PEPSI CO INC.
INTRODUCTION
In 1772,, the British scientist invented a method of "pushing" carbon dioxide into water by dissolving it under pressure, thus creating fairly long-lasting bubbles. The technique led to development of the soft-drink industry. Companies that manufacture nonalcoholic beverages and carbonated mineral waters or concentrates and syrups for the manufacture of carbonated beverages comprise the soft drink industry. By the beginning of the 19th century, carbonated water was being made commercially in France and North America; shortly thereafter, flavors (normally fruit concentrates) were added to enliven the taste. In the 1820s, small carbonated bottling operations were established in Canada, producing carbonated drinks in refillable bottles that were merchandised as medicinal elixirs or tonics. Most soft drinks are still carbonated to give drinks a "tangy bite" and to stimulate the tongue. Furthermore, because scent is an important part of taste, the flavors carried as vapors in the bubbles enhance taste.
Soft drink industry is probably the widest and the deepest base in the world that flooded with so many categories. The costumer base for soft drinks is a whopping 95% of regular users in the United State. Today, the two largest players the Coca-Cola and the Pepsi-Cola dominate soft drink industry.
PepsiCo Inc.
In early 1890s, a pharmacist founded the Pepsi-Cola business beverage in New Bern, North Carolina in the United States. Pepsi-Cola was originally called “Brad’s drink”. On August 28, 1898, Brad’s drink was changed to “Pepsi Cola”. Pepsi was initially intended to cure stomach pains. Bradham coined the name Pepsi from dyspepsia (stomachache or indigestion) ( 2005). PepsiCo, Inc. was founded in 1965 through the merger of Pepsi-Cola and Frito-Lay. Currently, PepsiCo consists of major segments of products: the snack food of Frito-Lay North America and Frito-Lay International; the beverage of Pepsi-Cola North America, Gatorade/Tropicana North America and PepsiCo Beverages International; and Quaker Foods North America, manufacturer and marketer of ready-to-eat cereals and other food products.
Through its subsidiaries and markets, PepsiCo sells and distributes salty and sweet snacks in the United States and international. Its manufactures concentrates of brand Pepsi, Mountain Dew and other brands for sale too. PepsiCo is a world leader in convenient foods and beverages industry, with annual revenues of about $27 billion and over 143,000 employees all over the world. PepsiCo brands are available in nearly 200 countries and territories. During the year 1995 to 2000, PepsiCo have conducted several acquisitions and merger. One of them in 1998, acquiring Tropicana Products from Seagram Company Ltd., was the biggest acquisition ever undertaken by PepsiCo. This resulted in a large amount of cash outflow and a new segmentation of the business structure, which ultimately led to a fluctuated financial report.
ECONOMIC BACKGROUND
Demand and Supply
Pepsi has four soft drinks in the top ten beverages in the world. These brands are Pepsi, Mountain Dew, Diet Pepsi, and Caffeine Free Diet Pepsi. Pepsi also has the #1 tea in the United States, Lipton Tea. Some other strong brands are All Sport, Slice, Tropicana, Starbucks, Aquafina and a license agreement with Ocean Spray juices .Pepsi Cola Company now produces and markets nearly 200 refreshment beverages to retail, restaurants and food service customers in more then 190 countries and territories around the world and generates revenue of over 18 billion dollars. According to company statistics, more than half of all soft-drink buyers purchase six or more different brands, and more than 80 percent of soft-drink buyers purchase three or more brands.
Price
Prices of Pepsi brands in BD's top-10 declined at slightly greater rate than prices of Coke's brands. Coke Classic was down -3.5%; Pepsi down -3.6%. Diet Coke down -3.8%; Diet Pepsi down -3.9%. Sprite down -2.1%; Mt Dew down -4.9%. CF Diet Coke down -3%; CF Diet Pepsi -3.7%. Pepsi's view. At PepsiCo's 6/4/97 meeting with Wall Street analysts, PepsiCo CEO Roger Enrico, according to analysts, says Pepsi won't "allow its market position to be threatened by Coke's aggressive pricing." Enrico declares: "If Coke goes to zero, we go to zero. Our nuclear bomb is as big as theirs." Pepsi CEO reportedly calls Coke system's CSD pricing "irrational." (1999). The table is shown below.
