Case PepsiCo

PepsiCo – 2009 Case Notes Prepared by: Dr. Mernoush Banton Case Author: John & Sherry Ross

A.

Case Abstract

Pepsi (www.pepsico.com (www.pepsico.com)) is a comprehensive strategic management case that includes the company’s calendar December 31, 2008 financial statements, 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 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 New York Stock Exchange under ticker symbol PEP.

B.

Vision Statement (Actual)

 “PepsiCo’s responsibility responsib ility is to continu ally improve all aspects of o f the world in which we operate – environment, social, economic – creating a better tomorrow than today. Our vision is put into action through programs and a focus on environmental stewardship, activities to benefit society, and a commitment to build shareholder value by making PepsiCo a truly sustainable company.”

Vision Statement (Proposed) To become the leading producer and marketer of food and beverage products in the world.

C.

Mission Statement (Actual)

 “Our mission is to be the world’s premier consumer products company focused on convenient foods and beverages. We seek to produce financial rewards to investors 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 do, we strive for honesty, fairness and integrity.” integrity.”

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

1. 2. 3. 4. 5. 6. 7. 8. 9.

D.

Customer Products or services Markets Technology Concern for survival, profitability, growth Philosophy Self-concept Concern for public image Concern for employees

External Audit

CPM – Competitive Profile Matrix PepsiCo Critical Success Factors Market Share

Coca-Cola

Kraft

Weight

Rating

Weighted Score

Rating

Weighted Score

Rating

Weighted Score

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 Organizational Structure Price Competitiveness Financial Position Customer Loyalty Global Expansion Advertising

0.02

2

0.04

3

0.06

1

0.02

0.09

2

0.18

3

0.27

4

0.36

0.09

2

0.18

3

0.27

1

0.09

0.1

3

0.30

2

0.20

1

0.10

0.08

1

0.08

3

0.24

2

0.16

0.12

3

0.36

4

0.48

2

0.24

0.09

3

0.27

4

0.36

1

0.09

0.08

2

0.16

3

0.24

1

0.08

0.05

2

0.10

3

0.15

1

0.05

0.09

3

0.27

2

0.18

1

0.09

Social Responsibility Quality of management Size of product line Total

1

2.42

3.21

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 3. Purchase smaller, successful developers of competing products

1.75

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. 2. 3. 4. 5. 6.

Regulation – FDA, Clean Water Act, etc. Foreign exchange rates in current economy Raw materials supplies – clean water Changes in consumer taste Health issues – more consumers are shifting to healthy food 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

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 3. Purchase smaller, successful developers of competing products

0.08

3

0.24

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

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

Opportunities

Threats

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

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

0.04

2

0.08

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

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 competition

0.06

3

0.18

(Coke)

and

indirect

(Kraft)

Total

1.00

2.53

Positioning Map

Customer Loyalty (High)

Pepsi Coke

Weak Product Variety

Strong Product Variety

Customer Loyalty (Low)

E.

Internal Audit Strengths 1. 2. 3. 4. 5. 6. 7. 8. 9.

Name recognition both domestically and internationally Stronger than industry average in price to cash flow ratio Strong marketing and promotion advertising campaigns Reliable and established distribution channel management Has diverse business units which reduces overall business risks Recent reorganization Owns more bottling companies than 10 years ago Sales increased by approximately US$3.5 billion from 2007 to 2008 Increase in net profit for the last consecutive years

Weaknesses 1. 2. 3. 4. 5.

Short term liability of US$369 due in 2009 Increasing long term debt by US$3.6 billion from 2007 to 2008 Increase in other liabilities by US$2.3 billion from 2007 to 2008 Decline in carbonated beverages from 2006 to 2008 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

Price/Cash Flow Ratio

14.00

13.10

13.70

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 Equity (%)

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

on Return on Interest Assets (%) Coverage

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

and

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 billion from 2007 to 2008

US$3.5

0.07

4

0.28

9. Increase in net profit for the last consecutive years

0.06

3

0.18

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

0.06

2

0.12

Strengths 1. Name recognition internationally

both

domestically

Weaknesses

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 Total

0.07

1

0.07

F.

1.00

2.91

SWOT Strategies 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

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)

and the compound annual growth rate of the market in the period 2008-2013 is predicted to be 5 percent 3. Purchase smaller, successful developers of competing products 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 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

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)

G.

