Case PepsiCo

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PepsiCo – 2009

Case Notes Prepared by: Dr. Mernoush Banton

Case Author: John & Sherry Ross

A.

A. Case

Case Abstract

Abstract

Pepsi (

Pepsi (www.pepsico.comwww.pepsico.com) is a comprehensive strategic management case that) is a comprehensive strategic management case that includes the company’s calendar December 31, 2008 financial statements, includes the company’s calendar December 31, 2008 financial statements, competitor information and more. The case time setting is the year 2009. Sufficient competitor information and more. The case time setting is the year 2009. Sufficient internal and external data are provided to enable students to evaluate current internal and external data are provided to enable students to evaluate current strategies and recommend a three-year strategic plan for the company. strategies and recommend a three-year strategic plan for the company. Headquartered in Purchase in the U.S. state of New York, PepsiCo is traded on the Headquartered in Purchase in the U.S. state of New York, PepsiCo is traded on the New York Stock Exchange under ticker symbol PEP.

New York Stock Exchange under ticker symbol PEP.

B.

B. Vision Statement (Actual)

Vision Statement (Actual)

“PepsiCo’s

“PepsiCo’s responsibresponsibility is to continuility is to continually improve ally improve all aspects oall aspects of the world in f the world in which wewhich we operate – environment, social, economic – creating a better tomorrow than today. operate – environment, social, economic – creating a better tomorrow than today. Our vision is put into action through programs and a focus on environmental Our vision is put into action through programs and a focus on environmental stewardship, activities to benefit society, and a commitment to build shareholder stewardship, activities to benefit society, and a commitment to build shareholder value by making

value by making PepsiCo a truly sustainable company.”PepsiCo a truly sustainable company.”

Vision Statement (Proposed)

To become the leading producer and marketer of food and beverage products in the To become the leading producer and marketer of food and beverage products in the world.

world.

C.

C. Mission

Mission Statement

Statement (Actual)

(Actual)

“Our

“Our mission mission is is to to be be the the world’s world’s premier premier consumer consumer products products company company focused focused onon convenient foods and beverages. We seek to produce financial rewards to investors convenient foods and beverages. We seek to produce financial rewards to investors as we provide opportunities for growth and enrichment to our employees, our 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 business partners and the communities in which we operate. And in everything we do, we strive for

do, we strive for honesty, fairness and integrithonesty, fairness and integrity.”y.”

Mission

Mission Statement

Statement (Proposed)

(Proposed)

To be the world’s (3) premier consumer products company focused on convenient To be the world’s (3) premier consumer products company focused on convenient foods and beverages (2). We strive for healthy financial rewards to investors (5) as foods and beverages (2). We strive for healthy financial rewards to investors (5) as we provide opportunities for growth and enrichment to our employees (9), business we provide opportunities for growth and enrichment to our employees (9), business partners, and the communities (8) in which we operate. We have outstanding partners, and the communities (8) in which we operate. We have outstanding technological (4) and marketing (7) systems to continually innovate and create technological (4) and marketing (7) systems to continually innovate and create differenti

differentiated products for our customers (1) ated products for our customers (1) worldwide. And in everything we worldwide. And in everything we do, wedo, we strive for honesty, fairness, and integrity (6).

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1. Customer

2. Products or services 3. Markets

4. Technology

5. Concern for survival, profitability, growth 6. Philosophy

7. Self-concept

8. Concern for public image 9. Concern for employees

D. External Audit

CPM – Competitive Profile Matrix

PepsiCo Coca-Cola Kraft Critical

Success Factors

Weight Rating Weighted Score Rating Weighted Score Rating Weighted Score Market Share 0.1 3 0.30 4 0.40 2 0.20 Product Quality 0.09 2 0.18 4 0.36 3 0.27 Customer Service 0.02 2 0.04 3 0.06 1 0.02 Organizational Structure 0.09 2 0.18 3 0.27 4 0.36 Price Competitiveness 0.09 2 0.18 3 0.27 1 0.09 Financial Position 0.1 3 0.30 2 0.20 1 0.10 Customer Loyalty 0.08 1 0.08 3 0.24 2 0.16 Global Expansion 0.12 3 0.36 4 0.48 2 0.24 Advertising 0.09 3 0.27 4 0.36 1 0.09 Social Responsibility 0.08 2 0.16 3 0.24 1 0.08 Quality of management 0.05 2 0.10 3 0.15 1 0.05 Size of product line 0.09 3 0.27 2 0.18 1 0.09 Total 1 2.42 3.21 1.75 Opportunities

