one in their categories, with market share of
76%, 40% and approximately 15% respectively.

 Threat of New Entrants

Threat of new entrants is low because of the following considerations:
 In carbonated drinks industry, PepsiCo had already build a strong brand
image
to the customers. It will be difficult for the new entrants to compete with
existing players in the industry such as PepsiCo and Coca Cola
  PepsiCo’s Power of One strategy only shows that the company has strong
relationship with its retailers and distributors

 Threat of Substitutes
The threat of substitutes is moderate because of the following considerations:
 There is a close substitute for every noncarbonated drink category however,
because of PepsiCo’s product differentiation strategy, consumers will think
twice before switching to others. Such as Propel, flavor and vitamin-enriched
water for physically active consumers and Life Water, a vitamin-enhanced
water to image-driven people. They also targeted mainstream water
consumers with unflavored Aquafina, Aquafina FlavorSplash (offered in four
flavors) and Aquafina Sparkling zero-calorie lightly carbonated circus or berry
flavored water.

PEPSICO INTERNATIONAL (Snacks, Beverages and Food Items Outside North

America)

 Buyer Power
Buyer power is moderate because of the following considerations:
 For snack foods in international market, consumer characteristics in the U.S.
that had forced snack food makers to adopt better-for-you and good-for-you
snacks applied was also applied in other developed countries as well. Since
demand for health and wellness products in Europe was growing by 10-13%
per year, PepsiCo was eliminating trans fats from the snacks and expanded
the nutritional credentials of its snacks sold in Europe.
 It has low buyer concentration. Since, they PepsiCo International operates in
a global scale, it follows that they have a wide range of consumers. It can also
be ascertain by using the information of PepsiCo’s market share in different
countries.
 Availability of substitute products
 Supplier Power
Supplier power is low because of the following considerations:
 Since PepsiCo is a manufacturing company, their sales depends on the raw
materials used which only means they cannot operate without their suppliers.
However, the individual power of supplier is still low because of the availability
of substitutes of raw materials.
 PepsiCo is considered the largest seller of liquid refreshments in the United
States which can also be a factor for dependency of its supplier’s sale on
PepsiCo. It would be a big loss on the part of the suppliers if they lose
PepsiCo as their client wherein the company’s order is in large volume since
they are operating in a global scale.

 Competitive Rivalry
Competitive rivalry is moderate because of the following considerations:
 There are many existing players in the industry internationally
 However, given the substantial market share of PepsiCo in every category of
different countries, the threat of existing players will be minimized.

 Threat of New Entrants

Threat of new entrants is low because of the following considerations:
 World class brands like PepsiCo takes large investment and efforts. Building
brand loyalty and close relationships with its retailers and distributors is not
easy which discourages new entrants.
 Threat of Substitutes
Threat of substitutes is moderate because of the following considerations:
 Internationally, there is a high availability of substitutes in the market but
because of PepsiCo’s initiative on developing a continuum of healthy
beverages, the threat of substitution will be minimized because it will attract
more health-conscious consumers.

QUAKER FOODS NORTH AMERICA

 Buyer Power
Buyer power is high because of the following considerations:
 Low concentration of buyers which means there are few sellers but many
buyers.
 Availability of substitute products.
 Supplier Power
Supplier power is low because of the following considerations:
 Like PepsiCo, Quaker Oats is a big client for any supplier because they also
purchase in large volume which gives them the power over their suppliers.
 Competitive Rivalry
Competitive rivalry is high because of the following considerations:
 There is a tight competition in the cereal market. Quaker Foods was the third
largest ready-to-eat cereal maker with a 14% market share in 2005. While
Kellogg’s held a market share of 30% and 26% for General Mills. Quaker grits
and Aunt Jemima pancake mix and syrup competed in mature categories and
both owned market leading positions.

 Threat of New Entrants

Threat of new entrants is low because of the following considerations:
 Quaker Oats was PepsiCo’s largest acquisition as it was the number one
brand of oatmeal in the U.S. It is also considered as the leading brand of rice
cakes and granola snack bars etc. Thus, it has already built a strong brand
image in the cereal market which is difficult to match on the part of new
entrants.
 Along with the brand image is the customer loyalty and relationship with it
retailers which discourages new players in the industry.

 Threat of Substitutes
Threat of substitutes is moderate because of the following considerations:
  It was stated that in 2005, Quaker Foods share in the market is much lesser
than its competitors which means consumers prefer the products offered by
Kellogg’s and General Mills than products from Quaker Foods.

C. THE ORGANIZATION

Company’s History

1898- A pharmacist from New Bern, North Carolina named Caleb Bradham crated the
formula for a carbonated beverage he named Pepsi-Cola.

1932- Elmer Doolin of San Antonio, Texas began manufacturing and marketing Fritos
corn chips and Herman Lay started a potato chip distribution business in Nashville,
Tennessee.

1961- Doolin and Lay agreed to a merger for the businesses to establish the Frito-Lay
Company.

1965- Pepsi-Cola and Frito Lay shareholders agreed to a merger between the salty
snack icon and soft drink giant.

1977- PepsiCo Inc. acquired Pizza Hut.

1978- PepsiCo Inc. acquired Taco Bell.

1986- PepsiCo Inc. acquired Kentucky Fried Chicken (KFC).

1980s-1990s- PepsiCo Inc. acquired Mug root beer, 7UP International, Smartfood
ready-to-eat popcorn, Walker’s Crsips (UK), Smith’s Crisps (UK), Mexican cookie
company, Gamesa and SunChips.

1990- PepsiCo Inc. acquired quick-service restaurant Hot n’ Now.

1992- PepsiCo Inc. acquired quick-service restaurant California Pizza Kitchens. Also,
the company expanded beyond carbonated beverages with an agreement with Ocean
Spray to distribute single-serving juices.
1993- PepsiCo Inc. acquired quick-service restaurants East side Mario’s, D’ Angelo
Sandwich Shops and Chevy’s Mexican Restaurants. Also, PepsiCo Inc. introduced
Lipton ready-to-drink teas.

1994- Aquafina bottled water and Frappucino ready-to-drink teas were introduced.

1997- CEO Roger Enrico spun off the company’s restaurants as an independent,
publicly traded company to focus PepsiCo on food and beverages.

2001- PepsiCo Inc. completed its acquisition of the Quaker Oats Company.

2006- PepsiCo Inc. made tuck-in acquisitions including Stacy’s bagel and pita chips,
Izze carbonated beverages, Duyvis nuts (Netherlands) and Star Foods (Poland).

2007- PepsiCo Inc. acquired Naked Juice fruit beverages, Sandora juices (Ukraine),
Bluebird snacks (New Zealand), Penelopa nuts and seeds (Bulgaria) and Lucky Snacks
(Brazil). The company also entered into a joint venture with the Strauss Group to market
Sabra, the top-selling and fastest growing brand of hummus in the United States and
Canada.