Average Price Per 288-oz
Price
$ +/-
% +/-
Classic
$ 5.47
-0.20
-3.5%
Pepsi
$ 5.43
-0.20
-3.6%
Diet Coke
$ 5.61
-0.22
-3.8%
Sprite
$ 5.50
-0.12
-2.1%
Dr Pepper
$ 5.57
-0.21
-3.6%
Mt Dew
$ 5.63
-0.29
-4.9%
Diet Pepsi
$ 5.64
-0.23
-3.9%
7UP
$ 5.53
-0.17
-3.0%
CF Diet Coke
$ 5.47
-0.17
-3.0%
CF Diet Pepsi
$ 5.54
-0.21
-3.7%
PL cola
$ 3.76
-0.12
-3.1%
Production Costs
Pepsi-Cola International (PCI) recorded an unusual charge of $218 million or 14 cents per share for the fourth quarter of 1998 to reflect asset impairment and the cost of restructuring of its operations there. However, in this first quarter of 1999, Pepsi-Cola International showed improvements. Their bottler case sales advanced by 2%, the seventh consecutive quarter of growth and operating profits increased by $6, totaling to $16 million.
Production costs are reported in selling, general and administrative expenses and include costs of advertising and other marketing activities. Advertising expenses were $1.9 billion in 1998 and $1.8 billion in both 1997 and 1996. (PepsiCo Inc., Annual Report). Deferred advertising expense, classified as prepaid expenses in the Consolidated Balance Sheet, was $34 million in 1998 and $53 million in 1997. Deferred advertising costs are expensed in the year first used and consist of:
- media and personal service prepayments,
- promotional materials in inventory, and
- production costs of future media advertising.
Property, Plant and Equipment, net
1998
.
1997
Land
$
460
.
$
365
Buildings and improvements
3,114
.
2,623
Machinery and equipment
8,806
.
7,513
Construction in progress
730
.
793
$
13,110
.
$
11,294
Accumulated depreciation
(5,792
)
(5,033
)
$
7,318
.
$
6,261
Elasticity and Profitability
1995
1996
1997
1998
1999
2000
Profit Margin
8%
6%
10%
9%
10%
11%
The profit margin of the PepsiCo grows steadily almost every year except the 2% decrease in 1996 and 4% increase in 1997. In 1996, the company’s sales rose 5% to nearly $32 billion, but earnings fell 28% down to $1.1 billion. If one-time charge was excluded, earnings declined 6% to $1.9 billion. The reason is that Pepsi-Cola International had dramatic losses. A big bottler in Brazil and Argentina in which the company had an ownership interest ran into major financial difficulties. Also in 1996, Pizza Hut and Taco Bell, the subsidiary companies of Pepsi-Cola, suffered volume declines, resulting in lower sales and profits in U.S. restaurant business. All of the above reasons lead to the decreasing of net income. However, in 1997, PepsiCo installed over 150,000 beverage vending machines and coolers in North America. They also formed a team to expand fountain beverage business in restaurants and foodservice, where historically their bottling contracts made it hard to serve the thousands of accounts requiring delivery to a central commissary. Changing the contracts created a long-term growth opportunity. Moreover, Pepsi-Cola also began their national rollout of Aquafina bottle water. All of these marketing strategies increased its sales in 1997 dramatically, and lead to the increase of its net income.
