Planeamiento Estrategico Tasa

PepsiCo – 2005

Henry Beam: Western Michigan University

Forest David: Francis Marion University

A. Case Abstract

This is a comprehensive strategic management case that includes the company’s financial statements, organization chart, competitor information, and industry trends. Sufficient internal and external data are provided to enable students to evaluate current strategies and recommend a three-year strategic plan for the company.

Founded in 1898 and headquartered in Purchase, New York, PepsiCo, Inc., is a global snack and beverage company. It manufactures, markets, and sells carbonated and noncarbonated beverages, as well as various salty, sweet, and grain-based snacks and food products worldwide. Its beverage product suite includes beverage concentrates, fountain syrups, and finished goods under various brands such as Pepsi, Mountain Dew, Gatorade, Tropicana Pure Premium, Sierra Mist, Mug, Tropicana Juice Drinks, Propel, SoBe, Slice, Dole, Tropicana Twister, and Tropicana Season’s Best. PepsiCo also manufactures, markets, and sells ready-to-drink tea and coffee products through joint ventures with Lipton and Starbucks. PepsiCo’s snack product suite includes Lay’s potato chips, Doritos flavored tortilla chips, Cheetos cheese flavored snacks, Tostitos tortilla chips, Fritos corn chips, Ruffles potato chips, Rold Gold pretzels, Sunchips multigrain snacks, Munchies snack mix, Grandma’s cookies, Quaker oats corn and rice snacks, and Cracker Jack candy coated popcorn.

PepsiCo licenses the Aquafina water brand to its bottlers and markets this brand. PepsiCo offers cereals, rice, pasta, and other products, including Crunch and Life ready-to-eat cereals, Rice-A-Roni, Pasta Roni, and easy side dishes. The company distributes its products through direct store delivery, broker warehouse, and food service and vending distribution networks to its customers, including franchise bottlers, distributors, and retailers.

B. Vision Statement (proposed)

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

world.

C. Mission Statement (actual)

To be the world’s premier consumer products company focused on convenient foods and beverages to produce healthy financial rewards to investors as we provide opportunities for growth and enrichment to our employees, business partners, and the communities in which we operate. And in everything we do, we strive for honesty, fairness, and integrity.

(Proposed)

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 we provide opportunities for growth and enrichment to our employees (9), business partners, and the communities (8) in which we operate. We have outstanding technological (4) and marketing (7) systems to continually innovate and create differentiated products for our customers (1) worldwide. And in everything we do, we strive for honesty, fairness, and integrity (6).

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

Opportunities

1. ‘Generation Y’ consumers are known for their Pepsi brand loyalty.

2. Companies such as Cadbury Schweppes can be purchased relatively cheaply.

3. Health-minded public.

4. Reach teenagers through Pepsi Zone in malls and shopping centers.

5. Easier to do business globally now than ever before.

6. Powerful go to market.

7. Different cultures enjoy drinks with less sugar than Americans.

Threats

1. One production facility and four distribution centers affected in Louisiana from Hurricane Katrina.

2. Celebrities’ actions and public behavior.

3. A deteriorating economy.

4. Intense rivalry by new firms entering.

5. Coca-Cola has largest share market.

6. Losing KFC, Pizza Hut, and Taco Bell acquisitions.

7. Anti-American views by the Middle East (Mecca and Zam Zam Colas).

CPM – Competitive Profile Matrix

PepsiCo Coca-Cola Cadbury Schweppes

Critical Success Factors Weight Rating Weighted Score Rating Weighted Score Rating Weighted Score

