University of Santo Tomas

PepsiCos Diversification Strategy in 2008

A Case Analysis presented to Mr. Real Carpio So

By: Ongchua, Regina Ortigosa, Jose Maria Palomillo, Fatima Payumo, Earl Peralta, Jennifer 4M2

December 13, 2010

BACKGROUND In 1932, the companys salty-snack business began when 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. In 1961, Doolin and Lay agreed to a merger between their businesses to establish the Frito-Lay Company. In the year 1965, Pepsi Cola was established when Frito-Lay shareholders agreed to a merger between the salty snack icon and soft drink giant. During its first five years as a snack and beverage company, PepsiCo introduced new products such as Doritos and Funyuns; entered markets in Japan and Eastern Europe. By 1971, PepsiCo had more than doubled its revenues to reach $1 billion. The company began to pursue growth through acquisitions as early as 1968, but its 1977 acquisition of Pizza Hut significantly shaped the strategic direction of PepsiCo for the next 20 years. And its followed by Taco Bell in 1978 and Kentucky Fried Chicken in 1986 created a business portfolio described by Wayne Calloway as a balanced three legged stool. PepsiCo also strengthened its portfolio of snack foods and beverages during 1980s and 1990s with acquisitions of Mug root beer, 7UP international, Smartfood ready-to-eat popcorn, Walkers Crisp and many more. By 1996, it had become clear to PepsiCo management that the potential strategic fit benefits existing between restaurants and PepsiCos core beverage and snack businesses were difficult to capture. In 1997, CEO Roger Enrico spun off the companys restaurants as an independent, publicly traded company to focus PepsiCo on food and beverages. In 2001, Quaker Oats was PepsiCos largest acquisition and gave it the number one brand of oatmeal in United States. The combination of acquisitions and the strengths of PepsiCos core snacks and beverages business allowed the companys revenues to increase from $20 billion in 2000 to more than 39.5 billion in 2007. In 2008, PepsiCos corporate strategy had diversified the company into salty and sweet snacks, soft drinks, orange juice, bottled water, ready to drink teas and coffees. Most PepsiCo brands had achieved number one or number two positions in their respective food and beverage categories through strategies one of these corporate strategies was product reformulations to make snacks less unhealthy. The company believed that its efforts to develop good-for-you or better-for you products would create growth opportunities. PROBLEM How can pepsi co. increase its sales, profitability, and growth in the international market? OBJECTIVE To expand on large international markets that provides potential growth for PepsiCo, and applies the existing strategies in North America to the international operations

THEORETICAL FRAMEWORK Mission Our mission is to be the world's premier consumer products company focused on convenient foods and beverages. We seek to produce financial rewards to investors as we provide opportunities for growth and enrichment to our employees, our business partners and the communities in which we operate. And in everything we do, we strive for honesty, fairness and integrity. Vision "PepsiCo's responsibility is to continually improve all aspects of the world in which we operate - environment, social, economic - creating a better tomorrow than today." Our vision is put into action through programs and a focus on environmental stewardship, activities to benefit society, and a commitment to build shareholder value by making PepsiCo a truly sustainable company.

Strategy
Financials PepsiCo was the largest snack and beverage company in 2007 with net revenue of approximately $39.5 billion. PepsiCos quick ratio has been decreasing as of 2007, although its current ratio has increased by year 2007. For PepsiCos profitability ratio, it has been increasing and decreasing for previous years. Value Chain
PepsiCo is in cost saving resulting from corporatewide procurement of product ingredients and packaging materials. PepsiCo management had a proven ability to capture strategic fits between the operations of new acquisition and other businesses.
PepsiCo coordinated globally to achieve greatest possible economies of scales and best practices and routine in distributing. PepsiCo shares its marketed research information to its divisions and coordinated its Power of One activities across its product lines.

Distribution The Power of One strategy has been effective for PepsiCo for more than 10 years and was continuing to boost PepsiCo's volume and identify new product formulations desired by the consumers. It works as both PepsiCo marketers and retailers collaborate in stores and during offsite summits to devise tactics to increase consumers' tendency to purchase more than one product that is offered by PepsiCo. Retailers would also

recommend PepsiCo's new products to the consumers.It also placed Pepsi and FritoLay products side by side in supermarket's shelves. In addition, PepsiCo has also added the "Innovation Summit" with its Power of One, where retailers share their views on consumer shopping and eating habits. With this PepsiCo has created new products and also helped to identify the supply chain efficiencies of PepsiCo that affected the retailers. Industry Analysis Barriers to entry Even if it is easy to produce these kinds of products but with the dominance of PepsiCo products it will be difficult to enter the market. This makes the barriers to enter the market high and making it an opportunity for PepsiCo. Rivalry In terms of snacks Frito-Lay, a product of PepsiCo, owned the top selling chip brand in the US. Acquiring a two-to-one lead on the market share in the US makes its rivalry against snacks low, and gives PepsiCo an opportunity. And in terms of beverages PepsiCo still is the largest seller of liquid refreshments in the US with a 26% share of the market in 2006, its not like the snacks in competition as Coca-Colas has the 23% market share. Their difference in the market share is not that high like the snacks category. But since other competitors only acquired two-to-one percentage of PepsiCos share, the rivalry in terms of beverages is low making it an opportunity for PepsiCo. Although Quaker Oats has successfully acquired more than 50% of the market share in oatmeal, it is only 3rd largest ready-to-eat cereal maker, making its rivalry in cereals high, which makes a threat for PepsiCo in the cereal category. Supplier power PepsiCo is the one manufacturing its products, and has achieved to acquire a lot of products. Although the case has not mentioned about its suppliers, and since no problems have therefore mentioned, it can be assumed that its suppliers power is low, which makes it an opportunity to PepsiCo, unless they provide their own supplies. Buyer power Now a days most consumer are health conscious, this behavior of the customers makes PepsiCo realize to start turning its products more less unhealthy. As PepsiCo still uses its strategy Power of One as getting information of consumers behavior with the help of the retailers and following these behaviors, it makes the buyer power high making it a threat for PepsiCo.