Management Capabilities

PepsiCo’s management team was dedicated to capturing the strategic fit benefits
within the business lineup throughout the value chain. The company’s procurement
activities were coordinated on a global scale to achieve the greatest possible
economies of scale. Moreover, best practices were routinely transferred between its 230
plants, 3,600 distribution systems and 120,000 service routes around the world. Also,
PepsiCo shared marketed research information to better enable each division to
develop new products likely to be hits with consumers and coordinated its power of One
activities across the product lines.

In addition, PepsiCo management had a proven ability to capture strategic fits

between the operations of new acquisitions and its other businesses. The Quaker Oats
integration produced a number of noteworthy successes including: (1) $160 million in
cost savings resulting from corporate-wide procurement of product ingredients and
packaging materials, (2) an estimated $40 million in cost savings attributed to joint

3- Year Fianncial Ratios of PepsiCo Inc. (2005-2007)

distribution of Quaker snacks and Frito-Lay products and (3)$120 million in cost savings
annually by 2005 from combination of Gatorade and Tropicana hot fill operations.
Leverage Ratios

Formula 2007 2006 2005 Interpretation

PepsiCO was in good

position from 2005-2007 in
Total Debts its debt to total assets
Debt to total ratio. Since the result of
Total Assets
Assets Ratio the ratio is below 1, this
0.50 0.49 0.55
imply that the company
can avoid bancrupcy and
its capital is mostly
financed by the owners
rather than the creditors.

A less than 1 ratio is what

the creditors usually like
in the company. PepsiCO
Total Debts
had a highest DER in 2005
Total Stockholders’
which corresponds
Debt to Equity
slightly unsatisfactory
Equity Ratio
1.00 0.94 1.22 result among the three
ratios. However, the
company had a good ratio
in 2006 but it increase
about 0.06 in 2007. In
otherwords, PepsiCO had
a flactuating condition
from 2005-2007 in its debt
to equity ratio.
 PepsiCO has a low results
from 2005-2007. This
Long-Term Debts means that only small
Long Term Total Stockholders’ portion of the company's
Debt to Equity
assets was provided by
Equity Ratio the creditors. For example
0.24 0.17 0.16 in 2007, only 24% of the
assets was financed by
the creditors. This implies
a good image to PepsiCO
because a low ratio means
a low business risk.

PepsiCO had a flactuating

condition in three
consecutive years.
EBIT
Times However, it is still in good
Interest Total Interest position. Based on the
Charges
Earned rule of thumb, a ratio of 2
Ratio 3.87 5.19 2.77 or higher is still
considered adequate to
protect the creditors'
interest in the firm. In
2007, this means that
PEPSIco had an operation
income that can covered
its interest expenses up to
3.87 times.
Profitability Ratios

Formula 2007 2006 2005 Interpretation

Generally, the higher the

Sales-COGS
gross margin the better.
Gross Profit Sales
0.54 0.55 0.56
However, in the case of
Margin
PepsiCO, it has a declining
GPM Ratio from 0.56 in 2005
to 0.54 in 2007. The gross
profit margin in 2007 tells us
that Company PepsiCO has
54% of its revenues left over
after it pays the direct cost
(COGS).

Based on the computed

data, within three years,
Operating
EBIT there was only 0.01
Profit Margin
0.20 0.21 0.20 increased of OPM ratio. As
Sales
of 2007, it indicates that
PepsiCO generated a net
profit of 0.20 cents after
paying for a variable cost
and before paying interest
and taxes.
 The NPM ratio of PepsiCO
was in flactuating condition.
Net Income This means that PepsiCO's
Net Profit Sales 0.14 0.16 0.13 efficiency in converting
Margin sales to actual profit varies
from 2005-2007. Based on
the result of 2007 NPM ratio,
the company has 0.14 cents
of net income foe every peso
of sales.

Based on the table, there

was an increase of
Net Income PepsiCO's ROA from 2005-
Return on Total Assets 0.16 0.19 0.13 2006 and a decrease in 2006-
Total Assets 2007. As a general rule, the
(ROA) higher the ROA of a
company the better. As
showed in 2007, it tells us
that for every 1 peso
invested in the PepsiCO's
asset, it produced 0.16 of net
income.

Reeturn on 0.33 0.37 0.28 The rule of thumb suggests

Stockholders' Net Income that ROE must be 10%-14%
Equity (ROE) Total Stockholders' to fund future growth. In the
Equity case of PepsiCO, it shows
that PepsiCO was
 performing well within three
consecutive years and high
enough for the sustainability
of company's growth. In
2007, this means that for
every one peso of common
shareholders equity, it
earned about 0.33 cents.

Activity Ratios

Formula 2007 2006 2005 Interpretation

The result indicates that

Sales PepsiCO can sold out its
Inventory
Inventory of inventory by 17.24 times in
Turnover
finished goods 17.24 18.24 19.23 2007, 18.24 times in 2006
and 19.23 times in 2005.
From 2006 to 2007, there
was an increase in the
PepsiCO's ratio which
gives a good impact on the
company's operation. This
means that a company's
inventory in 2007 was sold
 and replaced faster than
2006 and 2005.

A high ratio is preferred for

most businesses. However,
Fixed
Sales based on the given table,
Assets
Fixed Assets 2.14 2.18 2.26 PepsiCO has a declining
Turnover
ratio from 2005 to 2007. In
2007,it implied that there
was a 2.14 peso earned for
every one peso invested in
fixed assets.

PepsiCO has a fluctuating

total assets turnover. From
Total Sales
2005- 2006, it increase
Assets Total Assets
1.14 1.17 1.03 about 0.14 but suddenly
Turnover
decrease in 2006-2007. In
2007 result, it shows that
for every one dollar
invested in the PepsiCO's
assets, it produces 1.14 of
sales.

Liquidity Ratios
 Formula 200 2006 2005 Interpretation
7

A ratio lower than 1

tells us that the
Current Current Assets
company does not
Ratio Current
6.03 0.59 have enough currrent
Liabilities
assets to pay its
debts. In 2005,
PepsiCo has only 59
cents in current assets
to pay its 1 dollar
current debt. However,
it can be seen that in
year 2006, the
company has more
than enough current
assets amounting 6
pesos and 3 cents to
cover its current
liabilities if they come
due.

Quick Current Assets - Inventory

In 2005, this means
Ratio that PepsiCo cannot
Current Liabilities
meet its current (short-
-1.00 0.0 term) debt obligations
1 without selling
inventory because the
 quick ratio is only 0.01
which is less than 1.