Market Share

Product Quality

Customer Service

Organizational Structure

Price Competitiveness

Financial Position

Customer Loyalty

Global Expansion

Advertising

Social Responsibility

Quality of management

Size of product line .10

.09

.02

.09

.09

.10

.08

.12

.09

.08

.05

.09 3

3

2

3

3

3

4

4

4

2

3

4 .30

.27

.04

.27

.27

.30

.32

.48

.36

.16

.15

.36 4

4

2

3

3

4

4

4

4

4

4

4 .40

.36

.04

.36

.27

.40

.40

.48

.36

.32

.20

.36 2

3

1

3

3

3

2

2

1

3

2

3 .20

.27

.02

.27

27

.30

.20

.24

.09

.27

.10

.27

Total 1.00 2.71 3.87 2.35

External Factor Evaluation (EFE) Matrix

Critical Success Factors Weight Rating Weighted Score

Opportunities

1. Retaining ‘Generation Y’ consumers. 0.10 3 0.30

2. Companies such as Cadbury Schwappes can be purchased relatively cheaply. 0.06 4 0.24

3. Health-minded public. 0.08 3 0.24

4. Reach teenagers through Pepsi Zone in malls and shopping centers. 0.08 2 0.16

5. Easier to do business globally now than ever before. 0.08 3 0.24

6. Powerful go to market. 0.03 1 0.03

7. Different cultures enjoy drinks with less sugar than Americans. 0.05 3 0.15

Threats

1. One production facility and four distribution centers affected in Louisiana from Hurricane Katrina. 0.04 2 0.08

2. Celebrities’ actions and public behavior. 0.06 1 0.06

3. A deteriorating economy. 0.05 2 0.10

4. Intense rivalry by new firms entering. 0.12 2 0.24

5. Coca-Cola has largest share market. 0.15 3 0.45

6. Losing KFC, Pizza Hut, and Taco Bell acquisitions. 0.06 4 0.24

7. Anti-American views by the Middle East (Mecca and Zam Zam Colas). 0.04 2 0.08

Total 1.0 2.61

E. Internal Audit

Strengths

1. Well-known brand.

2. World leader in convenient food and beverages.

3. Available in 200 countries.

4. Powerful go to marketing.

5. Larger corporation than Coke.

6. Through diversification has reduced risk.

7. Diverse line of products meeting different cultural needs.

8. Great marketing plan consistent with celebrities in advertising.

9. Great organization chart.

10. Consistently pays cash dividends.

11. Sales grew on average of 16 percent for past 40 years.

12. Return to shareholders grew 16 percent.

13. Many different companies owned by Pepsi in different countries.

Weaknesses

1. Coke outsells Pepsi in all areas of the world.

2. Pepsi has not been able to achieve 15 cent annual increase in earnings.

3. Too much Goodwill on balance sheet.

4. Decrease in sales in other beverages.

5. Information architecture is weak.

6. Net profit margin is below Coke’s.

Financial Ratio Analysis (January 2006)

