PEPSICO Diversification Strategy

INTERNATIONAL STRATEGIC MANAGEMENT

Clémentine BABONNEAU Alice BEZIRARD Léna BITTON Carole GUIMBART

How can PEPSICO improve its diversification strategy in 2008?

Strategic Diagnosis • External analysis • Internal company analysis

Alternatives

Recommendations

EXTERNAL EXTE RNAL ANALYSIS ANALYSIS

-MARKET TRENDS -PESTEL -OPPORTUNITIES & THREATS -PORTER’S 5 FORCES

• Diet and reduced

• Great-tasting • Gourmet flavor • Styles

calories food • Non-carbonated beverages

Consumer health and wellness concern

Consumers want to reward themselves

Ready to eat and ready to drink consumption

Consumer desire to escape from the norm and taste snacks from a wider, often global palate

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Political 

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Economic 

High growth potential of emerging markets

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But…strong competition to enter

Social 

Healthier lifestyles promote different patterns of consumption and represent new product opportunities

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But…less interest in sodas with high sugar content

Technological 

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Strong R&D departments to develop new products

Ecological 

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Protectionism in emerging markets

Environment friendly packaging solutions

Legal  

More and more protected consumers Stricter legislation to defend against obesity

Consumer lifestyle: • “Better for you” – “Good for you” opportunities • Changing lifestyles of consumers • Taste preferences from country to country: adaptation to the local tastes

International Expansion • Emerging markets: developing countries China, India, Russia, Mexico,

Brazil • Developed countries: growing markets in healthy snacks outside US : new consumers needs and expectations: reduce saturated fats, cholesterols, trans fats, simple carbohydrates “ China and Brazil would be the 2 largest international markets for snacks ”

Potential growth of markets: • Increasing consumption of water bottles in US • Increasing consumption of savory snacks like Cheetos cheese (expectation:

+27% by 2013) • Broadening the products: Avoid the dependence on US markets by going abroad

Awareness for healthy, sugar and salt free meals Decline in Carbonated Drink Sales Potential Negative Impact of Government Regulations • Legal barriers to enter new markets : protectionism • Legislation involving environmental, health, and safety may force a

reorganization in the industry

Intense Competition • Fast-food industry: fierce price competition and low profit margins • High rivalry between powerful global companies (The Coca-Cola

Company, Nestlé, Danone, Kraft Foods...). Risk of influence on pricing pricing, advertising, sales promotion initiatives

Potential Disruption Due to Labor Unrest • In 2008 a strike in India shut down production for nearly an entire

month

Threat of new entrants

+/Medium bargaining power -Dependence on raw materials -But…a lot of suppliers available

Bargaining power of suppliers

+ High -All kind of food depending on the taste -Pay attention to healthy and wellness categories

Rivalry among existing competitors

Threat of substitute products

-Low power of new entrants Few multinational groups own the largest part of the market share Possible entrants for niche markets or local markets

Bargaining power of buyers

++ Very high bargaining power (retailers) -Power of brand recognition as an argument to attract the final customer who is loyal -Depends on the size of the retailer

++ Very high rivalry -High diversification from each competitor -Few strong groups control the market

Share information and be transparent regarding the stakeholders  Be able to forecast the trends at a local and global level  Adapt to customer lifestyle and needs  Product innovation and diversification  Be visible everywhere  Good control over the manufacturing process to achieve economies of scale 

INTERNAL ANALYSIS

-ORGANIZATIONAL STRUCTURE -CORE COMPETENCIES -COMPETITIVE ADVANTAGES

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PepsiCo’s organizational structure & Net Revenues for each Business Segment

(in $ millions) in 2007:

$11,586 Frito-Lay North America

Salty Snacks brands

$15,798 Quaker Foods North America

Oat Food and Cereals brands

$10,230

$1,860

PepsiCo Beverages North America

Pepsi International

Non Alcoolics Beverages brands

Organizational profile: Diversification strategy = multi products & multi markets

• PepsiCo constantly improved its knowledge on the consumer

Market Research

behaviour by identifying trends such as healthier products: • New brand value: PepsiCo’s better -for-you & good-for-you  products

R&D: Product Innovation

• Launch of less saturated fat and less salted products answering to

Efficient Information System

• Close relationships with suppliers & customers under the Power of

International expansion Strategic acquisitions

the trends found it by « Consumer Insight dept » • Introduction of Lay’s traditional flavour with 50% less saturated   fat

One program that allow PepsiCo to have direct information from both retailers & customers

• PepsiCo has succeed in creating an international exposure

especially with Beverages & Salty snacks (increase of 22% in 2007)

• Those acquisitions allowed PepsiCo to gain synergy in its whole

business

Brand equity: -Awareness -Recognition -Perception

Brand equity

Differentiation: -High value products -Strong positioning

Differentation

Product diversity

Product diversity: - 3 Business Units - A wide and deep range of products

Competitive Advantages

Wide range of products Efficient identification of trends Reactive

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Proactive instead of

International Exposure High profit margins Total control on the several steps of the supply chains (allow them to control & reduce the production and delivery costs)

Relatively unsuccessful in increasing the worldwide awareness of Quaker Foods Wide In 2006, only 6 countries represented 75% of Quaker Foods International sales out of US Difficulties to find a synergy between their restaurants & beverages they sold

