PepsiCo’s Diversification Strategy in 2014

Editor's Notes

• #28: First, international market expansion strategy through mergers and acquisitions. Mergers and acquisitions can offer the advantages of gaining access to competencies and infrastructure, reducing direct costs and overheads and achieving organic growth. Recently, PepsiCo has engaged in important mergers and acquisitions such as acquisition of juice and diary businesses Lebedyansky in Russia, Mabel cookies in Brazil, and Suntory in Japan.
• #29: formation of strategic alliances in global scale. Specifically, strategic partnerships have been formed with Calbee (Russia) in 2009, Tingyi in China in order to claim a share in growing beverage market in China in 2011 and Important strategic alliances are formed by PepsiCo at home markets as well. Specifically, by forming a strategic alliance with Starbucks – a global coffee house chain, PepsiCo has been able to claim its share from increasing energy drink market segment in 2012
• #30: Pepsico financial condition or results of operations could be adversely affected if they are unable to grow our business in developing and emerging markets (particularly China, India and the Latin America, Africa, eastern europe and Middle East regions) or as a result of unstable political conditions, civil unrest or other developments and risks in the markets where our products are made, manufactured, distributed or sold. Emerging markets in 2013 for PepsiCo produced an impressive average 10% organic growth (which excludes acquisitions). This included very strong performances by China, Mexico, Brazil, Saudi Arabia, Pakistan, and Turkey. Revenue climbed in the double digits in the Latin America foods and Asia, Middle East and Africa regions, but growth was far more modest in Europe, where beverages volume declined. Indra Nooyi said “By 2030, an additional three billion people may join the middle class in developing and emerging markets,” the annual report projected. “We will continue to invest in building our capabilities there.” .  So she began buying food and beverage companies in emerging economies worldwide — Brazil, India, Ukraine, and many others — culminating in two big Russian outfits, the Lebedyansky juice company and Wimm-Bill-Dann, which is mainly a dairy business. That’s a lot of buying — over $7 billion just for the two Russian companies. But “doing it the slow way, organically, would have set us back,” says Nooyi. “We had to power forward and then build from there.” With an acquisition finalized in 2011, the company became the largest food and beverage maker in Russia
• #31: focus on organisational culture. Organisational culture can be defined as “the collection of words, actions, thoughts, and “stuff” that clarifies and reinforces what a company truly values” and the nature of organisational culture directly impacts its performance in short-term and long-term perspectives. PepsiCo CEO Indra Nooyi is widely believed to be an unconventional corporate leader for a good reason. It has been noted that “she’s been known to walk the halls at Pepsi barefoot, sometimes even singing along the way” (Sheetz-Runkle, 2010, p.112) and this fact communicates her willingness to embrace her differences with positive implications on employee morale and organisational culture.
• #32: developing and promoting the idea of One PepsiCo. Specifically, Indra Nooyi has been striving to increase the level of association of individual brands with PepsiCo company values and philosophy through promoting the idea of One PepsiCo. This is meant to be facilitated through sharing supply-chain management and infrastructure, operational costs for many brands within PepsiCo portfolio have been decreased.
• #33: Korea: https://www.youtube.com/watch?v=f5z3D34oHQk (1:52) A wide range of innovative marketing initiatives developed by PepsiCo marketing team by using celebrity endorsement in an innovative manner by attracting a popular singers include “Live for now” Multi Year Plan Campaign rolled out globally 2012 Live for now campaign: "Live for Now" reflects the insight that Pepsi fans all around the world desire to capture the excitement of now – a mind-set that is aligned at the very core with the brand's DNA. "Live for Now" will invite and inspire Pepsi fans to live each moment to the fullest through a breadth of global, pop-culture platforms, including relationships with music and entertainment brand evangelists, digital innovation, epic events and unique partnerships. . Importantly, cross-cultural differences in various markets are taken into account when developing and delivering PepsiCo marketing messages. For example, the marketing tagline of “Live for Now” associated with Pepsi brand has been modified as “Yalla Now” and “Oh Yes Abhi” for Middle East and Indian markets or Sống trọn từng giây in Vietnam respectively taking into account cross-cultural differences associated with these markets.
