A REPORT ON

PEPSICO IN 2007: STRATEGIES TO

INCREASE SHAREHOLDER VALUE

Submitted to:
Dr.M.P.Vithal
Professor of Finance & Strategy

Submitted by:
GROUP NO.:5
NAME OF THE STUDENT ROLL NO.
ALOKA A KALE 09PGDM048
KISHOR PATOWARY 09PGDM062

MUKESH KUMAR RANJAN 09PGDM067

RAKHI RANJAN 09PGDM077
SIVARAJ S 09PGDM085

INDIAN INSTITUTE OF PLANTATION MANAGEMENT, BANGALORE

(An Autonomous Organization Promoted by the Ministry of Commerce and
Industry – Govt. of India)
Jnana Bharati Campus Malathalli Post
Bangalore 560 056

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 CONTENTS

S.NO PARTICULARS PAGE NO.

1 EXECUTIVE SUMMARY 4

2 INTRODUCTION 5

3 ISSUES OR PROBLEM OF THE CASE 6

4 SOLUTIONS FOR THE PROBLEMS 6

5 FINANCIAL HIGHLIGHTS OF PEPSICO 8

2007

6 RECOMMENDATIONS 8

7 SWOT ANALYSIS 9

8 CONCLUSION 10

9 REFERENCES 10

EXECUTIVE SUMMARY
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PepsiCo Inc. was established in 1965 when Pepsi-Cola and Frito-Lay shareholders agreed to
merge. The roots can be traced to 1898 when Caleb Bradham, a pharmacist, created the formula
for a carbonated beverage he named Pepsi-Cola. By 1971, PepsiCo had doubled more than its
revenues to reach $1 billion. The years 1977, 1978 and 1986 marked acquisitions of Pizza Hut,
Taco Bell and KFC and this paved way for a balanced three legged stool (snacks, soft drinks and
Fast food). By 1196, it had become clear to PepsiCo’s management that the potential strategic
benefits existing between restaurants and PepsiCo’s core beverage and snack businesses were
difficult to capture. In 1997, CEO Roger Enrico spun off the company’s restaurants
as an independent, publicly traded company to focus PepsiCo on food and beverages.
The Quaker Oats acquisition at $13.9 billion brought Quaker’s most valuable asset Gatorade
under PepsiCo. After the completion of Quaker Oats acquisition in August 2001, PepsiCo made a
number of small, tuck-in acquisitions. The combination of acquisitions coupled with PepsiCo’s
core snacks and beverage businesses allowed the revenues to increase from approximately $20
billion in 2000 to more than $35 billion in 2006. PepsiCo’s corporate strategy was diversification
and a relatively new element of PepsiCo’s corporate strategy was product reformulations to make
snack foods and beverages less unhealthy. This brought GFY and BFY products into limelight.
In 2006, Frito-Lay brands accounted for 31 percent of PepsiCo’s total revenues and 51 percent of
the company’s profits. In 2007, improving the performance of the division’s core salty brands
and further developing health and wellness products were key strategic initiatives.
Revenues to PepsiCo’s beverage segment in North America had expanded because the company
broadened its line of non carbonated beverages like Gatorade, Aquafina, Tropicana and
Starbucks Cold Coffee. To compete with Coke, PepsiCo started coming up with new brands and
strategies on improved local distribution.
Power of one strategy proved of immense benefit to PepsiCo. Developing an understanding of
consumer taste preferences was a key to expanding into international markets. In 2006, 75 per
cent of Quaker Oats international sales were that of $500 million. PepsiCo’s management was
dedicated to capturing strategic benefits within the business line up throughout the value chain.
PepsiCo’s financial managers expected the company’s line up of snack, beverage, and
grocery items to generate cumulative management operating cash flows of $15 billion between
2007 and 2009. Acquisitions and restructuring led PepsiCo to increase the value delivered to its

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shareholders through share price appreciation and a rising dividend. PepsiCo’s strategies seemed
to be firing in 2007. The company’s current growth rates were sustained.
Dividends to shareholders had grown at a compound annual rate of 15 percent between 2001 and
2006 to reach $1.16 per share. In May 2006, the company’s board announced a new $8.5 billion
Share repurchase program that would expire on June 30, 2009.

INTRODUCTION
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PepsiCo is a leading global snack and beverage company. They manufacture, market and sell a
variety of salty, convenient, sweet and grain-based snacks and non-carbonated beverages and
foods. The case ``PepsiCo in 2007 : Strategies to Increase Shareholder Values ' by John gamble
provides detailed overview of the world 's largest beverage company which revenues is estimated
at approximately 35 million. They have a commitment to sustainable growth, known as
Performance with Purpose, which is focused on generating healthy financial returns while giving
back to the communities they serve. PepsiCo is divided into four divisions which are: Frito Lay
North America (FLNA), PepsiCo Beverages North America (PBNA), PepsiCo International (PI),
and Quaker Foods North America (QFNA). PepsiCo products are sold to authorized bottlers,
independent distributors and retailers. In 2007, FLNA net revenue was $11.6 billion, PBNA net
revenue was $10.2 billion, PI net revenue was $15.8 billion and QFNA net revenue was $1.9
billion.

Presently in India, food and beverage is growing an annual growth rate of 20% (FnBnews.com).
Because of this growth rate, all the stakeholders and shareholders of this industry will get benefit.
So it is worth enough to study this case to know about the strategies which were followed by
global leading food and beverage company i.e. PepsiCo in enhancing their shareholders value.

