Case 23 Pepsico's

BFV GROUP : Beatrice Teresa Colantoni, Francesco Morgia, Valentina Palmerio. PepsiCo’s Business Case – CASE 23 PEPSICO’S HISTORY. PepsiCo, Inc., was established in 1965 when PepsiCola and Frito-Lay shareholders agreed to a merger between the salty-snack icon and soft-drink giant. The new company was founded with annual revenues of $510 million and such well-known brands as Pepsi-Cola, Mountain Dew, Fritos, Lay’s, Cheetos, Ruffles, and Rold Gold. By 1971, PepsiCo had more than doubled its revenues to reach $1 billion. The company began to pursue growth through acquisitions outside snacks and beverages as early as 1968, but its 1977 acquisition of Pizza Hut significantly shaped the strategic direction of PepsiCo for the next 20 years. The acquisitions of Taco Bell in 1978 and Kentucky Fried Chicken in 1986 created a business portfolio described by Wayne Calloway (PepsiCo’s CEO between 1986 and 1996) as a balanced three-legged stool. Calloway believed the combination of snack foods, soft drinks, and fast food offered considerable cost sharing and skill transfer opportunities. PepsiCo strengthened its portfolio of snack foods and beverages during the 1980s and 1990s, adding also quick-service restaurant. By 1996 it had become clear to PepsiCo management that the potential strategic-fit 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. Soon after the spinoff of PepsiCo’s fast-food restaurants was completed, Enrico acquired Cracker Jack, Tropicana, Smith’s Snackfood Company in Australia, SoBe teas and alternative beverages, Tasali Snack Foods (the leader in the Saudi Arabian salty-snack market), and the Quaker Oats Company. PEPSICO’S STRATEGY. PepsiCo’s corporate strategy has diversified the company into salty and sweet snacks, soft drinks, orange juice, bottled water, ready-to-drink teas and coffees, purified and functional waters, hot and ready-to-eat breakfast cereals, grain-based products and breakfast condiments. Most PepsiCo brand 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, internal expansion, and strategic acquisition. The main objective of product reformulation and innovation is to make products healthier (better- for-you and good-for-you products), trying to match the new needs and tastes of customers, and trying to grow awareness of the nutritional content of snack foods. Over time, PepsiCo divested its group of fast-food restaurant businesses (KFC, Pizza Hut, and Taco Bell) to focus on its core soft-drink and snack-food businesses, where their specialized resources and capabilities could add more value. The economies of scale can be specified as the main source of value for PepsiCo derived from inbound logistics primary activity. PepsiCo also benefits from locating its production sites within close geographical proximity to the main sources of raw materials in order to save on transportation costs. PepsiCo’s Performance with Purpose plan utilized investments in manufacturing automation, a rationalized global manufacturing plan, reengineered distribution systems, and simplified organization structures to drive efficiency. In addition, the company’s Performance with Purpose plan was focused on minimizing the company’s impact on the environment by lowering energy and water consumption and reducing its use of packaging material, providing a safe and inclusive workplace for employees, and supporting and investing in the local communities in which it operated. PepsiCo had been listed on the Dow Jones Sustainability World Index for seven consecutive years and listed on the North America Index for eight consecutive years as of 2013. At PepsiCo, they believe that there is an opportunity to change how the world produces, distributes, consumes and disposes of foods and beverages in order to tackle the shared challenges we face. They aim to use their scale, reach and expertise to help build a more sustainable food system; one that can meet human needs for nutrition and enjoyment, and continue to drive economic and social development, without exceeding the natural boundaries of the planet. PEPSICO’S MAIN GOALS: ➔ Winning in the marketplace, being more consumer-centric and accelerating investment for top-line growth. • Broaden their portfolios to win locally in convenient foods and beverages • Fortify their North American businesses • Accelerate international expansion, with disciplined focus on 'right-to-win' markets ➔ Transforming their capabilities, cost and culture by operating as one PepsiCo, leveraging technology, winning locally and globally enabled. • Drive savings through holistic cost management to reinvest to win in the marketplace • Develop and scale core capabilities globally through technology • Build differentiated talent and culture ➔ Integrating purpose into their business strategy and doing even more for the planet and for their people. PEPSICO’S DIVISIONS. PepsiCo’s company is made up of seven divisions: PepsiCo Beverages North America; Frito-Lay North America; Quaker Foods North America; Latin America; Europe; Africa, Middle East and South Asia; and Asia Pacific, Australia/New Zealand and China. Each of these divisions has its own unique history and way of doing business. 