PepsiCo Inc.’s Comparative Revenue Pie per Division (2005-2007)

Illustration 1. 2007 PepsiCO Net Revenue per Division

 5%
Frito-Lay North America
29%

40% PepsiCo Beverages North America

Pepsi International
26%
Quaker Foods North America

In 2007, PepsiCo International division contributed the highest net revenue with
40% to PepsiCo’s total net revenue. Meanwhile, Frito-Lay North America division
ranked second contributing 29% out of the company’s total net revenue. By 2007,
FLNA’s revenue increased by 7% as a result of double-digit growth in sales of
SunChips, Quaker Rice Cakes, and multipacks of other products. It was also stated that
the average consumption of carbonated soft drinks in the US was increased to 60
servings per month. On the other hand, PepsiCo Beverages North America division
ranked third and contributed 26% to the company’s total net revenue. This was the
result of the 7% increased as the company broadened its line of noncarbonated
beverages like Gatorade, Tropicana Fruit juices Lipton ready-to-drink tea. Lastly,
Quaker Foods North America division ranked last and contributed 5% to the total net
revenues of the company. This division was still in the last spot in spite of the 2%
increase in the sales volume of Quaker Foods.

Illustration 2. 2006 PepsiCO’s Net Revenue per Division

 5%
Frito-Lay North America
31%
37% PepsiCo Beverages North America

Pepsi International
27%
Quaker Foods North America

In 2006, PepsiCo International division contributed the highest net revenue with
37% to PepsiCo’s total net revenue. The main countries that contributed for this
increase in net revenue of PepsiCo International were Europe, Africa, Middle East, New
Zealand and Brazil which had 22% increase within the year. Meanwhile, Frito-Lay North
America division ranked second contributing 31% out of the company’s total net
revenue. This was because of the acquisition of Flat Earth fruit and vegetables snacks
which offered to exploit customers’ desires for healthier snacks. On the other hand,
PepsiCo Beverages North America division ranked third and contributed 27% to the
company’s total net revenue. Based on the given data, PepsiCo had 26% market share
of liquid refreshments in United States in 2006 Lastly, Quaker Foods North America
division ranked last and contributed 5% to the total net revenues of the company.

Illustration 3. 2005 PepsiCo's Net Revenue per division

 5%
Frito-Lay North America
32%
35% PepsiCo Beverages North America

Pepsi International
28%
Quaker Foods North America

In 2005, PepsiCo International division contributed the highest net revenue with
35% to PepsiCo’s total net revenue. Meanwhile, Frito-Lay North America division
ranked second contributing 32% out of the company’s total net revenue. On the other
hand, PepsiCo Beverages North America division ranked third and contributed 28% to
the company’s total net revenue. Lastly, Quaker Foods North America division ranked
last and contributed 5% to the total net revenues of the company.

D. CURRENT MARKETING STRATEGIES

Diversification

This diversification strategy of PepsiCo Inc. includes both related and unrelated
diversification. In terms of the related diversification strategy, some of its products that
have functional versions are: Aquafina FlavorSplash (offered in four flavors), Aquafina
Sparkling and Aquafina Alive. Furthermore, the company developed new indulgent
Doritos flavors that included Fiery Habanero and Blazin’ Buffalo & Ranch. Moreover,
Stacy’s pita chips came in 15 varieties, including Multigrain, Soy Thin Stick Bun,
Cinnamon Sugar, Whole Wheat and Texarkana Hot. For unrelated diversification, in
2008, PepsiCo had diversified the company into salty and sweet snacks, soft drinks,
orange juice, bottled water, ready to drink teas and coffees, purified and functional
waters, isotonic beverages, hot and ready-to-eat breakfast cereals grain based products
and breakfast condiments.

Push Marketing

PepsiCo’s world class advertising has helped the company to reach to its target
market around the world. Also, it’s Power of One retailer alliance strategy had been in
effect for more than 10 years and was continuing to help boost PepsiCo’s volume and
identify new product formulations desired by consumers. With this strategy, PepsiCo
marketers and retailers collaborated in stores and during offsite summits to devise
tactics to increase consumer’s tendency to purchase more than one product offered by
PepsiCo during a store visit. Moreover, PepsiCo’s most successful new products had
been recommended by retailers.

Forward Integration

PepsiCo has developed close relationships with its distribution allies. With
PepsiCo’s Power of One retailer alliance strategy, PepsiCo marketers and retailers
collaborated in stores and during offsite summits to devise tactics to increase
consumer’s tendency to purchase more than one product offered by PepsiCo during a
store visit.
Divestiture

In 1996, it had come clear to PepsiCo management that the potential benefits
existing between restaurants and PepsiCo’s core beverage and snack businesses were
difficult to capture. In addition, any synergistic benefits achieved were more than offset
by the fast-food industry’s fierce price competition and low profit margins. With that,
PepsiCo’s CEO Roger Enrico spun off the company’s restaurants as an independent
publicly traded company to focus PepsiCo on food and beverages.

Market Development

From 1980s to 1990s, PepsiCo Inc. acquired Mug root beer, 7UP International,
Smartfood ready-to-eat popcorn, Walker’s Crsips (UK), Smith’s Crisps (UK), Mexican
cookie company, Gamesa and SunChips. In addition, after the completion of the Quaker
Oats acquisition in August 2001, PepsiCo Inc. made “tuck-in” acquisitions of small, fast-
growing food and beverage companies internationally to broaden its portfolio of brands
including Duyvis nuts (Netherlands), Star Foods (Poland), Sandora juices (Ukraine),
Bluebird snacks (New Zealand), Penelopa nuts and seeds (Bulgaria) and Lucky Snacks
(Brazil). Furthermore, PepsiCo’s carbonated drinks are distributed and sold in
international markets such as Middle East, India, Thailand, Egypt, Venezuela, Nigeria,
China and Russia.

In 2006, PepsiCo’s salty snack foods are distributed in countries such as Mexico,
Holland, South Africa, Australia, Brazil, India, United Kingdom, Russia, Spain and
China. Lastly, Quaker Oats oatmeal and cereals were manufactured and distributed in
international markets such as the United Kingdom. On the other hand, in 2007,
Gatorade was available in 42 international markets, Tropicana was in 27 country
markets outside North America and Lipton was sold in 27 international markets.In
addition, Aquafina was brought to selected emerging markets in Eastern Europe,
Middle East and Asia. In 2008, PepsiCo International manufactured, marketed, and sold
snacks and beverages in approximately 200 countries outside the United States.

Market Penetration
 PepsiCo’s noncarbonated drink, Gatorade had grown by 21 percent in 2005 and
12 percent in 2006 to reach sales of over $3 billion. Gatorade’s impressive growth had
come about through the introduction of new flavors and formulations such as the lower-
calorie G2 and the Tiger Woods signature Gatorade brand. Volume growth was also
attributable to new container sizes and designs, new multipacks, world class advertising
and added points of distribution.

