2 Letter to Shareholders 10–11 Financial Highlights 12 The Breadth of the PepsiCo Portfolio 14 Reinforcing Existing Value Drivers 18 Migrating Our Portfolio Towards High-Growth Spaces Table 22 Accelerating the Benefits of of Contents One PepsiCo 24 Aggressively Building New Capabilities 28 Strengthening a Second-to-None Team and Culture 30 Delivering on the Promise of Performance with Purpose 33 PepsiCo Board of Directors 34 PepsiCo Leadership 35 Financials Dear Fellow Shareholders, Running a company for the long • We delivered +$1 billion savings term is like driving a car in a race in the first year of our productiv- that has no end. To win a long race, ity program and remain on track you must take a pit stop every now to deliver $3 billion by 2015; and then to refresh and refuel your • We achieved a core net return car, tune your engine and take other on invested capital3 (roic) of actions that will make you even 15 percent and core return on faster, stronger and more competi- equity3 (roe) of 28 percent; tive over the long term. That’s what • Management operating cash we did in 2012—we refreshed and flow,4 excluding certain items, refueled our growth engine to help reached $7.4 billion; and drive superior financial returns in • $6.5 billion was returned to our the years ahead. shareholders through share repurchases and dividends. We invested significantly behind our brands. We changed the operating The actions we took in 2012 were model of our company from a loose all designed to take us one step federation of countries and regions further on the transformation to a more globally integrated one to journey of our company, which enable us to build our brands glob- we started in 2007. Back then, we ally, deliver breakthrough innovation recognized that the market environ- to consumers and unleash significant ment was rapidly shifting around us. productivity. Simply put, we took We realized that in order to stay in actions that we believe set ourselves front, we would need to make up for long-term sustainable growth significant changes. We set our- and superior performance. selves a dual challenge—to renew our highly successful company to I am delighted to report that our position it for long-term advantage performance in 2012 reflected our and growth while continuing to de- operational excellence and was in liver strong and consistent financial line with our expectations and guid- results during the transformation. ance on every key metric: We have eagerly embraced this • Our organic revenue was up 5 challenge and made the required 1 Pictured: Indra K. Nooyi, percent; investments. Our journey to date PepsiCo Chairman and • Core earnings per share (eps) has shown significant results. We Chief Executive Officer were $4.10;2 have reinforced our existing 2 2012 PEPSICO ANNUAL REPORT business while also shifting our of diverse ethnic and immigrant com- portfolio to attractive growth munities across countries. spaces. We have built out the key capabilities we need to compete in Intensifying consumer and govern- the future. We have raised our ment focus on health and wellness capacity to drive continuous is changing the relative growth productivity. We have strengthened trajectory of our categories and Organic revenue was up our talent pool across the organiza- products. Consumers are clearly 5%5 percent1 in 2012. tion, and, by no means least, we changing their habits, preferences have embedded our vision of and consumption patterns. Food Performance with Purpose into all safety and security are now front of our actions and practices. and center in the minds of govern- ments and consumers, increasing That is what we have achieved so the need for robust systems within far, and it is considerable. We are companies to ensure ingredient Core earnings per share (eps) $4.102 were $4.10 in 2012. an exciting company with a strong and product traceability. Sustained foundation and track record. But commodity price increases and as I look forward into 2013 and volatility have challenged company beyond, it is clear that we still have cost structures. Meanwhile, there is further to go on our journey. Our a strong and growing environmental +$1 billion$1B in savings delivered in transformation must continue. consciousness emerging in societies the first year of our productivity around the world as the focus on program and remain on track to The Environment in water use, waste disposal (espe- deliver $3 billion by 2015. Which We Operate cially of plastic) and energy use by Over the past several years, a industry receives additional scrutiny. number of forces have combined to radically reshape the external Lastly, the global retail environ- environment in which the food and ment is transforming. In emerg- Achieved28% a core net return beverage industry operates. These ing and developing markets, the 3 changes have had a major impact growth of organized modern trade on invested capital (roic) of 