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John E. Gamble
Texas A&M UniversityCorpus Christi
epsiCo was the worlds largest snack and beverage company, with 2013 net revenues of
approximately $66.4 billion. The companys
portfolio of businesses in 2014 included Frito-Lay
salty snacks, Quaker Chewy granola bars, Pepsi
soft-drink products, Tropicana orange juice, Lipton Brisk tea, Gatorade, Propel, SoBe, Quaker
Oatmeal, Capn Crunch, Aquafina, Rice-A-Roni,
Aunt Jemima pancake mix, and many other regularly consumed products. The company viewed the
lineup as highly complementary since most of its
products could be consumed together. For example,
Tropicana orange juice might be consumed during
breakfast with Quaker Oatmeal, and Doritos and a
Mountain Dew might be part of someones lunch. In
2014, PepsiCos business lineup included 22 $1 billion
global brands.
The companys top managers were focused on
sustaining the impressive performance through strategies keyed to product innovation, close relationships
with distribution allies, international expansion, and
strategic acquisitions. Newly introduced products
such as Mountain Dew KickStart, Tostitos Cantina tortilla chips, Quaker Real Medleys, Starbucks
Refreshers, and Gatorade Energy Chews accounted
for 15 to 20 percent of all new growth in recent years.
New product innovations that addressed consumer
health and wellness concerns were important contributors to the companys growth, with PepsiCos
better-for-you and good-for-you products becoming
focal points in the companys new product development initiatives.
In addition to focusing on strategies designed
to deliver revenue and earnings growth, the company maintained an aggressive dividend policy,
CASE 21
EXHIBIT 1
C-307
Net revenue
Net income
Income per
common share
basic, continuing
operations
Cash dividends
declared per
common share
Total assets
Long-term debt
2012
2011
2010
2009
2008
2007
2006
2005
2004
$66,415 $65,492 $66,504 $57,838 $43,232 $43,251 $39,474 $35,137 $32,562 $29,261
6,740
6,178
6,443
6,320
5,946
5,142
5,599
5,065
4,078
4,212
$4.37
$3.96
$4.08
$3.97
$3.81
$3.26
$3.38
$3.00
$2.43
$2.45
$2.24
$2.13
$2.03
$1.89
$1.78
$1.65
$1.42
$1.16
$1.01
$0.85
$77,478
24,333
74,638
23,544
72,882
20,568
68,153
19,999
39,848
7,400
35,994
7,858
34,628
4,203
29,930
2,550
31,727
2,313
27,987
2,397
COMPANY 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, Lays, Cheetos, Ruffles, and Rold Gold. PepsiCos roots can
be traced to 1898 when New Bern, North Carolina,
pharmacist Caleb Bradham created the formula
for a carbonated beverage he named Pepsi-Cola.
The companys salty-snack business began in 1932
when Elmer Doolin, of San Antonio, Texas, began
manufacturing and marketing Fritos corn chips and
Herman Lay started a potato chip distribution business in Nashville, Tennessee. In 1961, Doolin and
Lay agreed to a merger between their businesses to
establish the Frito-Lay Company.
During PepsiCos first five years as a snack and
beverage company, it introduced new products such
as Doritos and Funyuns, entered markets in Japan
and eastern Europe, and opened, on average, one new
snack-food plant per year. 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
C-308
EXHIBIT 2
PART 2
70
65
60
75
55
50
45
05
06
07
08
09
10
Year
11
12
13
14
190
170
160
150
140
130
120
110
10
210
S&P 500
05
06
07
08
09
10
Year
11
12
13
180
PepsiCos
Stock Price
220
230
14
CASE 21
C-309
Lucky. The company also entered into a joint venture with the Strauss Group in 2007 to market
Sabrathe top-selling and fastest-growing brand
of hummus in the United States and Canada. The
company acquired the Russian beverage producer
Lebedyansky in 2008 for $1.8 billion, and in 2010 it
acquired Marbo, a potato chip production operation
in Serbia.
In 2010 and 2011, the company executed its
largest acquisitions since the 2001 acquisition of
Quaker Oats. In 2010, PepsiCo acquired the previously independent Pepsi Bottling Group and PepsiCo Americas for $8.26 billion in cash and PepsiCo
common shares. The acquisition was designed to
better integrate its global distribution system for its
beverage business. In 2011, it acquired Russias leading food and beverage company, Wimm-Bill-Dann
Foods, for $3.8 billion. The combination of acquisitions and the strength of PepsiCos core snacks and
beverages business allowed the companys revenues
to increase from approximately $29 billion in 2004
to more than $66 billion in 2013. Exhibit 3 presents
PepsiCos consolidated statements of income for
20112013, while the companys consolidated balance sheets for 20122013 are presented in Exhibit
4. The companys calculation of free cash flow for
20112013 is shown in Exhibit 5.
BUILDING SHAREHOLDER
VALUE IN 2014
Three people had held the position of CEO since the
company began its portfolio restructuring in 1997.