Growth Rates % PepsiCo Industry SP-500

Sales (Qtr vs year ago qtr) 12.80 21.10 14.20

Net Income (YTD vs YTD) (8.00) 6.50 16.30

Net Income (Qtr vs year ago qtr) (36.70) 5.50 17.00

Sales (5-Year Annual Avg.) 7.49 7.96 4.93

Net Income (5-Year Annual Avg.) 11.50 15.05 10.40

Dividends (5-Year Annual Avg.) 10.33 9.39 4.27

Price Ratios

Current P/E Ratio 25.6 19.9 18.8

P/E Ratio 5-Year High 34.3 45.1 64.8

P/E Ratio 5-Year Low 17.7 17.2 17.4

Price/Sales Ratio 3.13 2.07 1.48

Price/Book Value 6.92 4.88 2.83

Price/Cash Flow Ratio 18.70 13.30 12.40

Profit Margins

Gross Margin 57.8 54.4 47.2

Pre-Tax Margin 19.5 15.3 11.9

Net Profit Margin 12.6 10.9 8.0

5-Yr Gross Margin (5-Year Avg.) 60.3 56.3 47.3

5-Yr Pre-Tax Margin (5-Year Avg.) 17.6 14.0 9.4

5-Yr Net Profit Margin (5-Year Avg.) 12.4 9.9 5.8

Financial Condition

Debt/Equity Ratio 0.16 0.59 1.06

Current Ratio 1.2 1.1 1.4

Quick Ratio 1.0 0.8 0.9

Interest Coverage 29.4 8.4 3.5

Leverage Ratio 2.2 2.7 5.7

Book Value/Share 8.54 8.33 13.26

Investment Returns %

Return on Equity 27.9 25.7 15.3

Return on Assets 12.8 9.5 2.7

Return on Capital 24.0 16.2 7.4

Return on Equity (5-Year Avg.) 31.5 24.2 11.9

Return on Assets (5-Year Avg.) 13.6 8.4 2.0

Return on Capital (5-Year Avg.) 25.7 14.2 5.6

Management Efficiency

Income/Employee 26,000 24,000 29,000

Revenue/Employee 204,000 223,000 367,000

Receivable Turnover 8.8 10.0 7.7

Inventory Turnover 8.1 8.6 7.8

Asset Turnover 1.1 1.0 0.4

Adapted from www.cnbc.com

Date Avg. P/E Price/Sales Price/Book Net Profit Margin (%)

12/04 21.00 2.99 6.46 14.3

12/03 20.80 2.95 6.68 13.2

12/02 23.60 2.90 7.82 13.2

12/01 30.90 3.17 9.90 9.9

12/00 26.90 3.53 9.95 10.7

Adapted from www.cnbc.com

Date Book Value/ Share Debt/Equity ROE (%) ROA (%) Interest Coverage

12/04 $8.08 0.18 31.0 15.0 34.2

12/03 $6.98 0.14 30.0 14.1 31.6

12/02 $5.40 0.24 35.6 14.1 28.3

12/01 $4.92 0.31 30.8 12.3 19.4

12/00 $4.98 0.32 30.1 11.9 15.5

Adapted from www.cnbc.com

Net Worth Analysis (January 2006 in millions)

1. Stockholders’ Equity + Goodwill = 13,572 + 3,909 $ 17,481

2. Net Income x 5 = $4,212 x 5= $ 21,060

3. Share Price = $60.00/EPS 2.31 = 138.6 x Net Income $4,212 = $ 109,402

4. Number of Shares Outstanding x Share Price = 1,659 x $60.00 = $ 99,540

Method Average $61,871

Internal Factor Evaluation (IFE) Matrix

Critical Success Factors Weight Rating Weighted Score

Strengths

1.Well-known brand 0.15 4 0.60

2. World Leader in convenient food and beverages 0.08 4 0.32

3. Available in 200 countries 0.10 4 0.40

4. Powerful go to marketing 0.06 4 0.24

5. Larger corporation than Coke 0.03 3 0.09

6. Through diversification has reduced risk 0.03 3 0.09

7. Diverse line of products meeting different cultural needs 0.06 4 0.24

8. Great marketing plan consistent with celebrities in advertising 0.03 3 0.09

9. Great organization chart 0.01 3 0.03

10.Consistently pays cash dividends 0.04 3 0.12

11. Sales grew on avg. of 16 percent for past 40 years 0.06 4 0.24

12. Return to Shareholders grew 16 percent 0.06 4 0.24

13. Lot of listing on Web sites of different companies owned by Pepsi in different countries. 0.03 3 0.09

Weaknesses

1.Coke out sells Pepsi in all areas of the world 0.07 1 0.07

2. Pepsi has not been able to achieve 15 cent annual increase in earnings 0.03 2 0.06

3. Too much Goodwill 0.03 1 0.03

4. Decrease in sales in other beverages 0.05 2 0.10

5. Information architecture is weak 0.02 2 0.04

6. Net profit margin in below the competition’s 0.06 1 0.06

Total 1.00 3.15

F. SWOT Matrix

Strengths Weaknesses

1. Well-known brand.

2. World leader in convenient food and beverages.

3. Available in 200 countries.

4. Powerful go to marketing

5. Larger corporation than Coke.

6. Through diversification has reduced risk.

7. Diverse line of products-meeting different cultural needs.

8. Great marketing plan-consistent with celebrities in advertising.

9. Great organization chart.

10. Consistently pays cash dividends.

11. Sales grew on avg. of 16 percent for past 40 years.

12. Return to shareholders grew 16 percent.

13. Lot of listings on Web site of different companies owned by Pepsi in different countries. 1. Coke outsells Pepsi in all areas of the world.