1. Increase in international market demand for colas, chips and breakfast foods 2. In 2013, the United States savory snacks market is forecast to have a value

of US$28 billion, an increase of 27.8 percent since 2008 and the compound annual growth rate of the market in the period 2008–2013 is predicted to be 5 percent

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4. Healthy food snack is on the rise as consumers are shifting to healthy food 5. Teens are less conscious of health issues and still like sweet drinks

Threats

1. Regulation – FDA, Clean Water Act, etc. 2. Foreign exchange rates in current economy 3. Raw materials supplies – clean water

4. Changes in consumer taste

5. Health issues – more consumers are shifting to healthy food

6. Consumers switching to lower cost house brands for both snacks and beverages

7. Substitute products – other snacks, water, tap water, ready-to-drink, sports drinks, etc.

8. Decrease in U.S. cola market

9. Reduction in buying power of large retailers

10. Strong direct (Coke) and indirect (Kraft) competition External Factor Evaluation (EFE) Matrix

Key External Factors Weight Rating Weighted Score Opportunities

1. Increase in international market demand for colas, chips and breakfast foods

0.08 4 0.32 2. In 2013, the United States savory snacks market

is forecast to have a value of US$28 billion, an increase of 27.8 percent since 2008 and the compound annual growth rate of the market in the period 2008-2013 is predicted to be 5 percent

0.08 3 0.24

3. Purchase smaller, successful developers of competing products

0.06 3 0.18

4. Healthy food snack is on the rise as consumers are shifting to healthy food

0.08 3 0.24

5. Teens are less conscious of health issues and still like sweet drinks

0.08 3 0.24

Threats

1. Regulation - FDA. Clean Water Act, etc. 0.06 1 0.06 2. Foreign exchange rates in current economy 0.05 2 0.1 3. Raw materials supplies - clean water 0.07 2 0.14

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4. Changes in consumer taste 0.09 2 0.18 5. Health issues – more consumers are shifting to

healthy food

0.08 2 0.16

0.04 2 0.08

0.07 3 0.21

8. Decrease in U.S. cola market 0.06 2 0.12 9. Reduction in buying power of large retailers 0.04 2 0.08 10. Strong direct (Coke) and indirect (Kraft)

competition 0.06 3 0.18 Total 1.00 2.53 Positioning Map Strong Product Variety Weak Product Variety Customer Loyalty (High) Customer Loyalty (Low)

Pepsi

Coke

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E. Internal Audit

Strengths

1. Name recognition both domestically and internationally 2. Stronger than industry average in price to cash flow ratio 3. Strong marketing and promotion advertising campaigns 4. Reliable and established distribution channel management 5. Has diverse business units which reduces overall business risks 6. Recent reorganization

7. Owns more bottling companies than 10 years ago

8. Sales increased by approximately US$3.5 billion from 2007 to 2008 9. Increase in net profit for the last consecutive years

Weaknesses

1. Short term liability of US$369 due in 2009

2. Increasing long term debt by US$3.6 billion from 2007 to 2008 3. Increase in other liabilities by US$2.3 billion from 2007 to 2008 4. Decline in carbonated beverages from 2006 to 2008

5. Recent acquisition of companies could cost the company additional acquisition cost along with some internal negative synergies

Financial Ratio Analysis (December 2009)