Even though Roger Enrico was the chief architect of
the business lineup as it stood in 2007, his successor,
Steve Reinemund, and Indra Nooyi, the companys
CEO in 2007, were both critically involved in the
restructuring. Nooyi joined PepsiCo in 1994 and
developed a reputation as a tough negotiator who
engineered the 1997 spin-off of Pepsis restaurants,
spearheaded the 1998 acquisition of Tropicana, and
played a critical role in the 1999 IPO of Pepsis
bottling operations. After being promoted to chief
financial officer, Nooyi was also highly involved
in the 2001 acquisition of Quaker Oats. Nooyi was
selected as the companys CEO upon Reinemunds
retirement in October 2006. Nooyi had emigrated
to the United States in 1978 to attend Yales Graduate School of Business, and she worked with the
C-310
EXHIBIT 3
PART 2
Net revenue
Cost of sales
Selling, general, and administrative expenses
Amortization of intangible assets
Operating profit
Interest expense
Interest income and other
Income before income taxes
Provision for income taxes
Net income
Less: Net income attributable to noncontrolling interests
Net income attributable to PepsiCo
Net income attributable to PepsiCo per common share:
Basic
Diluted
Weighted-average common shares outstanding:
Basic
Diluted
Cash dividends declared per common share
$66,415
31,243
25,357
110
9,705
(911)
97
8,891
2,104
6,787
47
$ 6,740
2012
$65,492
31,291
24,970
119
9,112
(899)
91
8,304
2,090
6,214
36
$ 6,178
2011
$66,504
31,593
25,145
133
9,633
(856)
57
8,834
2,372
6,462
19
$ 6,443
$4.37
$4.32
$3.96
$3.92
$4.08
$4.03
1,541
1,560
$2.24
1,557
1,575
$2.1275
1,576
1,597
$2.025
CASE 21
EXHIBIT 4
C-311
2012
Assets
Current assets
Cash and cash equivalents
Short-term investments
Accounts and notes receivable, net
Inventories
Prepaid expenses and other current assets
Total current assets
Property, plant, and equipment, net
Amortizable intangible assets, net
Goodwill
Other nonamortizable intangible assets
Nonamortizable intangible assets
Investments in noncontrolled affiliates
Other assets
Total assets
$ 9,375
303
6,954
3,409
2,162
22,203
18,575
1,638
16,613
14,401
31,014
1,841
2,207
$ 77,478
$ 6,297
322
7,041
3,581
1,479
18,720
19,136
1,781
16,971
14,744
31,715
1,633
1,653
$74,638
$ 5,306
12,533
17,839
24,333
4,931
5,986
53,089
$ 4,815
11,903
371
17,089
23,544
6,543
5,063
52,239
41
(171)
41
(164)
25
4,095
46,420
(5,127)
26
4,178
43,158
(5,487)
(21,004)
24,409
110
24,389
$ 77,478
(19,458)
22,417
105
22,399
$ 74,638
C-312
EXHIBIT 5
PART 2
2013
2012
2011
$9,688
(2,795)
109
$ 7,002
$8,479
(2,714)
95
$5,860
$8,944
(3,339)
84
$5,689
marketed, and sold snacks and beverages throughout Europe, while the companys Asia, Middle East,
and Africa division produced, marketed, and distributed snack brands and beverages in more than 150
countries in those regions. A full listing of Frito-Lay
snacks, PepsiCo beverages, and Quaker Oats products is presented in Exhibit 6. Select financial information for PepsiCos six reporting units is presented
in Exhibit 7.
CASE 21
EXHIBIT 6
C-313
Snack Brands
Beverage Brands
Pepsi-Cola
Quaker Oatmeal
Mountain Dew
Life cereal
Mug
Sierra Mist
Slice
Quisp cereal
Mothers cereal
Go Snacks
Quaker Oatmeal-to-Go
Starbucks DoubleShot
(partnership)
Quaker grits
H2OH!
Gatorade
Puffed Wheat
Propel
Tropicana
Tropicana Twister
Spudz snacks
Frito-Lay nuts
Tropicana Smoothie
Izze
Naked Juice
Mirinda
7UP
Grain Waves
Pepsi
Quaker Bakeries
Kas
Teem
Manzanita Sol
Fruko
Evervess
Yedigun
Puffed Wheat
Grandmas cookies
Sabra hummus
Shani
Cruesli cereal
Fiesta
D&G (license)
Mandarin (license)
PART 2
C-314
EXHIBIT 6
(Continued)
Snack Brands
Beverage Brands
Radical Fruit
Hamkas snacks
Quaker Oats
Quaker Meu Mingau
Quaker cereal bars
Quaker Oatbran
Corn goods
Magico chocolate powder
Kurkure
Quaker Mgica
Smiths Sensations
Cheetos Shots
Quaker pastas
Quavers Snacks
Quaker Frut
Bluebird Snacks
Duyvis Nuts
Mller yogurts
Lucky snacks
Penelopa nuts and seeds
Marbo
Wimm-Bill-Dann
Source: Pepsico.com.