Product Development

Most PepsiCo brands had achieved number one or number two positions in their
respective food and beverage categories through product innovations. This includes
product reformulations to make snack foods less unhealthy. The company developed
“good-for-you” or “better-for-you” products. Presented below are the efforts of each
division of PepsiCo Inc. to innovate and improve their products:

*Frito-Lay North America (FLNA)

Frito-Lay North America eliminated trans fats from Lay’s, Fritos, Ruffles,
Cheetos, Tostitos and Doritos varieties. The company had introduced Lay’s classic
potato chips, which were cooked in sunflower oil and retained Lay’s traditional flavor but
contained 50 percent less saturated fats. Also, the company had developed new
multigrain and flour tortilla Tostitos varieties that appealed to indulgent snackersand
were healthier than traditional Tostitos. Furthermore, the company developed new
indulgent Doritos flavors that included Fiery Habanero and Blazin’ Buffalo & Ranch.
Also, FLNA had expanded the number of flavors of SunChips including Garden Salsa
and Cinnamon Crunch. SunChips were also introduced in 100-calorie minipacks and
20-bag multipacks. On the other hand, one of PepsiCo’s acquired company in 2006,
Flat Earth fruit and vegetable snacks offered an opportunity for the company to exploit
consumers’ desires for healthier snacks and address deficiency in most diets. With that,
Flat Earth developed baked vegetable crisps (Farmland Cheddar, Tangy Tomato
Ranch, Garlic and Honor Field) and baked fruit crisps (Peach Mango Paradise, Apple
Cinnamon Grove and Wild Berry Patch) that were launched in 2007. Other “good-for-
you” snacks included Stacy’s pita chips which was also acquired in 2006 and Quaker
Chewy granola bars. In 2008, Stacy’s pita chips came in 15 varieties, including
Multigrain, Soy Thin Stick Bun, Cinnamon Sugar, Whole Wheat and Texarkana Hot.

*PepsiCo Beverages North America (PBNA)

PepsiCo Beverages North America also distributed Quaker rice cakes, which had
added chocolate-drizzled and multigrain varieties in 2007. On the other hand, PepsiCo
improved the nutritional properties of their soft drinks. The company attempted to
develop new types of sweeteners that would lower the calorie content of nondiet drinks.
Furthermore, PBNA launch Tava, an additional calorie-free, caffeine-free, better-for-you
carbonated beverage that was launched in United States in 2007. In 2006, PBNA had
introduced SoBe Life Water and functional versions of Aquafina including Aquafina
FlavorSplash (offered in four flavors), Aquafina Sparkling and Aquafina Alive. Moreover,
some the company’s product lines that were developed for its water business includes
Propel which is marketed to physically-active consumers and Life Water marketed to
image-driven consumers. Lastly, PBNA also introduced new flavors of Gatorade also in
new container sizes and designs, and new multipacks and formulations such as the
lower-calorie G2 and the Tiger Woods signature Gatorade sub-brand.

*PepsiCo International

The company developed and made modest modifications to its snacks in most
countries. The company supplemented its global brands with varieties spiced to local
preferences. Classic varieties of Lay’s, Doritos, and Cheetos snacks were sold in Latin
America. While on the countries such as in Thailand, the company offered seaweed-
flavored Atesanas chips and Lay’s White Mushroom potato chips sold in Russia.
Furthermore, PepsiCo eliminated trans fats from its snacks and expanding the
nutritional credentials of its snacks sold in Europe since there’s continuous growth for
the demand for health and wellness products in Europe.

*Quaker Oats North America

Not found in the case.

 IV. MARKETING STRATEGY
A. TOWS MATRIX
Strengths
1. Revenue of PBNA had increased by
7% annually between 2006 and
2007
2. PepsiCo focused in soft drink
innovation toward improving the
nutritional properties of soft drink
3. Quaker Foods ownership of
Gatorade
4. Quaker Foods product innovation
such as reduced-calorie oatmeal-
and-raisin bars
5. Gatorade gained 72% market share
in Latin America region in 2006.
6. Tropicana was the number one
juice brand in Europe with 100%
sales growth in 2006.
7. FLNA Strategic initiatives done by
the management of the snack
division.
8. FLNA’s retention of Lay’s flavor
cooked in sunflower oil with 50%
less saturated fat.
Opportunities
Weaknesses
1. During Mid-1990s, PepsiCo brand
except Mountain Dew lose market
share to Coca-Cola’s brand
2. PesiCo’sSobe Essential Energy and
SoBE Adrenaline Rush drinks held
negligible share of the energy drink
market
3. 75 % of Quaker Oats’ international
sales of $500 million was accounted
for by just 6 countries in 2006
4. Low profitability of Quaker
international operations
5. Per capita consumption of
PepsiCo’s snacks in developing
countries is low.
6. Low, single -digit annual growth of
Frito-Lay’s North America.
7. Annual revenue growth for PepsiCo
International’s product is not
maximized.
Threats
 1. Gatorade could achieve even
stronger performance once the
prohibition on bundled beverages
contracts came to an end
2. PepsiCo was attempting to develop
new types of sweeteners that would
lower the calorie content of non-diet
drinks
3. Making more Quaker products
available outside United States and
Canada
1. PepsiCo’s 31% market share during
2007 was considerably less than
Coca-Cola’s market share of 41.6%
Carbonated soft drinks volume
declined by 12.6% in 2007
2. Existence of bigger cereal-makers
in the industry
3. Fierce competition in food and
beverage international markets
4. Stock price downturn

4. Increasing awareness of nutritional 5. The U.S. second largest snack food

content of snack food maker close gap with Frito-Lay.

6. New flavor development for salty

5. Expansion of product lines of snacks done by the other
PepsiCo International manufacturers.

6. Strategic acquisitions of companies

outside North America

7. Taste preferences of salty snacks

were similar from country to
country.

8. 50% American’s average

consumption of the Department of
Agriculture’s recommended daily
diets of fruits and vegetables.