Growth Rates % PepsiCo Industry S&P 500 Sales (Qtr vs year ago qtr) -1.50 -0.20 -4.80 Net Income (YTD vs YTD) 2.00 3.70 -6.00 Net Income (Qtr vs year ago qtr) 9.00 -0.70 26.80 Sales (5-Year Annual Avg.) 9.91 4.26 12.99 Net Income (5-Year Annual Avg.) 7.64 14.03 12.69 Dividends (5-Year Annual Avg.) 21.24 10.40 11.83

Price Ratios PepsiCo Industry S&P 500

Current P/E Ratio 18.3 18.3 26.7

P/E Ratio 5-Year High NA 11.7 16.6

P/E Ratio 5-Year Low NA 5.2 2.6

Price/Sales Ratio 2.22 1.71 2.25

Price/Book Value 6.16 5.16 3.48

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Profit Margins % PepsiCo Industry S&P 500

Gross Margin 53.2 26.5 38.9

Pre-Tax Margin 16.6 13.0 10.3

Net Profit Margin 12.3 9.7 7.1

5Yr Gross Margin (5-Year Avg.) 54.9 46.8 38.6 5Yr PreTax Margin (5-Year Avg.) 18.7 13.5 16.6 5Yr Net Profit Margin (5-Year Avg.) 13.7 9.8 11.5

Financial Condition PepsiCo Industry S&P 500

Debt/Equity Ratio 0.52 0.92 1.09 Current Ratio 1.3 1.2 1.5 Quick Ratio 1.0 0.9 1.3 Interest Coverage 47.5 20.5 23.7 Leverage Ratio 2.5 3.0 3.4 Book Value/Share 9.81 8.52 21.63

Adapted from www.moneycentral.msn.com

Avg P/E Price/ Sales Price/ Book Net Profit Margin (%) 12/08 20.60 2.02 7.00 11.9 12/07 20.00 3.24 7.17 14.3 12/06 18.30 3.00 6.67 16.0 12/05 23.30 3.10 6.87 12.5 12/04 21.20 3.07 6.45 14.2 12/03 21.60 3.00 6.67 13.2 12/02 27.70 2.96 7.53 11.8 12/01 34.60 3.77 9.93 10.2 12/00 28.80 3.97 11.33 11.4 12/08 20.60 2.02 7.00 11.9 Book Value/ Share Debt/ Equity Return on Equity (%) Return on Assets (%) Interest Coverage 12/08 $7.80 0.68 42.5 14.3 21.1 12/07 $10.74 0.24 32.8 16.3 32.0 12/06 $9.38 0.18 36.7 18.9 27.2 12/05 $8.61 0.37 28.6 12.9 23.1

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12/04 $8.05 0.26 30.9 14.9 31.5 12/03 $6.96 0.19 30.0 14.1 29.3 12/02 $5.53 0.29 31.5 12.8 24.1 12/01 $4.94 0.35 27.7 11.1 16.6 12/00 $4.38 0.42 33.2 12.3 14.0 12/08 $7.80 0.68 42.5 14.3 21.1 Adapted from www.moneycentral.msn.com

Internal Factor Evaluation (IFE) Matrix

Key Internal Factors Weight Rating Weighted Score Strengths

1. Name recognition both domestically and internationally

0.09 4 0.36

2. Stronger than industry average in price to cash flow ratio

0.06 4 0.24

3. Strong marketing and promotion advertising campaigns

0.08 4 0.32

4. Reliable and established distribution channel management

0.07 3 0.21

5. Has diverse business units which reduces overall business risks

0.08 4 0.32

6. Recent reorganization 0.08 4 0.32

7. Owns more bottling companies than 10 years ago

0.07 4 0.28

8. Sales increased by approximately US$3.5 billion from 2007 to 2008

0.07 4 0.28

9. Increase in net profit for the last consecutive years

0.06 3 0.18

Weaknesses

1. Short term liability of US$369 due in 2009 0.07 1 0.07

2. Increasing long term debt by US$3.6 billion from 2007 to 2008

0.09 1 0.09

3. Increase in other liabilities by US$2.3 billion from 2007 to 2008

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4. Decline in carbonated beverages from 2006 to 2008