2. Pepsi has not been able to achieve 15 cent annual increase in earnings.

3. Too much Goodwill.

4. Decrease in sales in other beverages.

5. Information architecture is weak.

6. Net profit margin is below Coke’s.

Opportunities S-O Strategies W-O Strategies

1. ‘Generation Y’ consumers are known for their Pepsi brand loyalty.

2. Companies such as Cadbury Schweppes can be purchased relatively cheaply.

3. Health-minded public.

4. Reach teenagers through Pepsi Zone in malls and shopping centers

5. Easier to do business globally now than ever before.

6. Powerful go to market

7. Different cultures enjoy drinks with less sugar than Americans. 1. Continue to use brand name to attract Generation Y consumers (S1 O1).

2. Continue to expand product line in the US and abroad (S7, O7).

3. Develop new organic drinks (S1, O3).

1. Expand into international markets (W1, O5).

Threats S-T Strategies W-T Strategies

1. One production facility and four distribution centers affected in Louisiana from Hurricane Katrina.

2. Celebrities’ actions and public behavior.

3. A deteriorating economy.

4. Intense rivalry by new firms entering.

5. Coca-Cola has largest share market.

6. Losing KFC, Pizza Hut, and Taco Bell acquisitions.

7. Anti-American views by the Middle East (Mecca and Zam Zam Colas). 1. 1. Produce a cheaper brand of Pepsi (W1, T3, T5).

G. SPACE Matrix

y-axis = FS + ES = 5.4 + (-3.6) = 1.8

x-axis = CA + IS = -2.0 + (+4.6) = 2.6

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

I. The Internal-External (IE) Matrix

The IFE Total Weighted Score

Strong Average Weak

3.0 to 4.0 2.0 to 2.99 1.0 to 1.99

High I II III

3.0 to 3.99

PepsiCo Beverages

Medium IV V VI

The EFE Total Weighted Score 2.0 to 2.99 PepsiCo

Frito-Lay

Pepsi Co International

Low VII VIII IX

1.0 to 1.99

Quaker Foods

Grow and Build

Segments Revenue Profits (operating)

PepsiCo International $9,862M $1,323M

Frito-Lay $9,560M $2,389M

PepsiCo Beverages $8,313M $1,911M

Quaker Foods $1,526M $475M

J. QSPM

Strategic Alternatives

Key Internal Factors Weight Further Expand into International Markets Produce a Cheaper Brand of Pepsi Products

Strengths AS TAS AS TAS

1. Well-known brand 0.15 4.00 0.60 3.00 0.45

2. World leader in convenient food and beverages 0.08 4.00 0.24 1.00 0.08

3. Available in 200 countries 0.10 4.00 0.40 1.00 0.10

4. Powerful go to marketing 0.06 --- --- --- ---

5. Larger corporation than Coke 0.03 --- --- --- ---

6. Through diversification has reduced risk 0.03 2.00 0.06 4.00 0.12

7. Diverse line of products meeting different cultural needs 0.06 2.00 0.12 4.00 0.24

8. Great marketing plan consistent with celebrities in advertising 0.03 --- --- --- ---

9. Great organization chart 0.01 --- --- --- ---

10. Consistently pays cash dividends 0.04 --- --- --- ---

11. Sales grew on avg. of 16 percent for past 40 years 0.06 --- --- --- ---

12. Return to Shareholders grew 16 percent 0.06 --- --- --- ---

13. Lot of listing on Web site of different companies owned by Pepsi in different countries 0.03 --- --- --- ---

Weaknesses

1. Coke outsells Pepsi in all areas of the world 0.07 4.00 0.28 3.00 0.21

2. Pepsi has not been able to achieve 15 cent on annual increase in earnings 0.03 --- --- --- ---

3. Too much Goodwill 0.03 --- --- --- ---

4. Decrease in sales in other beverages 0.05 1.00 0.05 4.00 0.20

5. Information architecture is weak 0.02 --- --- --- ---

6. Net profit margin in below the competition’s 0.06 --- --- --- ---

SUBTOTAL 1.75 1.40

Key External Factors Weight Further Expand into International Markets Produce a Cheaper Brand of Pepsi Products