Matching

1. S4, O3, O4: Product Development through continued efforts of making “better-
for-you”, ‘good-for-you” products it can counter back to the health awareness
trend.
2. S5, O5, O6: Market Development by increasing PepsiCo products global
availability through expanding to added international markets.
3. W1, O5, T1: Horizontal Integration as the strategy to achieve the highest
possible economies of scale in the beverage industry while minimizing the fixed
 costs. In turn, the strengthening of PepsiCo’s beverages distribution will be
possible.
4. S10, T5: Utilization of PepsiCo’s Power of One Retail Strategy to shelf PepsiCo
soft drinks beside the well-performing snacks in order to increase the outlook of
consumers in purchasing PepsiCo soft drinks rather than Coca-cola.
5. S8, T6:Market Penetration through promotions and stronger marketing
campaigns. Through the said strategy, it will generate awareness to the snackers
that the Frito-Lay’s snack foods are much healthier to newly developed flavors
from the competitors
6. W1, W2, O8, O2: Market Development by making more Quaker products and
Gatorade product lines available in this market and after the FTC ruling, placing
them side-by-side by utilizing PepsiCo’s Power of One Retail strategy.
7. S2, 02: Product Modification Strategy by successfully innovating the formula
of the PepsiCo’s soft drinks into a healthier and low calorie content drinks, the
customers’ health concerns will be address by the management. This may also
help in increasing the company’s market share in the industry of carbonated
drinks.
8. S7, T6: Management Initiatives Strategy through the initiatives of the
management, such as rigorously addressing the customers’ concerns, the FLNA
can have a much higher gap with the second largest snack food maker of U.S.
9. S3, S4, O4, T3: Product Modification Strategy and Power of One Strategy
can help in eliminating the threat posed by the existing big cereal-maker in the
industry. By doing the mentioned strategies, it will be favorable to the Quaker
Foods because the Power of One Strategy give the possibility that the
consumers will purchase more than one PepsiCo product especially the Quaker
Foods. Furthermore, the Product Modification Strategy will help the Quaker
Foods to address the consumer’s health awareness on snack food.
10. O1, W6: Power of One Strategy, since Gatorade is one of the great performing
product line of PepsiCo, it can also help to increase the growth rate of Frito-Lay’s
products through the joint distribution. The said strategy will give an appeal to the
Gatorade’s active and health conscious customers to pair the isotonic drink with
“good-for-you” or “better-for-you” snack foods.
11. S2, O2, O5: Market Penetration through promotions emphasizing product
differentiation for PepsiCo core beverages.
12. W3, O6: Market Development by increasing PepsiCo products global availability
through expanding to added international markets.
13. W4, O1: Under Power of One Retail Strategy by PepsiCo, Gatorade products
could be paired with Quaker products to help improve the profitability of its
international operations.
 14. S1, T1: Divestiture of underperforming product lines in order to focus more in
their core beverages.
15.

B. ANALYSIS OF TARGET MARKET

Market Segmentation (PepsiCo International)

 Geographic
PepsiCo as a worldwide company has to take additional factor such as
geographic as consideration. However, trends in the United States might not be
the same in other countries so there’s really a need to segment their market
according to its geographic location. For example, the average consumptionof
carbonated soft drinks varies from country to country, in the U.S. was 60 servings
per month, 23 servings per month in the developed countries and 6 servings per
month which bears further opportunities for PepsiCo International.
For the snack foods industry, PepsiCo believed there is a great
opportunity for growth in international markets since per capita consumption of
snacks in the United States averaged 6.6 servings per month, while per capita in
other developed countries averaged 4.0 servings per month and 0.4 servings per
month for the developing countries. By year 2010, PepsiCo expected that China
and Brazil would be the two largest international markets for snacks, United
Kingdom to be the third largest while developing markets Mexico and Russia
would be the fourth and fifth largest international markets for snacks,
respectively.
 Psychographic
PepsiCo has variety of products to satisfy different preferences. It has
segmented its product to cope for different psychographic variables such as taste
preference and lifestyle. For salty snacks, taste preferences were more similar
from country to country than many other food items which allowed PepsiCo made
modest modifications to its snacks in most countries. For example, classic
varieties of Lay’s, Doritos and Cheetos snacks were sold in Latin America.
However, for local preferences, they supplemented its global brands with
 varieties such as the seaweed-flavored Atesanas chips sold in Thailand and
Lay’s White Mushroom potato chips sold in Russia.
For lifestyle, the better-for-you and good-for-you snacks offered in United
States was also applied in most other developed countries as well. PepsiCo was
eliminating trans fats from its snacks and expanding the nutritional credentials of
its snacks sold in Europe, since demand for health and wellness products in
Europe was growing 10-13% per year.
PepsiCo also increased the percentage of healthy snacks in markets
outside North America since consumers in most developed countries wished to
reduce their consumption of saturated fats, cholesterol

Market Segmentation (FLNA)

 Psychographic
There are three key trends shaping the salty snack foods industry which
includes convenience, growing awareness of nutritional content of snack foods
and indulgent snacking. FLNA has segmented its snack foods to suit different
consumer preferences. PepsiCo developed new flavors of salty snacks such as
jalapeno and cheddar tortilla chips and pepper jack potato chips to attract
indulgent snackers. They also begun using healthier oils when processing chips
and had expanded lines of baked and natural salty snacks to satisfy health-
conscious consumers. For consumers who likes going out, they also have
snacks packaged in smaller bags which addressed overeating concerns and can
provide additional convenience. In addition, the company also had eliminated
trans fats from all salty snacks varieties to make it more healthy. In 2006, the
acquisition of Flat Earth fruit and vegetable snacks offers opportunity for PepsiCo
because Americans consumed only 50% of the U.S. Department of Agriculture’s
recommended daily diet of fruits and vegetables. Due to the consumer desires.
For indulgent snackers, they also developed new multigrain and flour tortilla
Tostitos varieties.

Market Segmentation (PBNA)

  Psychographic
Growing health awareness of consumers doesn’t only apply in FLNA and
PepsiCo International but it also applies on their beverage products which are
under the PBNA division. The company’s primary focus in soft drink innovation
was directed toward improving the nutritional properties of soft drinks. PepsiCo
was attempting to develop new types of sweeteners that would lower the calorie
content of nondiet drinks especially for health-conscious consumers.
In noncarbonated beverage industry, the product lines for its water
business were developed around customer type and lifestyle. For example, their
Propel Fitness Water which is the leading brand of functional water, was
innovated into a flavor and vitamin-enriched water marketed to physically active
consumers while Life Water was a vitamin-enhanced water marketed to image-
driven consumers. PepsiCo also targeted mainstream water consumers with
unflavored Aquafina, Aquafina FlavorSplash and Aquafina Sparkling (a zero-
calorie lightly carbonated citrus or berry-flavored water).

Market Segmentation (Quaker Foods North America)

 Psychographic

Like the other three division, Quaker Foods North America also was into product
innovation that addressed consumer health and wellness concerns wherein
PepsiCo’s better-for-you and good-for-you products also includes the cereal
market. This just shows that QFNA also targets health-conscious consumers.