SPACE Matrix

FS Conservative

Aggressive

7

5 4

2 1

CS

IS -7

-6

-5

-4

-3

-2

-1

1

2

3

4

5

6

7

-1 -3 -4 -6

Defensive

-7

Competitive

ES Financial Stability (FS) Return on Investment Leverage Liquidity Working Capital Cash Flow

5 5 5 5 4

Environmental Stability (ES) Unemployment Technological Changes Price Elasticity of Demand Competitive Pressure Barriers to Entry

-4 -3 -4 -5 -4

Financial Stability (FS) Average

4.8

Environmental Stability (ES) Average

-4

Competitive Stability (CS) Market Share Product Quality Customer Loyalty Competition’s Capacity Utilization Technological Know-How

-2 -2 -2 -1 -3

Industry Stability (IS) Growth Potential Financial Stability Ease of Market Entry Resource Utilization Profit Potential

5 4 3 3 3

Competitive Stability (CS) Average

-2

Industry Stability (IS) Average

3.6

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

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

H.

Grand Strategy Matrix Rapid Market Growth Quadrant I 

Quadrant II 

Strong Competitive Position

Weak Competitive Position

Quadrant III 

1. 2. 3. 4. 5. 6. 7.

Market development Market penetration Product development Forward integration Backward integration Horizontal integration Related diversification

Slow Market Growth

Quadrant IV 

I.

The Internal-External (IE) Matrix The IFE Total Weighted Score

Strong 3.0 to 4.0 I

Average 2.0 to 2.99 II

Weak 1.0 to 1.99 III

PepsiCo Beverages

High 3.0 to 3.99

The EFE Total Weighted Score

IV

IV

PepsiCo International

PepsiCo

VII

VIII

VI

Medium 2.0 to 2.99

Low 1.0 to 1.99

IX

J.

QSPM

Key Factors 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 3. Purchase smaller, successful developers of competing products 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 TOTAL 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

Weight

Continue international expansion AS TAS

Purchase smaller companies offering healthy products AS TAS

0.08

4

0.32

1

0.08

0.08

4

0.32

2

0.16

0.06

1

0.06

3

0.18

0.08

1

0.08

4

0.32

0.08

1

0.08

3

0.24

0.06 0.05

--3

--0.15

--1

--0.05

0.07 0.09 0.08

1 1 1

0.07 0.09 0.08

3 3 3

0.21 0.27 0.24

0.04

---

---

---

---

0.07

1

0.07

4

0.28

0.06 0.04

4 ---

0.24 ---

2 ---

0.12 ---

0.06

1

0.06

4

0.24

1.00

1.62

2.39

0.09

4

0.36

1

0.09

0.06

---

---

---

---

0.08

---

---

---

---

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 SUBTOTAL SUM TOTAL ATTRACTIVENESS SCORE

K.

0.07

2

0.14

4

0.28

0.08

---

---

---

---

0.08 0.07

--1

--0.07

--3

--0.21

0.07

---

---

---

---

0.06

1

0.06

3

0.18

0.07 0.09

-----

-----

-----

-----

0.06

3

0.18

1

0.06

0.05

1

0.05

3

0.15

0.07

---

---

---

---

1.00

0.86 2.48

0.97 3.36

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.

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

$7,000,000,000 0

$8,000,000,000 0

$9,000,000,000 0

$7,000,000,000 25,000,000

$8,000,000,000 25,000,000

$9,000,000,000 25,000,000

EBT Taxes

7,000,000,000 1,876,000,000

8,000,000,000 2,144,000,000

9,000,000,000 2,412,000,000

6,975,000,000 1,869,300,000

7,975,000,000 2,137,300,000

8,975,000,000 2,405,300,000

EAT # Shares EPS

5,124,000,000

5,856,000,000

6,588,000,000

5,105,700,000

5,837,700,000

6,569,700,000

1,608,147,303 3.19

1,608,147,303 3.64

1,608,147,303 4.10

1,600,000,000 3.19

1,600,000,000 3.65

1,600,000,000 4.11

EBIT Interest

70 Percent Stock - 30 Percent Debt

Recession

Normal

Boom

70 Percent Debt - 30 Percent Stock

Recession

Normal

Boom

$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 EBT

20,000,000 6,980,000,000

20,000,000 7,980,000,000

20,000,000 8,980,000,000

5,000,000 6,995,000,000

5,000,000 7,995,000,000

5,000,000 8,995,000,000

Taxes EAT # Shares EPS

1,870,640,000 5,109,360,000

2,138,640,000 5,841,360,000

2,406,640,000 6,573,360,000

1,874,660,000 5,120,340,000

2,142,660,000 5,852,340,000

2,410,660,000 6,584,340,000

1,605,703,112 3.18

1,605,703,112 3.64

1,605,703,112 4.09

1,602,444,191 3.20

1,602,444,191 3.65

1,602,444,191 4.11

EBIT

Recession

Normal

Boom

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.