Opportunities AS TAS AS TAS

1. Retaining ‘Generation Y’ consumers. 0.10 --- --- --- ---

2. Companies such as Cadbury Schweppes can be purchased relatively cheaply. 0.06 3.00 0.18 2.00 0.12

3. Health-minded public. 0.08 --- --- --- ---

4. Reach teenagers through Pepsi Zone in malls and shopping centers. 0.08 --- --- --- ---

5. Easier to do business globally now than ever before. 0.08 4.00 0.24 2.00 0.16

6. Powerful go to market. 0.03 --- --- --- ---

7. Different cultures enjoy drinks with less sugar than Americans. 0.05 4.00 0.20 3.00 0.15

Threats

1. One production facility and four distribution centers affected in Louisiana from Hurricane Katrina 0.04 --- --- --- ---

2. Celebrities’ actions and public behavior 0.06 --- --- --- ---

3. A deteriorating economy 0.05 2.00 0.10 4.00 0.20

4. Intense rivalry by new firms entering 0.12 2.00 0.24 4.00 0.48

5. Coca-Cola has largest share market 0.15 3.00 0.45 4.00 0.60

6. Losing KFC, Pizza Hut, and Taco Bell acquisitions 0.06 --- --- --- ---

7. Anti-American views by the Middle East (Mecca and Zam Zam Colas) 0.04 3.00 0.12 1.00 0.04

SUBTOTAL 1.53 1.75

TOTAL ATTRACTIVNESS SCORE 3.28 3.15

K. Recommendations

• Expand further into international markets over a 5-year period by building 50 new bottling and processing companies at a cost of $4 billion. Focus on emerging markets where Coke is not as entrenched and increase advertising and marketing promotions in these areas at a cost of $200M.

• Produce a cheaper Pepsi brand of drinks and test market in the US at a cost of $500M.

L. EPS/EBIT Analysis

$ Amount Needed: $4,700M

Stock Price: $60

Tax Rate: 25%

Interest Rate: 7%

# Shares Outstanding: 1,659M

M. Epilogue

The three biggest sellers of bottled water in the U.S.--Nestlé, PepsiCo, and Coca-Cola --all introduced sugarless flavored water in 2005. All three companies are chasing a relatively small market because in 2004 (the latest available figures), the U.S. wholesale market for flavored water was only $170 million, versus $47 billion for soda, $14.4 billion for fruit beverages, and $9.2 billion for plain bottled water. As for growth, sales of flavored water could go to $800 million by 2009, says Beverage Marketing, a research firm.

On January 2, 2006, PepsiCo acquired Polish snack maker Star Foods for an undisclosed sum. One of Poland's leading makers of savory snacks, Star Foods was a privately held company owned by the Mitzalis family, Advent International, Copernicus Capital Partners, and Cazolico S.A. The acquisition strengthens PepsiCo’s position as Poland's market leader in potato chips and gives PepsiCo the largest position in the broader savory snack category, which includes potato chips, pretzels, and nuts. PepsiCo has sold Lay's potato chips in Poland since 1991.

In December 2005, Tropicana Products, Inc., a division of PepsiCo, introduced the first national orange juice with fiber. Tropicana Pure Premium Essentials® with Fiber delivers 3 grams of added fiber in every 8-oz. glass - as much fiber as is found in a medium-sized orange. Tropicana Products is the leading producer and marketer of branded fruit juices.

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