C. ANALYSIS OF MARKETING VARIABLES

1.) Product

Presented below is the list of PepsiCo Inc.’s Snack, Beverage and Quaker Brands,
2008:

Frito-Lay Brands PepsiCo Beverage Quaker Oats Brands

Brands
 Lay’s Potato Chips  Pepsi-cola  Quaker oatmeal
 Maui Style potato  Mountain Dew  Cap n’ Crunch
chips  Mountain Dew AMP cereal
 Ruffles potato chips energy drink  Life cereal
 Doritos Tortilla  Mug root beer  Quaker 100%
Chips  Sierra Mist Natural cereal
 Tostitos tortilla chips  Slice  Quaker Squares
 Santitas tortilla  Lipton Brisk cereal
chips (partnership)  Quisp cereal
 Fritos corn chips  Lipton Iced Tea  King Vitaman cereal
 Cheetos cheese (partnership)  Quaker Ohs! Cereal
flavored snacks  Dole juices and  Mother’s cereal
 RoldGold pretzels juice drinks (license)  Quaker grits
and snack mix  FruitWorks juice  Quaker Oatmeal-to-
 Funyuns onion works Go
flavored rings  Aquafina purified  Aunt Jemina mixes
 Go Snacks drinking water & syrups
 SunChips multigrain  Frappucino ready-  Quaker rice cakes
snacks to-drink coffee  Qauker rice snacks
 Sabritones puffed (partnership) (Quakes)
wheat snacks  Starbucks Double  Quaker Chewy
 Cracker jack candy- Shot (partnership) granola bars
coated popcorn  SoBe juice drinks,  Quaker Dipps
 Chester’s popcorn dairy and teas granola bars
 Grandma’s cookies  SoBe energy drinks  Rice-A-Roni side
(No Fear and dishes
 Munchos potato Adrenaline Rush)  Pasta Roni side
chips  Gatorade dishes
 Smartfood popcorn  Propel  Near East side
 Baken-ets fried pork  Tropicana dishes
 skins  Tropicana Twister  Puffed Wheat
 Oberto meat snacks  Tropicana Smoothie  Harvest Crunch
 Rustler’s meat  Izze soft drinks cereal
snacks  Naked juice  Quaker Baking
 Churrunais fried OUTSIDE NORTH Mixes
corn strips AMERICA  Spudz snacks
 Frito-lay nuts  Mirinda  Crisp’ums baked
 Frito-Lay, Ruffles,  7UP crisps
Fritos, and Tostitos  Pepsi  Quaker Fruit &
dips and salsas  Kas Oatmeal bars
 Frito-Lay, Doritos,  Teem  Quaker Fruit &
and Cheetos snacks  Manzanita Sol Oatmeal Bites
crackers  Paso de losToros  Quaker Fruit and
 Fritos, Tostitos,  Fruko Oatmeal Toastables
Ruffles and Doritos  Evervess  Quaker Soy Crisps
snack kits  Yedigun  Quaker Bakeries
 Hickory Sticks  Shani OUTSIDE NORTH
 Hostess Potato  Fiesta AMERICA
 Lay’s Stax potato  D & G (license)  FrescAvena
crisps beverage powder
 Mandarin (license)
 Miss Vickie’s potato  Toddy chocolate
 Radical fruit
chips powder
 Tropicana Touche
 Munchies snack mix  Toddynho chocolate
de Lait
 Stacy’s pita chips drink
 Alvalie gazpacho
 Flat Earth Fruit and fruit juices and  Coqueiro canned
Vegetable Chips vegetable juices dish
 Sabra hummus  Tropicana Season’s  Sugar Puffs cereal
OUTSIDE NORTH Best juices and  Puffed Wheat
AMERICA juice drinks  Cruesli cereal
 Bocabits wheat  Looza juices and  Hot Oat Crunch
 snacks nectars cereal
 Crujitos corn snacks  Copella Juices  Quaker Oatso
 Fandangos corn  Fruit Vita Juices Simple hot cereal
snacks  Sandora juices  Scott’s Porage Oats
 Hamka’s snacks  Scott’s So Easy
 Niknaks cheese Oats
snacks  Quaker bagged
 Quavers potato cereals
snacks  Quaker MaisSabor
 Sabritas potato  Quaker Oats
chips  Quaker oat flour
 Gamesa cookies  Quaker Meu Mingau
 Doritos Dippas  Quaker cereal bars
 Sonrics sweet  Quaker Oatbran
snacks  Corn goods
 Wotsits corn snacks  Magico chocolate
 Red Rock Deli powder
 Kurkure  Quaker Vitaly
 Smiths Sensations Cookies
 Cheetos Shots  3 minutos Mixed
 Quavers Snacks Cereal
 Bluebird snacks  Quaker Magica
 Duyvis Nuts  Quaker Magica con
 Lucky snacks Soja
 Penelopa nuts and  Quaker Pastas
seeds  Quaker Frut

The lineup of products that PepsiCo Inc. manufactures and sells to the market ranges
from snack, beverage and grocery items.
Price

The prices of the products of PepsiCo Inc. compared to its main competitor, Coca-Cola
is just at par.

Place

PepsiCo Inc. added points of distribution are convenience stores and

supermarkets. Also, the Gatorade’s broker-distribution system enabled Tropicana and
Lipton RTD teas to double sales volume between 2001 acquisition of Quaker Oats and
year-end 2005. Moreover, in 2007, the company has over 3,600 distribution systems
and 120, 000 service routes around the world to ensure well distribution of their
products. Lastly, Quaker snacks and Frito-Lay products’ joint distribution resulted to $40
million in cost savings.

Promotion

PepsiCo’s world class advertising has helped reach its target market on a global
scale. The company also sells signature sports drinks of a famous golf player, Tiger
Wood. In order to address the consumer’s growing awareness on health, PepsiCo
reformulated the company’s snacks with “good-for-you” or “better-for-you” taglines.

Physical evidence

PepsiCo’s Power of one retailer strategy enabled the company to make marketing
strategies that will induce consumer to purchase more of their products.One worth
mentioning is PepsiCo’s product bundling contracts with their retailers and
supermarkets to place Pepsi and Frito-Lay products side by side on shelves.

People

Through PepsiCo’s Power of One retailer alliance strategy, PepsiCo marketers and
retailers collaborated in stores and during offsite summits to devise tactics to increase
consumer’s tendency to purchase more than one product offered by PepsiCo during a
store visit. Moreover, PepsiCo’s most successful products had been recommended by
retailers.
Process

PepsiCo’s procurement activities were coordinated globally to achieve the greatest

possible economies of scale and best practices were routinely transferred between its
230 plants,3,600 distribution systems and 120,000 service routes around the world.
PepsiCo also shared marketed research information to better enable each division to
develop new products likely to be hits with consumers and coordinated its Power of One
activities across product lines.

V. PROBLEMS FOUND IN THE SITUATIONAL ANALYSIS

A. STATEMENT OF THE MAIN PROBLEM

U.S. Federal Trade Commission’s ruling of Gatorade’s prohibition to be jointly

distributed with PepsiCo’s soft drinks in convenience stores somehow affected the
ability of PepsiCo to maximize the profits and distribution for the beverages category.
The dilemma of PepsiCo to decide which one to supply in a particular convenience
store corresponds with letting go and letting the other product in.