Total Net revenues of PepsiCo Inc. from 1998 to 2007: increased by approximately 77%

Net revenues by activity (2004-2007): Frito-Lay North America=21%

PepsiCo beverages North America=23%

Pepsi International=60%

Quaker Foods North America=22%

Price in the stock exchange was about $33 in 1999 & about $64 in 2008 (+ 120%)

GOOD FINANCIAL HEALTH WHICH ALLOWS THEM TO SELF FINANCE THEIR GLOBAL EXPANSION

-MAIN STRATEGIC CHOICES -ACTUAL STRATEGY -PEPSICO DIVERSIFICATION -PEPSICO CHALLENGES

1997 Restructuration of PepsiCo Focus on snacks and beverages

Since 1997 Diversification and acquisition strategies

Result 2008 Strategic realignment in order to improve the PepsiCo Profits

Strategic International acquisitions

Strong presence in mature and emerging markets

Focus on snacks and beverages

Relevant innovations in R&D

Large diversification of PepsiCo’s

products

Make healthy and wellness products

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Product differentiation to respond to health concerns (use of healthier oils, natural salty snacks) Research on new flavors and new recipes: in order to attract more customers With International acquisitions, PepsiCo offers a different kind of food and beverages

A GREAT SUCCESS

•China and Brazil would

•Understand local taste

be the two largest international markets for snack

To increase the market share in developing countries and continue the strong development in emerging countries

To manage efficiently the new six reporting segments •Frito lay North America,

Quaker Foods North America, Latin American Foods, PepsiCo Americas Beverages, UK and Europe, Middle East, Africa & Asia

To succeed in adapting to the customer tastes of  customers worldwide

To innovate in order to improve the quality of their products while keeping going through the large diversification

•new flavors, health and

wellness products

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Stock Price: in 2008 PepsiCo Drops his stock price in order to improve overall profitability Quaker brand: under distributed in international market Gatorade: only one brand in growing market, it‟s not enough!

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Operating margin are not maximized

Industry Attractiveness Factor

Weight

Attractiveness Rating

Weighted Industry Rating

Market size and projected growth

0.15

7

1.5

Intensity of competition

0.20

8

1.6

Strategic fits and resource fits with other industries in portfolio

0.15

5

0.75

Resource requirement

0.15

6

0.90

Emerging industry opportunities and threats

0.10

4

0.4

Seasonal and cyclical influences

0.05

2

0.1

Social, political ,regulatory, and environmental factors

0.15

3

0.45

Industry uncertainty and business risk

0.05

4

0.20

Sum of weights

Industry attractiveness rating

1.00

5.9

According to the rating scale, a result of 5.9 industry attractiveness rating is a

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•

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•

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We have defined 3 SBUs: Frito Lays Beverages Quaker

We considered both american and international markets

high

Question marks

Frito lays AMERICA

LEGEND

GREY : AMERICA BUSINESS Pink: INTERNATIONAL BUSINESS

    e      t     a      R       h      t     w     o     r       G      t     e       k     r     a      M

Low

Frito lays Int

Bever ages Int Quaker Int

Stars Quaker AMERICA

Beverages AMERICA

Garbage can dogs

Cash cows 1

Relative Market Share

-OBJECTIVES

Increase International Sales

Improve operating margin

Reinforce the international presence

Manage the stock price

Choice number 1:

• Adapt their products

to the local customers

Choice number 2:

• International

acquisitions

• Forecast new

Choice number 3:

trends: • Improve the healthy products or make ecological packaging for egs

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Adapt their products to local customers Understand the consumer taste preference

Key

to expand into international market Taste are different in function of each country Follow the customer „s taste in order to attract them, in Mexico : spicy food, in Europe: healthy food with less saturated fat

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International acquisitions Increase PepsiCo presence

Reinforce their presence on new markets = Internationalization Increase the relationship with local companies in order implement easier New target: emerging countries

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Forecast the trends: Rely on marketing intelligence and research & development

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New customers expectations

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Nowadays, the

customer‟s taste is changing: 

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PepsiCo has to focus on healthy products in order to respond to consumer health and wellness (reduce the consumption of statured fats, cholesterol, trans fat, and simple carbohydrates). Improve the packaging in order to follow more and more environmental criteria Communication more about the sustainable efforts

Criteria

Weight

Alternative 1

Alternative 2

Alternative 3

COST

0,20

4

1

5

CONTROL

0,10

6

7

8

RISK

0,15

3

2

4

TIME

0,10

5

2

3

INTERNATIONALIZATION

0,20

9

10

5

BRAND EQUITY

0,05

8

9

10

FOLLOW CUSTOMERS‟

0,20

5

4

9

1

5,55/10

4,65/10

6,2/10

NEW NEEDS

TOTAL

ALTERNATIVE 1. Adaptation to local customers

ALTERNATIVE 3. Forecast the trends

ALTERNATIVE 2. International acquisitions

According to our analysis, the best choice for the company would be:

To try to forecast customer‟s trends and

to anticipate by providing new products through innovation How to do it ?

Rely on marketing research in order to detect new customer‟s needs

Rely on R&D to create new products suiting the needs