Earnings Estimates
Qtr(12/05)
Qtr(3/06)
FY(12/05)
FY(12/06)
Average Estimate
0.65
0.60
2.65
2.94
Number of Analysts
12
3
12
14
High Estimate
0.71
0.60
2.71
3.02
Low Estimate
0.63
0.59
2.61
2.85
Year Ago EPS
0.56
0.53
2.24
2.65
Growth Rate
16.07%
12.58%
18.53%
10.71%
ECONOMIC PROBLEM FACING PEPSI
Franchise System
The former strength that has been credited for most of PepsiCo success in the past has now become a weakness for Pepsi. This is the franchise system. The franchise system in Pepsi Corporate view has become a liability. Pepsi in today’s market must be able to act as one instead of several separate units. The franchise system has become a hindrance to Pepsi because many of these franchises have become very strong and will not be dictated by PepsiCo on how to handle their operations. Some of these franchises are unwilling to support certain Pepsi products and at times produce their own private label products that are in direct competition with Pepsi products. Furthermore, the franchisees are not willing to make capital expenditures to keep up with Coca-Cola who is a firm believer in reinvesting into their infrastructure (Coca Cola at present time does not operate a franchise bottling system).
International Competition
Pepsi versus Coke has been one of the highest-profile, highest-stakes marketing confrontations witnessed in any industry: "the cola-wars"- the only war where no one gets hurt. Coke has been winning the overall battle, but Pepsi does have its victories. Internationally Coke's market share increased to 49.2% last year compared to Pepsi's rate, flat at 15.7%. Coke sold $12.7 billion worth of products internationally, while Pepsi's totaled $3.2 billion. From this Coke pockets $.30 for every dollar, compared to Pepsi of less than $.07 per dollar
Unfortunately, for Pepsi they were a “Johnny Come Lately” into this arena. Pepsi has tried to enter this market by trying to do in three years what took Coke 50 years to do. This area will take years for Pepsi to mature simply due to Coke’s dominance in the international market and the strong ties that Coke has developed with these markets and their governments.
Supply of Raw Materials
Pepsi is also facing the problem concerning environmental issues like the supply of raw materials to produce their products. If Pepsi fails to help in environmental issues, the situation it had been during World War might happen again when they almost went out of business because of the shortage of sugar.
SOLUTION
Franchising System
First the franchise system is should be dismantled and be replaced with one bottling unit across North America. Pepsi Chairmen and chief executive Craig Weathrup will run this. North American President will head up the concentrate (fountain) end for Pepsi, Philip Marineau. This restructuring will allow Pepsi to act as one unit and eliminate competition with private labels and uncooperative franchise bottlers.
International Market
Pepsi should start to make strides in developing foreign markets. Pepsi must begin to sell in up and coming foreign markets where Coke is not dominating like India and China. As mentioned earlier the restaurant spin off will also give Pepsi a better chance to get in larger fountain accounts. They also need to be financially strong to keep up with a powerhouse like Coca-Cola and be able to strike back in the long running cola war.
Supply of Raw Materials
Pepsi also has to deal with such environmental issues like the supply of raw materials to produce their products. If the environment will provide them a good raw material they might have a more profit. PepsiCo's dedication and commitment to the environment is stated in their "Worldwide Code of Conduct". The "Worldwide Code of Conduct" defines PepsiCo's commitment based on the following environmental principles.
1. Developing programs that promote clean air and water, energy conservation, and reduce land fill waste.
2. By supporting programs that educate, train and motivate employees to help the environment
3. Business is conducted by complying with all applicable laws and regulations and provide a safe and healthy environment.
4. Minimizing the impact of our businesses on the environment through methods that are socially responsible, scientifically based and economically sound, such as recycling and conservation.
5. By cooperating with different organizations and governments to find solutions that reduces pollution and by supporting environmental policies.
CONCLUSION
Pepsi has built a reputation around the world as a major player in the soft drink market as well as the leader in the snack food industry. This has been done by creating a wholesome environment for their customers all the while maintaining its integrity. Currently they are facing stiff competition from Coca-Cola, but with their various marketing ventures as well as the selling of their restaurant franchises, Pepsi is poised to give Coke a definite battle in the future as to which cola consumers want. Through its subsidiaries and markets, PepsiCo sells and distributes salty and sweet snacks in the United States and international. Its manufactures concentrates of brand Pepsi, Mountain Dew and other brands for sale to franchised bottlers in the United States and international markets. It produces, markets, sells and distributes juices under several Tropicana trademarks in the United States and internationally.
0 comments:
Post a Comment