• #35: focus on increasing core organic revenue. Core organic revenue can be explained as a type of revenue that is achieved through increasing the volume of production and sales. PepsiCo core organic revenues were increased by 5% during 2012 (Annual Report, 2012) and by 4% at the end of 2014 and the company strategic level management is committed to further increase the levels of core organic revenues through maintaining high quality standards and applying effective marketing strategy. Moreover, organic revenues can be further increased by concentrating on core competencies of the business. It can be specified that “a competence is an attribute or collection of attributes possessed by all or most of the companies in an industry” (Campbell et al., 2012, p.34).
• #36: Strength: Product diversity. PepsiCo has several hundreds of brands, which include: carbonated and noncarbonated drinks, water, savory and whole grain-based snacks. Product diversification strengthens PepsiCo because it doesn’t have to rely on few key products or seasonal sales and isn’t significantly affected by changes in customer tastes.  The company offers nearly every type beverage or snack and its brands can often be substituted for each other. For example, Lay’s can be replaced with Doritos, Cheetos, Ruffles, Tostitos or Fritos, so if one product doesn’t satisfy a consumer’s needs, PepsiCo can offer many more choices. Therefore, changes in customer tastes do not affect the company as severely as they would other companies. Extensive distribution channel. PepsiCo products are served to more than 10 million stores per week in more than 200 countries. CSR. The firm recognizes its role in a society and engages in education, recycling, water usage reduction, obesity fighting and other projects through PepsiCo Foundation, thus increasing its brand awareness and customer loyalty. Competency in mergers and acquisitions. The key to PepsiCo business growth is its successful mergers and acquisitions of beverage, bottling and snacks companies. PepsiCo acquired such brands as Gatorade, Tropicana, Doritos, Quaker Oats and many others. 22 brands earning more than $1 billion a year. Comprehensive product portfolio with more than 90 brands serving nearly every niche in the beverage, food and snack industries.The company doesn’t have to rely on one or two of its product to bring most of the revenues. Instead, Pepsi has around 90 different brands, of which 22 have each generated more than US$1 billion dollars in 2014 that contribute significantly to its income, serving different industries and satisfying various consumer tastes. PepsiCo’s brand portfolio is highly diversified and only The Coca-Cola Company has more brands in the beverage, food and snack industries. No competitor has as many high earning brands as PepsiCo. Successful marketing and advertising campaigns. More than $2 billion spent on advertising over 2012 resulted in PepsiCo’s growing market share over its main competitors, including Coca Cola Company, which spent even more on advertising. Complementary product sales. In its annual financial report, PepsiCo revealed one of its studies' results that about 30% of customers who buy its snacks also buy its beverages. PepsiCo’s decision to diversify its product range is firm’s competitive advantage too. Proactive and progressive. According to New York Times food industry writer Melanie Warner, PepsiCo, by many critics, is considered to be most proactive and progressive food company. Weakness: Over-dependence on Wal-Mart. More than 13% of PepsiCo business revenues come from Wal-Mart store chain. Wal-Mart has a significant buyer power and can easily dictate prices over PepsiCo leaving it with very small margins. In addition, if PepsiCo would lose Wal-Mart it would lose 13% of its revenue and competitive advantage. Low pricing. PepsiCo usually prices its products lower than its competitors. Low price is associated with low quality and PepsiCo products are usually perceived as ones. Questionable practices. PepsiCo is using and selling tap water but places view of mountains on its water bottle labels, thus deceiving people that it is mountain spring water when it is not. PepsiCo has also been criticized for using water in India with higher than allowed amount of pesticides in it. Weak brand awareness. The Coca Cola Company has the largest share market of beverages in the world and much stronger brand awareness than Pepsi, placing it at competitive disadvantage. Too low net profit margin. PepsiCo’s net profit margin is 9.7% compared to Coca Cola’s 18.55% and Nestlé’s 11%.