0.05 1 0.05

5. Recent acquisition of companies could cost the company additional acquisition cost along with some internal negative synergies

0.07 1 0.07

Total 1.00 2.91

F. SWOT Strategies

Strengths Weaknesses

2. Stronger than industry average in price to cash flow ratio

3. Strong marketing and promotion advertising campaigns

4. Reliable and established distribution channel management

5. Has diverse business units which reduces overall business risks 6. Recent reorganization 7. Owns more bottling

companies than 10 years ago

8. Sales increased by approximately US$3.5 billion from 2007 to 2008 9. Increase in net profit for

the last consecutive years

1. Short term liability of US$369 due in 2009

2. Increasing long term debt by US$3.6 billion from 2007 to 2008 3. Increase in other liabilities by US$2.3 billion from 2007 to 2008 4. Decline in carbonated beverages from 2006 to 2008 5. Recent acquisition of companies could cost the company additional acquisition cost along with some internal negative synergies

Opportunities S-O Strategies W-O Strategies 1. Increase in international

market demand for colas, chips and breakfast foods.

2. In 2013, the United States savory snacks market is forecast to have a value of US$28 billion, an increase of 27.8 percent since 2008 1. Continue international expansion (S1, S3, S7, O1) 2. Purchase smaller companies offering healthy products (S2, S4, S5, O3, O4) 3. Consolidate bottling operations (S4, S6, O3)

1.

Promote “healthy” snacks and drinks (W4, O4)

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and the compound annual growth rate of the market in the period 2008-2013 is predicted to be 5 percent

4. Healthy food snack is on the rise as consumers are shifting to healthy food 5. Teens are less conscious

of health issues and still like sweet drinks

Threats S-T Strategies W-T Strategies 1. Regulation – FDA, Clean

Water Act, etc.

2. Foreign exchange rates in current economy

3. Raw materials supplies – clean water

4. Changes in consumer taste

5. Health issues – more consumers are shifting to healthy food

8. Decrease in U.S. cola market

9. Reduction in buying power of large retailers 10. Strong direct (Coke) and

indirect (Kraft) competition

1. Sponsor programs to teens and younger generation to through virtual Facebook, Twitter, and such (S1, S2, S3, O5)

1. Sell off non-producing product lines and then pay off the long term debt (W1, W2, W3, T8, T9)

2. Reorganize further and use the excess cash to buy companies with healthier products (W4, W5, T5, T6, T7)

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G. SPACE Matrix

Financial Stability (FS) Environmental Stability (ES)

Return on Investment 5 Unemployment -4

Leverage 5 Technological Changes -3

Liquidity 5 Price Elasticity of Demand -4

Working Capital 5 Competitive Pressure -5

Cash Flow 4 Barriers to Entry -4

Financial Stability (FS) Average 4.8 Environmental Stability (ES) Average -4

Competitive Stability (CS) Industry Stability (IS)

Market Share -2 Growth Potential 5

Product Quality -2 Financial Stability 4

Customer Loyalty -2 Ease of Market Entry 3 Competition’s Capacity Utilization -1 Resource Utilization 3 Technological Know-How -3 Profit Potential 3 Competitive Stability (CS) Average -2 Industry Stability (IS) Average 3.6

Y-axis: FS + ES = 4.8 + (-4.0) = 0.8

FS

CS

ES

IS

6 5 4 3 2 1 Conservative Aggressive Competitive Defensive 1 2 4 5 7 -2 -3 -4 -5 -7 -6 -1 7 -7 -6 --4 -3 --1

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X-axis: CS + IS = (-2.0) + (3.6) = 1.6

H. Grand Strategy Matrix

1. Market development 2. Market penetration 3. Product development 4. Forward integration 5. Backward integration 6. Horizontal integration 7. Related diversification Weak Competitive Position