CASE 21
EXHIBIT 7
C-315
2012
2011
Net revenues
Frito-Lay North America
Quaker Foods North America
Latin American Foods
PepsiCo Americas Beverages
Europe
Asia, Middle East, Africa
Total division
$14,126
2,612
8,350
21,068
13,752
6,507
66,415
$13,574
2,636
7,780
21,408
13,441
6,653
65,492
$13,322
2,656
7,156
22,418
13,560
7,392
66,504
Operating profit
Frito-Lay North America
Quaker Foods North America
Latin American Foods
PepsiCo Americas Beverages
Europe
Asia, Middle East, Africa
Total division
$ 3,877
617
1,242
2,955
1,293
1,174
11,158
$ 3,646
695
1,059
2,937
1,330
1,330
10,414
$ 3,621
797
1,078
3,273
1,210
1,210
10,866
Capital expenditures
Frito-Lay North America
Quaker Foods North America
Latin American Foods
PepsiCo Americas Beverages
Europe
Asia, Middle East, Africa
Total division
Total assets
Frito-Lay North America
Quaker Foods North America
Latin American Foods
PepsiCo Americas Beverages
Europe
Asia, Middle East, Africa
Total division
Depreciation and other amortization
Frito-Lay North America
Quaker Foods North America
Latin American Foods
PepsiCo Americas Beverages
Europe
Asia, Middle East, Africa
Total division
423
38
384
716
550
531
2,642
$ 5,308
983
4,829
30,350
18,702
5,754
65,926
430
51
253
863
525
283
2,553
365
37
436
702
575
510
2,625
$ 5,332
966
4,993
30,889
19,218
5,738
67,146
$ 445
53
248
855
522
305
2,570
439
43
413
1,006
588
693
3,182
$ 5,384
1,024
4,721
31,142
18,461
6,038
66,770
458
54
238
865
522
350
2,604
(Continued)
C-316
EXHIBIT 7
PART 2
(Continued)
2013
8
58
32
5
110
2012
10
59
36
7
119
2011
10
65
39
12
133
was estimated to be the third-largest international market for snacks, while developing markets Mexico and
Russia were expected to be the fourth- and fifth-largest
international markets, respectively.
Developing an understanding of consumer taste
preferences was a key to expanding into international markets. Taste preferences for salty snacks
were more similar from country to country than
were preferences for many other food items, and this
allowed PepsiCo to make only modest modifications
to its snacks in most countries. For example, classic varieties of Lays, Doritos, and Cheetos snacks
were sold in Latin America. In addition, consumer
characteristics in the United States that had forced
snack-food makers to adopt better-for-you or goodfor-you snacks applied in most other developed
countries as well.
PepsiCo operated 50 snack-food manufacturing and processing plants and 640 warehouses in
Latin America, with its largest facilities located in
Guarulhos, Brazil; Monterrey, Mexico; Mexico
City, Mexico; and Celaya, Mexico. PepsiCo was
the second-largest seller of snacks and beverages in
Mexico, and its Doritos, Marias Gamesa, Cheetos,
Ruffles, Emperador, Saladitas, Sabritas, and Tostitos brands were popular throughout most of Latin
America. The divisions revenues had grown from
$7.2 billion in 2011 to $8.3 billion in 2013 and
accounted for 12 percent of 2013 total net revenues.
CASE 21
PepsiCo Europe
All of PepsiCos global brands were sold in Europe,
as well as its country- or region-specific brands such
as Domik v Derevne, Chjudo, and Agusha. PespiCo
Europe operated 125 plants and approximately
525 warehouses, distribution centers, and offices in
eastern and western Europe. The companys acquisition of Wimm-Bill-Dann Foods, along with sales of
its long-time brands, made it the number-one food and
beverage company in Russia, with a 2-to-1 advantage
over its nearest competitor. It was also the leading
seller of snacks and beverages in the United Kingdom. PepsiCo Europe management believed further
opportunities in other international markets existed,
with opportunities to distribute many of its newest
brands and product formulations throughout Europe.
C-317
PEPSICOS STRATEGIC
SITUATION IN 2014
For the most part, PepsiCos strategies seemed to be
firing on all cylinders in 2014. PepsiCos chief managers expected the companys lineup of snack, beverage, and grocery items to generate operating cash
flows sufficient to reinvest in its core businesses,
provide cash dividends to shareholders, fund a $15
billion share-buyback plan, and pursue acquisitions
that would provide attractive returns. Nevertheless,
the low relative profit margins of PepsiCos international businesses created the need for a continued
examination of its strategy and operations to better
exploit strategic fits between the companys international business units.
The company had developed a new divisional
structure in 2008 to combine its food and beverage
C-318
PART 2
businesses in Latin America into a common division. Also, the companys international businesses
were reorganized to boost profit margins in Europe
and Asia, the Middle East, and Africa. However,
more than five years after the reorganization, the
performance of the companys international businesses continued to lag that of its North American
businesses by a meaningful margin. Some food
and beverage industry analysts had speculated that
additional corporate strategy changes might also
ENDNOTES
1
be required to improve the profitability of PepsiCos international operations and to help restore
previous revenue and earnings growth rates. Possible actions might include a reprioritization of
internal uses of cash, new acquisitions, further
efforts to capture strategic fits existing between the
companys various businesses, or the divestiture of
businesses with poor prospects of future growth
and minimal strategic fit with PepsiCos other
businesses.