• #37: Opportunities Growing beverages and snacks consumption in emerging markets. PepsiCo has made large investments in BRIC countries to expand its market share as these countries represent the fastest growing food and beverages markets in the world. If PepsiCo is successful it will increase its revenues and global market share significantly. In addition, it will be able to rely less on US market. Increasing demand for healthy food and beverages. Due to many programs to fight obesity, demand for healthy food and beverages has increased drastically. PepsiCo has an opportunity to further expand its product range with beverages and snacks that have low amount of sugar and calories. Further expansion through acquisitions. So far, PepsiCo has been successful in acquiring other companies and adding new growing brands to its portfolio. Bottled water consumption growth. Consumption of bottled water is expected to grow both in US (PepsiCo’s largest bottled water market) and the rest of the world. Savory snacks consumption growth. The same opportunity PepsiCo has in growing its revenue selling snacks as this market is also expected to grow. Threats: Changes in consumer tastes. Consumers around the world become more health conscious and reduce their consumption of carbonated drinks, drinks that have large amounts of sugar, calories and fat. Water scarcity. Water is becoming scarcer around the world and increases in both cost and criticism for PepsiCo over the large amounts of water used for production. Decreasing gross profit margin. PepsiCo’s gross profit margin was decreasing over the past few years and may continue to decrease due to higher water and other raw material costs. Legal requirements to disclose negative information on product labels. Some researches show that particular ingredients, consumed in extra large quantities, in some of PepsiCo products could cause cancer. For this reason, many governments consider to pass legislation that requires disclosing such information on product labels. Products containing such information may be perceived negatively and lose its customers. Strong dollar. More than 50% of PepsiCo’s income is from outside US. Due to strong dollar performance against other currencies PepsiCo’s income should fall. Increased competition from Snyder’s. Snyder’s increase its US savory snacks market share by 1.6% and almost all of it was taken from PepsiCo.
• #38: - Pepsi: seen a loss of market share, improve with “power of one”, investment right strategic plan. Aquafina: Increase environmental pressure, very competitive Frito-Lay: Worlds largest snack company, top se;;er in every brand, strategic planning and customer understanding, expand into new markets. Quaker Oats: number 1 oatmeal, “good for you”, expand to new markets.
• #39: They combine purchasing activities, gain more leverage with suppliers, and realize supply chain economies; share technology, transfer technical skills, combine R&D; combine sales andmarketing activities, use common distribution channels, brand name, and combine after-saleservice activities and usingcross-business collaboration to create new competitive capabilities.
• #40: Now will I tell you about
• #41: Distribution: Combining a spacious warehouse systems and utilities Quarker and Gatorade to expand distribution capacity through 3rd party considerably. Combined with the distribution system of the Tropicana. Sales: PepsiCo decided to keep Quarker cereal products, related products in the North American grain. For example, Aunt Jemima syrup and mixes. Some critics argue that this decision helps PepsiCo easier to sell products at a later stage. Technology: Combining the production technology of the Gatorade bottle hot forms -Tropicana => balance seasonal demand. Marketing: PepsiCo's strong brand in the US (with the phamSabritas Mexico) but the world market is not strong (Europe), combined with the Tropicana to reduce total costs.
• #42: Distribution: Spacious warehouse systems and utilities Quarker and PepsiCo Gatorade combined with the capacity to expand distribution through 3rd party significantly for PepsiCo. Sales: Combined sales force of Tropicana modest larger system of Quarker-Tropicana => extensive distribution and more efficient. Technology: Combined with technology PepsiCola North America => balance seasonal demand. Using technology about taste and aromas of FritoLay => unique flavor. Combined with Gatorade, Tropicana-Gatorade are 2 main types of products in the North American market: sports drinks and fruit juice, two types sold in different ways, through different retailers. When combined with the advantage of the production process heating bottled water significantly save costs. And thanks to the combination of scientific research institutes of sports nutrition Gatorade and Tropicana Center, PepsiCo has been intensive strength beverage segment functions.  Marketing: Benefit sharing cost / technology transfer opportunities with juice and healthy water.