Quadrant II Quadrant I

Quadrant IV Quadrant III

Strong Competitive

Position Rapid Market Growth

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I. The Internal-External (IE) Matrix

The IFE Total Weighted Score

Strong 3.0 to 4.0 Average 2.0 to 2.99 Weak 1.0 to 1.99 High 3.0 to 3.99 I II PepsiCo Beverages III Medium 2.0 to 2.99 IV PepsiCo International IV PepsiCo VI Low 1.0 to 1.99 VII VIII IX The EFE Total Weighted Score

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J. QSPM

Continue international expansion Purchase smaller companies offering healthy products

Key Factors Weight AS TAS AS TAS

Opportunities

1. Increase in international market demand for colas, chips and breakfast foods

0.08 4 0.32 1 0.08 2. In 2013, the United States savory snacks

market is forecast to have a value of US$28 billion, an increase of 27.8 percent since 2008 and the compound annual growth rate of the market in the period 2008-2013 is predicted to be 5 percent

0.08 4 0.32 2 0.16

0.06 1 0.06 3 0.18 4. Healthy food snack is on the rise as

consumers are shifting to healthy food

0.08 1 0.08 4 0.32 5. Teens are less conscious of health issues

and still like sweet drinks

0.08 1 0.08 3 0.24 Threats

1. Regulation – FDA, Clean Water Act, etc. 0.06 --- --- --- ---2. Foreign exchange rates in current

economy

0.05 3 0.15 1 0.05 3. Raw materials supplies – clean water 0.07 1 0.07 3 0.21 4. Changes in consumer taste 0.09 1 0.09 3 0.27 5. Health issues – more consumers are

shifting to healthy food

0.08 1 0.08 3 0.24 6. Consumers switching to lower cost house

brands for both snacks and beverages

0.04 --- --- --- ---7. Substitute products – other snacks,

water, tap water, ready-to-drink, sports drinks, etc.

0.07 1 0.07 4 0.28

8. Decrease in U.S. cola market 0.06 4 0.24 2 0.12 9. Reduction in buying power of large

retailers

0.04 --- --- --- ---10. Strong direct (Coke) and indirect (Kraft)

competition

0.06 1 0.06 4 0.24

TOTAL 1.00 1.62 2.39

Strengths

0.09 4 0.36 1 0.09 2. Stronger than industry average in price to

cash flow ratio

0.06 --- --- --- ---3. Strong marketing and promotion

advertising campaigns

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---4. Reliable and established distribution channel management

0.07 2 0.14 4 0.28 5. Has diverse business units which reduces

overall business risks

0.08 --- --- --- ---6. Recent reorganization 0.08 --- --- --- ---7. Owns more bottling companies than 10

years ago

0.07 1 0.07 3 0.21 8. Sales increased by approximately US$3.5

billion from 2007 to 2008

0.07 --- --- --- ---9. Increase in net profit for the last

consecutive years

0.06 1 0.06 3 0.18 Weaknesses

1. Short term liability of US$369 due in 2009 0.07 --- --- --- ---2. Increasing long term debt by US$3.6

0.09 --- --- --- ---3. Increase in other liabilities by US$2.3

0.06 3 0.18 1 0.06 4. Decline in carbonated beverages from

2006 to 2008

0.05 1 0.05 3 0.15 5. Recent acquisition of companies could

cost the company additional acquisition cost along with some internal negative synergies

0.07 --- --- ---

---SUBTOTAL 1.00 0.86 0.97

SUM TOTAL ATTRACTIVENESS SCORE 2.48 3.36

K. Recommendations

Purchase smaller companies that offer healthier drinks and snacks. Utilize the existing distribution channel for promoting the new line and use penetration pricing strategies to gain market share rapidly and against the competitors.