LITERATURE REVIEW:

Dockey et al (2000) discuss the ways of maximizing shareholder values and refers to the
importance of research on not just profitability of a company but also on managerial
attitudes/incentives and alignment or compatibility of the interests of directors and shareholders.
A survey of 175 finance executives was taken from 7 EU countries to analyze strategies and the
influences on strategy choice. Market leadership, continued profits, improving productive
capacity, generating better products, are the best business strategies useful in maximizing
shareholder returns and values. This paper highlights the importance of companies for
developing close relationship with shareholders and investors.

Shareholder wealth is defined as the present value of the expected future returns from the
company to the shareholders of the firm. These returns can be by payments of dividends
periodically, and is obtained by selling stocks. Shareholder wealth is determined by the market
value of the company’s stocks (Robbins et al, 2003/2004).

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ISSUES OR PROBLEM OF THE CASE
How will PepsiCo use its operating cash flows to maintain levels of increasing shareholder value
as it continues to expand?

STRATEGIC SOLUTIONS FOR THE PROBLEM:

The company is going to increase its shareholders value by implementing

 Product innovations ,

 Restructuring ,

 International expansion ,

 Relations with distribution allies , and

 Strategic acquisitions.

PRODUCT INNOVATIONS:

PepsiCo started focus on developing new product category on Good for You (GFY) and Better
For You (BFY) products. Most of the countries interested to reduce consumption of saturated
fats, cholesterol, transfats and simple carbs. For example, demand for health and wellness has
increased in Europe at 10-13%.

RESTRUCTURING:

In the fourth quarter of 2007, PepsiCo announced a realignment of their organizational structure
into three new business units and they are as follows: PepsiCo Americas Foods (PAF) which
includes FLNA, QFNA and all of their Latin American food and snack businesses (LAF);
PepsiCo Americas Beverages (PAB) which includes PBNA and all of their Latin American
beverage businesses; and PI which includes all PepsiCo businesses located in the United
Kingdom, Europe, Asia, Middle East and Africa. PepsiCo changed their organizational structure
because they believe this change will help them deliver strong top-line performance and profit

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growth. They believe that they need to adapt to changes in the marketplace and improve
operating efficiencies.

INTERNATIONAL EXPANSION:

The years 1977, 1978 and 1986 marked acquisitions of Pizza Hut, Taco Bell and KFC and this
paved way for a balanced three legged stool (snacks, soft drinks and fast food). The Quaker Oats
acquisition at $13.9 billion brought Quaker’s most valuable asset Gatorade under PepsiCo. After
the completion of Quaker Oats acquisition in August 2001, PepsiCo made a number of small,
tuck-in acquisitions. The combination of acquisitions coupled with PepsiCo’s core snacks and
beverage businesses allowed the revenues to increase from approximately $20 billion in 2000 to
more than $35 billion in 2006.

RELATIONS WITH DISTRIBUTION ALLIES and STRATEGIC ACQUISITIONS:

Their strategy is to invest in its supply chain organization to more effectively deliver on evolving
customer and consumer trends for greater variety. PepsiCo used popular products to cross market
lesser known ones. 160 million dollar cost saved by acquisition of Quaker Oats due combined
corporate-wide procurement of product ingredients and packaging materials.

FINANCIAL HIGHLIGHTS OF PEPSICO 2007

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During 2007, PepsiCo reached amazing financial results which are hereunder,
• Net revenue grew at 12% (roughly three times the rate of global GDP growth)
• Division operating profit 10%
• Earnings per share grew 13%
• Total return to shareholders 26%
• Return on invested capital 29%
• Cash flows from operation $6.9 billion

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RECOMMENDATIONS
As per the case and PepsiCo’s situation at 2007 made some clear-cut recommendations as
PepsiCo should maintain close relationship with the distributors instead of following the same
strategy like additional profit margin, so that they can move their products to the end customers
easily. Secondly they should not restrict their operations where already they have working.
PepsiCo should continuously increase their operations globally; obviously it is an opportunity
(SWOT ANALYSIS). PepsiCo launched the innovative products in their existing markets only.
So there is need to launch in new markets with new and innovative, location specific products.

CONCLUSION

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Finally, this strategic change will give investors more granular international performance data.
Over the past three years, over $6 billion has been reinvested in the businesses through capital
expenditures to fuel growth. Any cash not reinvested in the businesses is returned to
shareholders. Since 2005, $16 billion has been returned to shareholders through a combination of
dividends and share repurchases. In 2007, cash returned to shareholder was up 34%. PepsiCo
generally uses their borrowing capacity in order to fund acquisitions, which was the case in 2007
when they spent $1.3 billion in acquisitions to enhance their future growth and create value to
their shareholders. Their current capital structure and debt ratings give them ready access to
capital markets and keep their cost of borrowing down. PepsiCo has great partnerships with other
brands and if it takes partnering with other brands to win in a certain marketplace for more
growth, then they will continue to expand into other marketplaces to grow their businesses. A
key factor to their successful partnerships with other brands is not simply as a distributor, but to
be involved in the development of these brands on a worldwide scale. The company’s current
growth rates were sustained. Dividends to shareholders had grown at a compound annual rate of
15 percent between 2001 and 2006 to reach $1.16 per share. In May 2006, the company’s board
announced a new $8.5 billion share repurchase program that would expire on June 30, 2009.

REFERENCES

• Arthur A. Thompson and A.J. Strickland, “ Crafting and Executing strategy”.

• Discussion Notes PepsiCo essay - 98915.mht

• http://www.gotessays.com/subject.php

• http://www.pepsico.com/

• http://www.pepsico.com/Download/PEPSICO_AR.pdf

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