B. STATEMENT OF THE SECONDARY PROBLEM

PepsiCo’s international operations were much less profitable than its businesses
operating in North America. In addition, PepsiCo was unsuccessful in making Quaker
branded products available outside United States.
 VI. STRATEGIC ALTERNATIVES

A. DESCRIPTION OF EACH ALTERNATIVE

Alternative 1: Develop better shelf space for Gatorade and better-for-you

snacks
As the U.S. Federal Trade Commission’s ruling ofGatorade’s prohibition to
be jointly distributed with soft drinks of PepsiCo in convenience stores will be
expiring in 2011, the company can now maximize and better respond to the
growing awareness of people about nutritional content of snacks. Which means,
the company can now negotiate with its retailers to develop better shelving
strategies for Gatorade and its better-for-you or good-for-you snacks such as
Quaker products.
Benefits:The company can now maximize the opportunity for greater revenues
for Gatorade and its better-for-you snacks.
Costs: This will entail additional costs for the company

Alternative 2: Strengthening of PepsiCo’s presence in international markets

As there is a great opportunity for PepsiCo’s products in international
markets particularly in China, Brazil, United Kingdom, Mexico and Russia for
snacks and its beverages particularly in developing countries.With that, the
company shall strengthen their presence in such markets through their Power of
One retailer alliance strategy and strategic acquisitions.
Benefits:This will make PepsiCo known to their selected markets to penetrate.
Costs: This will entail additional costs for the company

Alternative 3: Selling some of PepsiCo’s strategic acquisitions

For PepsiCo Inc. to have better cash flow for its expansion in international
markets, the company can sell some of their acquired companies which is not
giving strategic-fits in the company’s line of products.
 Benefits:This will give additional cash for the funding of its operations and this
will eliminate misfits between the businesses of PepsiCo.
Costs: Re-alignment of the strategic-fits of the businesses of PepsiCo will take
time.

VII. SELECTION OF STRATEGIC ALTERNATIVE AND IMPLEMENTATION

A. STATEMENT OFSELECTED STRATEGY

The researchers suggestsAlternative 1: Develop better shelf space for

Gatorade and better-for-you snacks and Alternative 2: Strengthening of
PepsiCo’s presence in international markets.

B. JUSTIFICATION FOR SELECTED STRATEGY

 EFE (FLNA)

Opportunities Weights Ratings Weighted

Score
1. Convenience eating as one of the key trends 0.07 3 0.21
in snacking.
2. Increasing customer awareness on healthy 0.10 4 0.40
eating.
3. Indulgent snacking as one of the trends in 0.06 3 0.18
snack food industry.
4. 50% American’s average consumption of the 0.12 3 0.36
Department of Agriculture’s recommended
daily diets of fruits and vegetables.
5. Taste preferences of salty snacks were 0.14 3 0.42
similar from country to country.
 Threats Weights Ratings Weighted
Score
1. New flavor development for salty snacks 0.12 3 0.36
done by the other manufacturers.
2. Manufacturers exploiting of healthier oils in 0.11 4 0.44
processing chips.
3. Other snack manufacturers produced in 0.07 2 0.14
smaller packaged to address overeating
concerns.
4. The U.S. second largest snack food maker 0.12 3 0.36
close gap with Frito-Lay.
5. Inclusion of both sweet and salty snacks in 0.09 2 0.18
the convenience food.
Total 1.00 3.05

 IFE FLNA

Strengths Weights Ratings Weighted

Score
1. Successful trans fats removal in all Lay’s, 0.14 3 0.42
Fritos, Ruffles, Cheetos, Tostitos, and Doritos
varieties.
2. SunChips’ flavors expansion with 100 calories 0.11 3 0.33
in mini packs.
3. Acquisition of Flat Earth Fruit and Vegetables 0.13 3 0.39
snacks and Stacy’s pita chips in exploiting
consumers’ desires for healthier snacks and
addressing deficiencies.
4. Product innovation on Quaker Chewy Granola 0.11 3 0.33
such as reduced-calorie oatmeal-and-raisins
bars.
5. The retention of Lay’s flavor cooked in 0.15 3 0.45
sunflower oil with 50% less saturated fat.
6. Frito-Lay’s high sales of salty snack food 0.09 3 0.27
industry accounting to 70%.
7. Strategic initiatives done by the management 0.16 4 0.64
of the snack division.

Weaknesses Weights Ratings Weighted

Score
1. Frito-Lay’s 29% contribution to company’s 0.11 2 0.22
operating profit higher than the 36%
contribution on total revenues
Total 1.00 3.05

 IFE (PBNA)

Key Internal factors Weight Rating Weighted

Factors
Strengths
1. PepsiCo was the largest seller of liquid 0.10 4 0.40
refreshment in the US with 20% market share
in the 2006
2. Revenue of PBNA had increased by 7% 0.20 3 0.60
annually between 2006 and 2007
3. PepsiCo broadened its line of noncarbonated 0.08 3 0.24
beverages on 2006 and 2007
4. PepsiCo focused in soft drink innovation toward 0.15 3 0.45
 improving the nutritional properties of soft drink
5. In 2008, PBNA’s Propel Fitness Water was the 0.15 3 0.45
leading brand of functional water
6. PBNA’s better-for-you and good-for-you 0.2 4 0.8
beverages made up to 70% of the division’s net
revenue
Weaknesses
7. During Mid-1990s, PepsiCo brand except 0.1 2 0.2
Mountain Dew lose market share to Coca-
Cola’s brand
8. PesiCo’sSobe Essential Energy and SoBE 0.02 2 0.04
Adrenaline Rush drinks held nevgligible share
of the energy drink market
Total 3.18

 EFE (PBNA)

Key External factors Weight Rating Weighted

Factors
Opportunities
1. PepsiCo was attempting to develop new types 0.1 4 0.4
of sweeteners that would lower the calorie
content of non-diet drinks
2. Company hoped its 2006 acquisition of Izze 0.1 2 0.20
lightly carbonated sparkling fruit drinks
3. Gatorade could achieve even stronger 0.2 4 0.8
performance once the prohibition on bundled
beverages contracts came to an end
4. Addition of “Innovation Summits” to its Power 0.1 3 0.3
Of One Strategy Program
Threats
 5. Coca-Cola was the 2nd largest nonalcoholic 0.1 3 0.3
beverage producer with 23% market share
6. PepsiCo’s 31% market share during 2007 was 0.15 3 0.45
considerably less than Coca-Cola’s market
share of 41.6%
7. Carbonated soft drinks volume declined by 0.15 2 0.3
12.6% in 2007
8. Cadbury-Schweppes and Nestle were the 3rd 0.1 2 0.2
and 4th largest beverage sellers in 2006
Total 2.95
 IFE (PEPSICO INTERNATIONAL)

Key Internal Factors Weight Rating Weighted

Factor
Strengths
1.) International snack volume grew in 0.05 4 .20
emerging markets by 9% in 2007
2.) International beverage volume 0.04 3 .12
grew by 8% in 2007
3.) Division’s revenues and operating 0.05 4 .20
profits increased by 15% in 2007.
4.) Gatorade gained 72% market 0.07 4 .28
share in Latin America region in
2006.
5.) Tropicana was the number one 0.08 4 .32
juice brand in Europe with 100%
sales growth in 2006.
Weaknesses
6.) 75% of Quaker Oats’ international 0.3 1 .3
sales of $500 million was only
accounted for by six countries.
 7.) Low relative profit margins of 0.2 2 .4
PepsiCo’s international businesses
8.) PepsiCo’s carbonated beverage 0.1 2 .2
consumption in emerging markets
is low.
9.) Per capita consumption of 0.1 2 .2
PepsiCo’s snacks in developing
countries is low.
10.) Annual revenue growth for 0.01 2 .02
PepsiCo International’s product is
not maximized.
TOTAL 1.0 2.24