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L. EPS/EBIT Analysis

US$ Amount Needed: $500 million Stock Price: US$61.37

Tax Rate: 26.8% Interest Rate: 5%

# Shares Outstanding: 1.6 Billion

Common Stock Financing Debt Financing

Recession Normal Boom Recession Normal Boom

EBIT $7,000,000,000 $8,000,000,000 $9,000,000,000 $7,000,000,000 $8,000,000,000 $9,000,000,000 Interest 0 0 0 25,000,000 25,000,000 25,000,000 EBT 7,000,000,000 8,000,000,000 9,000,000,000 6,975,000,000 7,975,000,000 8,975,000,000 Taxes 1,876,000,000 2,144,000,000 2,412,000,000 1,869,300,000 2,137,300,000 2,405,300,000 EAT 5,124,000,000 5,856,000,000 6,588,000,000 5,105,700,000 5,837,700,000 6,569,700,000 # Shares 1,608,147,303 1,608,147,303 1,608,147,303 1,600,000,000 1,600,000,000 1,600,000,000 EPS 3.19 3.64 4.10 3.19 3.65 4.11

70 Percent Stock - 30 Percent Debt 70 Percent Debt - 30 Percent Stock

Recession Normal Boom Recession Normal Boom

EBIT $7,000,000,000 $8,000,000,000 $9,000,000,000 $7,000,000,000 $8,000,000,000 $9,000,000,000 Interest 20,000,000 20,000,000 20,000,000 5,000,000 5,000,000 5,000,000 EBT 6,980,000,000 7,980,000,000 8,980,000,000 6,995,000,000 7,995,000,000 8,995,000,000 Taxes 1,870,640,000 2,138,640,000 2,406,640,000 1,874,660,000 2,142,660,000 2,410,660,000 EAT 5,109,360,000 5,841,360,000 6,573,360,000 5,120,340,000 5,852,340,000 6,584,340,000 # Shares 1,605,703,112 1,605,703,112 1,605,703,112 1,602,444,191 1,602,444,191 1,602,444,191 EPS 3.18 3.64 4.09 3.20 3.65 4.11

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M. Epilogue

PepsiCo continues to make strong growth moves on both the national and international stage, even in the struggling economy. First quarter results for Pepsi Bottling show it has been very profitable due to price increases and stronger U.S. sales of carbonated soft drinks. This helped offset the declining demand for pricier beverages such as bottled water. In the United States, PepsiCo’s major move has been a bid to buy the remaining shares of Pepsi Bottling. PepsiCo currently owns 33 percent of Pepsi Bottling. Pepsi Bottling has rejected this bid as being too low; however, it is expected that PepsiCo will continue with its bid to buy the remaining shares of the bottling company.

To further improve its international operations, PepsiCo has made a bid to buy PepsiAmericas. Basically, this would consolidate control of the Americas operations. Additionally PepsiCo has pledged to invest US$1 billion in Russia over the next three years, bringing its total investment to US$4 billion over a ten year time span. PepsiCo will also invest over US$1 billion in China over the next 4 years. This is in addition to continued investments in Japan, India, Europe, Mexico and Latin America. For the first quarter ending 3/21/09, PepsiCo’s net revenues of US$8,263 million are down US$70 million from the same quarter in 2008. However, PepsiCo has also controlled costs by decreasing cost of goods sold by US$90 million and decreasing sales, general and administrative expenses by US$9 million (same quarter comparison). This has resulted in a net profit of US$1,141 million, which is US$90 million less than last year’s first quarter. PepsiCo may need to further adjust costs to reflect continuing economic troubles as consumers shift to less costly drinks and snacks. Second quarter results continued the downward trend with beverage volume down 6 percent, Frito-Lay down 3 percent, and Quaker down 4 percent. However international volume was up 1 percent in snacks and 6 percent in beverages.

The first quarter balance sheet shows that cash is up slightly whereas current liabilities are down slightly; long-term debt has climbed US$1,393 million to a total of US$9,251 million. Part of this increase may well be due to aggressive expansion activities throughout the world.

Second quarter for PepsiCo shows better than expected profits based on cost cutting and growth in developing countries such as China and India. However, growth in the U.S. market continues to remain weak with a 1 percent decrease in volume.