• #43: Distribution: The ability to build a good system of Quarker warehouse and Gatorade has brought new dimensions to PepsiCo's distribution system. At that time the company has network of retail stores, vending machines are developed. This can help overcome the weaknesses of PepsiCo part of the revenue depends heavily on retail systems outside Walmart, minimize business risk. Sales: PepsiCo decided to keep Quarker cereal products, related products in the North American grain. For example, Aunt Jemima syrup and mixes. Some critics doubt that this decision helps sell products more easily at a later stage. Marketing: Technology transfer opportunities for PepsiCo's products, cost-benefit sharing / technology transfer opportunities with Frito Lay
• #44: Distribution: FritoLay outside the North American market: products are sold in 40 FritoLay country. The company holds a large position in the market. Specifically: 80% of the market in Mexican snack, Walkers Crisps 40% in the UK market. Before the merger with PepsiCo, Frito Lay has about 150 distribution centers across the United states. After the merger FritoLay combined with Quarker-Gatorade system for the purpose of distribution systems make use Gatorade Quarker-saving distribution costs. Sales: FritoLay North American part of the product line Quarker: cereal, food, energy ... and also dealing with a number like Quarker. Therefore, when combined with Quarker to provide a broader product line for retailers Quarker current, thereby increasing overall sales. Combine FritoLay Tropicana and Quarker creating sales force food through vending machines and food service outlets in North America's largest, a team of about 600 people who generate annual sales of more than $ 1 billion. Technology: FritoLay have specialized knowledge about taste and flavor, FritoLay also research and develop thousands of varieties of potatoes, patent new process flavorings for snacks condensed. Combined with Tropicana Tropicana to be able to use proprietary flavoring => create unique products. Marketing: Share brand carbonated beverage products. FritoLay namely 1965 was Marketing with PepsiCola, can see PepsiCo's intent is to use these two brands to penetrate each market for both brands are well-known.
• #45: They combine purchasing activities, gain more leverage with suppliers, and realize supply chain economies; share technology, transfer technical skills, combine R&D; combine sales andmarketing activities, use common distribution channels, brand name, and combine after-saleservice activities and usingcross-business collaboration to create new competitive capabilities. PepsiCo have the all 3 opportunities. For skill transfer, since PepsiCo include much of business units and divisions, they can have skill transferring within the own corporate and theglobe. The best practices were routinely transferred between its 230 plants, 3600 distribution systems, and 120,000 service routes around the world. For cost sharing, since PepsiCo can capture the strategic fit and resources fit benefits, they also prove to have cos-saving over time. Like, theyachieve $160 million in cost-saving resulting from corporate-wide procurement of product ingredients and packaging material. And for Brand Sharing, we have to mention one of the most successful strategies was “Power of One”, they allow PepsiCo to obtain the synergistic benefit of combining Pepsi-Cola and Frito-Lay. For instance, in Chile, Frito-Lay has over 90% of the market, but Pepsi is in lousy shape but due to Frito-Lay image Pepsi able to get a shelf space.
• #46: PepsiCo's portfolio does exhibit good strategic fit. It seems as though, for the most part, PepsiCo has pursued a strategy of acquiring businesses that have certain elements in common in terms of production, distribution, and marketing. The areas of the business in which PepsiCo has demonstrated particular success in exploiting strategic fits in the value chain are in purchasing, where Aquafina and Pepsi-Cola enjoy cost-sharing benefits, operations, where cost sharing benefits are achieved among hot fill operations of Tropicana distribution, in which cost sharing and skills transfer may be achieved among the longer-established beverage units and Gatorade, and in sales and marketing, where Frito-Lay products and all other convenience products (especially soft drinks) can be cross-marketed using brand sharing. PepsiCo should continue to explore new opportunities for skills transfer, brand sharing and cost sharing benefits across all business units, in order to maximize its advantage as a diversified company.
• #51: The company's snacks division, highlighted by brands such as Frito-Lay and Quaker Foods, made up 53% of its total net revenue for the 2014 year-end. 2 reasons for the importance of PepsiCo’s snack division to its growth: -Soft Drinks and Juices Are Falling Out of Favor With Consumers -Snacks Division Dominates North America 
• #52: In all years presented, free cash flow was used primarily to pay dividends and repurchase shares. We expect to continue to return free cash flow to our shareholders through dividends and share repurchases However, see “PepsiCo borrowing costs and access to capital and credit markets may be adversely affected by a downgrade or potential downgrade of our credit ratings.” in Pepsi Business Risks” for certain factors that may impact our credit ratings or our operating cash flows.