1) Frito-Lay North America manufactured, marketed and distributed snack foods. The main strategies of the brand are: sustainable agriculture, reduction of water use intensity by 7% year of year, reduction of the environmental impact (converting production to 100 natural gas), investing in their communities and volunteering, developing healthier products, and using sustainable packaging (plastic-free); 2) Quaker Foods North America is dedicated to making hearty oats delicious and convenient, and it has remained a leading brand in oats by developing everything from breakfasts to snacks to tasty recipe ideas. Quaker Oats developed a Center of Excellence to explore the relevance and benefits of oats through science, agriculture and innovation, giving to its customers healthy and high-quality products, in order to pursue the well-being. 3) North American Beverages is the second largest seller of non-alcholic beverages in North America during 2017 (after Coca Cola). PepsiCo plays an important role in helping people lead healthier lives. In their beverage business, they believe they can help in three important ways – in the product choices they offer, the information they provide, and the way they market their products.; 4) Latin America manufactured, marketed and distributed snack foods and many Quaker- branded cereals and snacks in Latin America, employing more than 70,000 employees in 34 countries and generating $7.2 billion dollars in sales. Over the course of more than 100 years, PepsiCo's Latin America business has grown to become one of the strongest foods and beverage manufacturers in the region, by working closely with local entrepreneurs and investing in lasting win-win partnerships with our suppliers and farmers, investors, consumers and communities; 5) Europe Sub-Saharan Africa (ESSA), which includes all of our beverage, food and snack businesses in Europe and Sub-Saharan Africa. PepsiCo makes, markets, distributes, and sells a number of leading snack food brands including Lay’s, Walkers, Doritos, Cheetos, and Ruffles, as well as many Quaker-branded cereals and snacks, through consolidated businesses as well as through non-controlled affiliates in the ESSA region. Its offerings also include beverage concentrates, fountain syrups, and finished goods under various brands. The company has an international joint venture with Unilever (under the Lipton brand name) through which it sells ready-to-drink tea products. Europe and Sub-Saharan Africa is likely to be the fastest growing revenue segment for PepsiCo in the near term. While PepsiCo’s total revenues increased at a CAGR of 1.5% from $62.8 billion in 2016 to $64.7 billion in 2018, ESSA’s revenues increased at a much higher CAGR, to $11.5 billion in 2018; 6) Asia, Middle East and North Africa (AMENA), which includes all of our beverage, food and snack. PepsiCo Asia, Middle East and North Africa (AMENA) covers four regions; Asia Pacific, Greater China, India, and the Middle East and North Africa region. Today, PepsiCo AMENA, either independently or in conjunction with third parties, makes, markets, distributes and sells a number of leading snack food brands including Lay’s, Kurkure, Chipsy, Doritos, Cheetos and Smith’s, and many Quaker-branded cereals and snacks. PepsiCo AMENA also makes, markets, distributes and sells beverage concentrates, fountain syrups and finished goods under various beverage brands including Pepsi, Pepsi Max, 7UP, Diet Pepsi, Mirinda, Mountain Dew, Aquafina, Slice and Tropicana. *The last two divisions have been divided in a different way, in 2019: Europe; Africa, Middle East and South Asia; Asia Pacific, Australia/New Zealand and China. North America Beverages and Frito-Lay North America segments are the biggest sources of PepsiCo revenues, with 58% of net revenues. Does PepsiCo’s portfolio exhibit good strategic fit? What value-chain match-ups do you see? What opportunities for skills transfer, cost sharing, or brand sharing do you see? Yes, Pepsico’s portfolio exhibit good strategic fit because Pepsico’s management

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