Threat of Substitutes As one product manager had explained that consumers would want to reward themselves by great-tasting, gourmet flavors, and styles. Using these restaurantinfluenced flavors trends to fill consumers desire to escape from the usual taste of these snacks. And since PepsiCo has a wide variety of products in terms of snacks and beverages and all are turning into less unhealthy, threats of substitutes should be low which makes it an opportunity for PepsiCo. SWOT ANALYSIS Strength Most PepsiCo had achieved number one or number two positions in their respective food and beverage categories through strategies keyed to product innovation, close relationships with distribution allies, international expansion, and strategic acquisition. Successful acquisition of Quaker Oats and Gatorade which are the number one brands in its respective categories. Frito-Lay owned the top-selling chip brand in each US salty snack category and held more than a two-to-one lead over the next largest snack food maker in the US The Power of One strategy successfully leveraged Frito-Lay and Pepsi together. Innovation Summits enabled PepsiCo to collaborate with retailers in terms of sharing consumer information and identifying supply chain inefficiencies. Weakness PepsiCos international operations were much less profitable than its business operating in North America PepsiCo moved somewhat slowly into some of international bottled water markets. PepsiCos SoBe Essential Energy and SoBe Adrenaline Rush drinks held a negligible share of the energy drink market, with Redbull for 40 percent industry sales, and Hansen Natural Corporations Monster energy drink and Coca-Colas Full Throttle energy drink for approximately 30% of industry sales in 2007. Opportunities Sales growth opportunity in the $70 billion market for noncarbonated beverages in international markets

By 2010, China and Brazil would be the two largest, UK would be the third while Mexico and Russia would be the fourth and fifth largest international markets for snacks. Threats PepsiCo had a downturn in its stock price that began in 2008. ALTERNATIVE COURSE OF ACTIONS Seek international markets that proves to be of great potential growth for PepsiCo o PepsiCo could use their marketing strategies used in penetrating Mexico, Holland, and South Africa, the top three biggest market share that they hold in the international market, to penetrate other countries. o China and Brazil, according to PepsiCo executives, will prove to be the two of the largest international market for snacks by the year 2010. Followed by United Kingdom, Mexico, and Russia would be 3 rd, 4th, and 5th respectively. These countries, especially China and Brazil, would be the most priced countries for the snack industry in the future. Investing in these countries and gaining a good standing in the market early would be of great help in gaining a bigger pie in the year 2010. Apply the Power of One program to the international market. o The Power of One, which provides the synergistic benefits of a combined Pepsi-Cola and Frito-Lay, compensates the weak product by placing it next to the product that has an appeal to the market. This program will be ideal to the international market because not all of the companys product will wholeheartedly be accepted by the new market. o The Power of One programs Innovation Summits, which encourage retailers to share their views on consumer shopping and eating habits, could be a valuable data gathering source on how to integrate the products into the new market. Hearing out the voice of the front man, the retailers, would lead to better understanding of what the consumers want in the product. o The Innovation Summits would also allow PepsiCo to better coordinate with the retailers in the international market in promoting their product and finding out the latest trend in the local market.

RECOMMENDATION/CONLUSION PepsiCos expansion to the international market could be a monumental task even for a multinational company. There are a lot of uncertain factors, such as barriers to entry, which will occur in the field. PepsiCo should be able to deal with some of the barriers especially with its strong brand image in the global market. We would recommend that PepsiCo use the knowledge that they have on the top three international markets. This knowledge pertains to their high market share on Mexico, Holland, and South Africa. And use that knowledge in order to come up with a marketing strategy to capture the potential growth, in the snack food industry, of China, Brazil, United Kingdom, and Russia. The application of the Power of One strategy, which started in North America, could be an ideal strategy to increase its sales of its product that is weak in the local market and put it along side its product that is strong. In doing this, it would increase the chance of the weak product to be bought when its seen by the consumer when s/he buying the product that is strong in the market. The key strategy is leveraging the weak brands to the stronger brands of PepsiCo. Added to the Power of One strategy is the Innovation Summit it is a good tool to use in order to know what the end-consumer wants to have. Retailers share their knowledge on the latest trends of what consumers do and need. By having the knowledge on what the local market wants, PepsiCo could make the necessary adjustments it needs to do in order to Fit-In the local market.