• #53: The free cash flow was contributed by Net Cash Provided by Operating Activities The strongest contributor to Pepsico’s operating profit is Frito-Lay North America and we can see that total So we can see that North America is the most important market to the pepsico and give pepsico an good finance condition to grow their stock price
• #54: Their primary sources of cash available to us to fund cash outflows, such as our anticipated share repurchases, dividend payments and scheduled debt maturities, include cash from operations and proceeds obtained from issuances of commercial paper and long-term debt.
• #56: PepsiCo increased its annual dividend for the 42nd consecutive year in 2014 and returned $8.7 billion to our shareholders through share repurchases and dividends, a 36% increase over 2013.
• #57: Pepsi began paying out occasional dividends in 1936 and has paid regular quarterly dividends since 1955. Since 1973, Pepsi has increased its regular quarterly dividends and in 1998 met the Dividend Aristocrat criteria of 25 consecutive years of dividend increases. 2017 will be Pepsi’s 45th consecutive year of dividend growth. Pepsi traditionally increases their quarterly dividend in the 2nd quarter of the calendar year. In February 2016, Pepsi announced an increase in their dividend of 7.1% to an annualized rate of $2.96. The next dividend increase is expected to be announced in February 2017 and to become effective in June 2017. Pepsi’s dividend growth alternates between 5 – 10 year periods of double-digit percentage growth and 5 – 7 year periods of more moderate increases. Pepsi grew its dividend by more than 10% annually from 1973 – 1982, 1988 – 1997 and 2004 – 2008, while the annual dividend growth during other periods, including most recently from 2009 – 2013, has been roughly 5% per year. From 2011 – 2016, Pepsi compounded its dividend an average of 7.89%. Longer-term dividend growth rates are better, with compounded dividend growth rates of 9.82% over the last 10 years, 9.94% over the last 20 years, and 10.76% over the last 25 years. Since beginning the streak of consecutive dividend increases in 1973, Pepsi has split its stock 4 times, with 3 for 1 stock splits in June 1977, June 1986, and September 1990 and a 2 for 1 stock split in May 1996. A single share, which collected $1.00 in dividends in 1972
• #58: The plans have both purchase and sales fees.  There is a $10 initial setup fee. The transaction fee for the direct purchase plan is either $3 for check purchases and $2 for one-time and recurring automatic investments, plus a 3 cent per share transaction fee.  For dividend reinvestments, the transaction fees are 3 cent per share fee, in addition to a 5% fee when more than 100 shares are owned.  (Pepsi pays part of the transaction fee when the account holds less than 100 shares.) When selling shares, an investor will pay 12 cents per share sold along with a transaction fee of either $25 or $30 depending on the type of sale (i.e., market order, batch order or day limit order).  Other fees may apply as well. Pepsi traditionally increases their quarterly dividend in the 2nd quarter of the calendar year. In February 2016, Pepsi announced an increase in their dividend of 7.1% to an annualized rate of $2.96. The next dividend increase is expected to be announced in February 2017 and to become effective in June 2017. Pepsi’s dividend growth alternates between 5 – 10 year periods of double-digit percentage growth and 5 – 7 year periods of more moderate increases. Pepsi grew its dividend by more than 10% annually from 1973 – 1982, 1988 – 1997 and 2004 – 2008, while the annual dividend growth during other periods, including most recently from 2009 – 2013, has been roughly 5% per year. From 2011 – 2016, Pepsi compounded its dividend an average of 7.89%. Longer-term dividend growth rates are better, with compounded dividend growth rates of 9.82% over the last 10 years, 9.94% over the last 20 years, and 10.76% over the last 25 years. Since beginning the streak of consecutive dividend increases in 1973, Pepsi has split its stock 4 times, with 3 for 1 stock splits in June 1977, June 1986, and September 1990 and a 2 for 1 stock split in May 1996. A single share, which collected $1.00 in dividends in 1972