15 percent and core return on on where and how companies must is beginning to slowly replace tradi- equity3 (roe) of 28 percent. compete to survive and thrive. Global tional mom and pop stores, and in macroeconomic growth has slowed developed markets, new discount significantly, and the outlook remains channels like hard discounters and mixed, particularly in developed dollar stores are rapidly growing. markets. Global economic power Additionally, online retailing is is becoming more distributed, with beginning to make inroads into the East becoming a larger player in our categories while social media Management operating cash the world. The demographic equa- amplifies positive messages and $7.4B4 flow , excluding certain items, tion in the West is shifting, with an rumors in the blink of an eye. reached $7.4 billion. increasing share of consumption in the hands of boomers, women and The combination of these shifts has smaller households, and rapid growth put considerable pressure on the 1 Organic results are non-GAAP financial measures that exclude certain items. See page 60 for a reconciliation to the most directly comparable financial measure in accordance with GAAP. 2 Core results are non-GAAP financial measures that exclude certain items. See page 58 for a reconciliation to the most directly comparable financial measure in accordance with GAAP. 3 Core results are non-GAAP financial measures that exclude certain items. See pages 106-107 for reconciliations to the most directly comparable financial measures in accordance with GAAP. $6.5B$6.5 billion was returned to 4 Represents a non-GAAP financial measure that excludes certain items. See page 67 for a reconciliation shareholders through share to the most directly comparable financial measure in accordance with GAAP. repurchases and dividends. 2012 PEPSICO ANNUAL REPORT 3 food and beverage industry. The company for long-term growth and paign, which puts fan-developed growth outlook in some developed profitability in this volatile and chal- ads on air during the big game. markets and categories has slowed lenging environment. In 2012, Doritos fan-created ads significantly, while emerging and placed first on the traditional and developing markets require new 1. We Reinforced Our Existing online Ad Meter ranking. In 2013, skills for success. Traditional ap- Value Drivers a “Crash the Super Bowl” Doritos proaches and legacy capabilities are We refocused our efforts on our fan-created ad ranked #1 as “most no longer sufficient to compete in key global brands and categories liked” and “most memorable” in the these spaces. in our most important developed Nielsen ratings. markets to drive profitable growth. But these changes also have given Most importantly, our goal is to rise to unparalleled opportunities for We are the #1 macrosnack player make the best savory snacks in PepsiCo. For one, the convenience in many developed markets in the the market. We eliminated the use trend is accelerating around the world, world. Our highly profitable snacks of partially hydrogenated cooking driving the growth of our catego- business has a strong stable of oils used to make savory snacks in ries. The strong outlook in emerging much-loved megabrands—Lay’s, North America, dramatically reduc- and developing markets for all our Doritos, Cheetos and SunChips—and ing trans fats. Additionally, we have products and the demand for Good- a structurally advantaged go-to-mar- reduced saturated fat levels and for-You products and categories in ket system in many major markets are reducing the sodium content of key markets also present major such as the U.S., Canada, the U.K. and our savory snacks, and we are dial- growth opportunities. Other potential Australia, among others. We have ing up baked offerings. new areas of expansion for us are been concentrating our insights, premium-priced products, products marketing and innovation resources Our developed market beverage for aging populations and value offer- behind our powerhouse brands and business remains large and profit- ings for those with lower incomes. key markets to successfully grow able. Across our major beverage demand and our share. markets, we revamped our invest- As a global company with positions ment to strengthen our key global in every key market in the world, As a result of our consistent invest- beverage brands, which include PepsiCo’s sheer scale as well as ments over the years, Lay’s is the #1 Pepsi, Mountain Dew, Sierra Mist, product and geographic diversity snack food brand in the world; Lay’s, 7UP (outside the U.S.), Starbucks give us the ability to power through Doritos and Cheetos are lovemarks and Lipton. We bought back country-specific trends and still in many countries in which they op- bottlers in North America and deliver superior returns. Our iconic erate, and a brand such as Tostitos Europe to unlock large, underex- brands are trusted in every country in the U.S.