 EFE (ITNL)

Key External Factors Weight Rating Weighted Factor

Opportunities
1.) Promotion of PepsiCo .3 3 .90
International to emerging
markets
2.) Increase sales in markets .2 2 .40
outside North America
3.) Expansion of product lines of .15 4 .60
PepsiCo International
4.) Strategic acquisitions of .10 4 .40
companies outside North
America
5.) Cost savings from corporate- .10 4 .40
wide procurement of product
ingredients
Threats
6.) Fierce competition in food and .07 3 .21
beverage international markets
7.) Stock price downturn .08 3 .24
TOTAL 1.0 3.15
 IFE (QFNA)

 Internal Strengths Weight Rating Weighted

Score
1.Large market share with a60+ percent 0.05 3 0.15
share per category in the US
2.Diversified product-offering 0.1 3 0.3
3.Product innovation such as reduced- 0.12 3 0.36
calorie oatmeal-and-raisin bars
4. This division produced the highest profit 0.08 3 0.24
for PepsiCo between2004 and 2007
5. Ownership of Gatorade 0.11 4 0.44
6.Third largest ready-to-eat cereal maker in 0.05 3 0.15
North America in 2005
7. Increasing sales of product lines including 0.07 3 0.21
Quaker Oatmeal, Life cereal, and Cap ‘n
Crunch Cereal during 2007
8. Quaker grits and Aunt Jemima pancake 0.07 3 0.21
mix and syrup which competed in mature
categories are part of the market leading
positions
Internal Weaknesses
1. The company had been relatively 0.08 1 0.08
unsuccessful in making Quaker branded
products available outside the United States.
2. Low profitability of international operations 0.08 1 0.08
3. 75 % of Quaker Oats’ international sales 0.10 2 0.2
of $500 million was accounted for by just 6
countries in 2006
4.Declining sales of its product lines 0.08 1 0.08
including Aunt Jemima syrup and pancake
mix, Rice-A-Roni and PastaRoni during
2007
major weakness (1), minor weakness (2), minor strength(3), major strength (4)
TOTAL WEIGHTED SCORE 1.0 2.5
External Opportunities Weight Rating Weighted Score

 EFE (QFNA)
1. Increasing awareness of nutritional 0.12 4 0.48
content of snack food.
2. Additional opportunities on 0.12 3 0.36
increasing sales in the international
market.
3. Demand for health and wellness 0.11 3 0.33
products in Europe was modestly
growing by 10-13% per year
4. Joint distribution of Gatorade and 0.14 1 0.14
Quaker products
5. The emergence of indulgent 0.09 3 0.27
snacking
6. Making more Quaker products 0.11 2 0.22
available outside North America
8.Providing more snacks in more 0.09 3 0.27
convenient packaging
External Threats
1.Existence of bigger cereal-makers in 0.13 2 0.26
the industry
poor (1), average (2), above average(3), superior(4)
TOTAL WEIGHTED SCORE 1.0 2.33

 IE MATRIX
 For the three divisions of PepsiCo Inc. (FLNA, PBNA, PepsiCo International and
QFNA), it belongs under the general strategy of grow and build. For the specific
strategies, the respective three divisions belonged to quadrants I, II and IV. This
suggests that the soundest strategies for the three divisions of PepsiCo Inc. to
implement are the following: (1) Backward, Forward Horizontal Integration, (2) Market
Penetration, (3) Market Development and (4) Product Development.

BCG MATRIX
BCG Matrix of PepsiCo
Revenue
(in a IG
Division million) % Revenue RMSP Rate %
Frito-Lay North America 11,586 29 0.27 7
PepsiCo Beverages North America 10,230 26 0.35 7
Pepsi International 15,798 40 0.96 18
Quaker Foods North America 1,860 5 0.02 5
Total 39,474 100.00

High
Stars Question Marks

Rela
tive
Mar
ket Cash Cows Dogs
Gro
wth

Low

High Relative Market Share Low

Stars (High Market Share, High Market Growth)

Cash Cows (High Market Share, Low Market Growth)

Question Marks (Low Market Share, High Market Growth)

jDogs(Low Market Share, Low Market Growth)

 Frito-Lay North America

13%

revenue
net profit

87%

PepsiCo Beverages North America

13%

revenue
net profit

87%
PepsiCo Beverages North America

13%

revenue
net profit

87%
 Sales Projection
Net Revenue
Division
2007* 2008** 2009** 2010** 2011** 2012**

Frito-Lay North America 11,586 12,165.30 12,773.57 13,412.24 14,485.22 15,933.74

PepsiCo Beverages North America 10,230 10,741.50 11,278.58 11,842.50 12,789.90 14,068.89

Pepsi International 15,798 16,587.90 17,417.30 18,288.16 19,751.21 21,726.33

Quaker Foods North America 1,860 1,953.00 2,050.65 2,153.18 2,368.50 2,605.35

Total 39,474 41,447.70 43,520.09 45,696.09 49,394.84 54,334.32

*Actual PepsiCo's Revenue
**Annual Projection of PepsiCo's Net
Revenue

OBJECTIVES
1st three years 1.05
4th year 1.08
5th year 1.10
STRATEGIC POSITION & ACTION EVALUATION (SPACE) MATRIX

Internal Dimensions External Dimensions

Competitive Advantage Industry Strength
-1Market Share Growth Potential+6
-2Strong Brand Image Close relationships with distribution
-3Customer Loyalty allies+6
-1Product Innovation Customer Power+3
-4Resource Utilization Supplier Power+4
Leverage+5
-2.2 4.8
Total X axis = 2.6
Financial Strength Environmental Stability
+5Liquidity Competitive Pressure-3
+6Use of economies of scale Demand Variability-1
+4Cash Flow Flexibility-1
+4Inventory Turnover Ease of Exit into the Market-5
4.75 -2.5
Total Y axis = 2.25
 Financial
Strength

(2.6, 2.25)
Conservative Aggressive

Environmental
Stability

Strategic Actions on the Aggressive Quadrant:

1. Integration – Joint distribution of Quaker and Gatorade products to increase

profitability.
2. Market Penetration – Enormous efforts to promote product differentiation
especially PepsiCo core beverages to recapture its established market share
prior to Coca Cola’s dominance
3. Market Development – Producing more good for you, better for you products
and catering the increasing opportunities of the international markets
C. Description of implementation of selected strategy

(SEE THE FILE IN EXCEL)