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PepsiCo to Launch New Non-sparkling Flavored Drink

Case Type: new product; marketing.

Consulting Firm: McKinsey & Company 2nd round full time job interview.
Industry Coverage: food and beverage.
Case Interview Question #00900: Our client PepsiCo Inc. (NYSE: PEP) is an American multinational
food, snack and beverage corporation headquartered in Purchase, New York, United States, with
interests in the manufacturing, marketing, and distribution of grain-based snack foods, beverages, and

other products. The company was formed in 1965 with the merger of the
Pepsi-Cola Company and Frito-Lay, Inc.
PepsiCo is one of the top three beverage manufacturers in the U.S. The main brands distributed by
PepsiCo include Pepsi, Mountain Dew, Gatorade, 7 Up, Aquafina, Naked Juice, Tropicana, etc.
Recently, they are thinking of launching a new non-sparkling flavored water product. The client
company PepsiCo is a vertically integrated beverage manufacturer that makes the drinks, has
five bottling plants, and owns their own distribution channels. They have asked us to determine
whether or not they should launch the new product, if yes, how to do it, and what the marketing
strategy should be.
Possible Answer: Commented [u1]: My hypothesis is that if the market for
Part 1: Background non-sparkling water is growing and we can take an
Sparkling water, also known as club soda, soda water, or carbonated water, is water into which carbon advantage of the growth as well as develop a competitive
dioxide gas under pressure has been dissolved. advantage, we should launch the production of the new
product. For this purpose, I would like to analyze:
Interviewer: Let the Candidate ask questions from their structure, but make sure that they ask some 1.Industry – historic trends as well as future projections.
variation of the following questions about the beverage market, and give these answers. If the interviewer gives information that the industry is
growing and it is expected to expand, I would refine my
hypothesis in the following way: Based on the information
What is the size of the entire water market in the United States? Answer is: 4 million gallons sold per provided by you, I would like to consider that the growing
year. industry serves as an indicator for a potential success of the
product. However, in order to make more well-based
Specifically, what is the breakdown in the water market, and what percentage of sales are in sparkling recommendation, I would like to continue with:
versus non-sparkling? The interviewer should now provide the following two graphs (the second graph 2.Competition
represents a further breakdown of the 10% non-sparkling water shown in the first graph: O2 Flavor a.Concentrated/fragmented
and Easy Drink are flavored non-sparkling water products. b.Shares of existing firms
c.Distribution channels
b.Distribution channels
Exhibit 1. Breakdown of U.S. water market

Exhibit 2. Breakdown of U.S. non-sparkling water market

The Candidate should now volunteer some key insights, which should include:

• Flavored non-sparkling water represents a small share of the overall market.

• Only two competitors have large market shares in this market –> our client PepsiCo may have an
opportunity to emerge as a third large competitor in this highly segmented market.

How will the drinks be packaged? Everyone packages their water in 16 oz bottles, and our client
PepsiCo will do the same (this will be important for the market sizing).

How will the drink be priced? $1 per bottle.

Part 2: Market Sizing
Interviewer: Ask the Candidate to do a market sizing and then determine how long it would take to
break even on this product.

First, the Candidate should calculate the size of the flavored non-sparkling water market:

• 10% of 4 million gallons = 400,000 gallons of flavored non-sparkling water sold each year.
• Each bottle contains 16 oz; there are 128 oz in a gallon, then 8 bottles make a gallon.
• 400,000 gallons * 8 bottles in a gallon = 3.2 million bottles sold each year in this market.

Part 3: Break even analysis

Interviewer: The next step is to figure out how long it will take to start making money on this product.
Give the Candidate the following information on the margins: Costs = 90 cents per bottle

Key Insight: The Candidate should see that since each bottle is sold for $1, the company makes 10
cents on each bottle.

Interviewer: The product launch will cost $400,000. How many bottles the client PepsiCo will have to
sell in order to break even?

Candidate: $400,000 / 10 cents per bottle = 4 million bottles need to be sold

Key Insight: The Candidate should see that 4 million bottles is larger than the entire annual market for
such products (3.2 million), so it will take a few years to reach this amount (assuming not change in
market size).

Interviewer: So how many years will it take?

Candidate: Looking back at the two graph, the Candidate should determine a reasonable market
share goal or estimation that this product will grab. Here are some possible thought processes:

a. Since the new entrant PepsiCo is a major company, it should come in strong with brand name

b. Since the other two main competitors have 12% and 18% market share, and our product is backed
by a strong company, perhaps this product will come in somewhere in that range. (Any estimate that is
backed by logical reasoning and reasonable assumptions is acceptable here.)

c. Using 15% as an estimate, the calculations should look like this:

• 15% of 3.2 million bottles = 480,000 bottles to sell each year = ~0.5 million
• 4 million bottles / 0.5 million bottles = 8 –> it will take 8 years to break even.

An excellent candidate would comment that 8 years is an “eternity” in a market like beverages
(especially because new beverages emerge constantly and trends change).

Part 4: Other marketing issues to consider

Interviewer: Knowing this information, how should the client PepsiCo position the new product in the

Candidate: Should ask for additional information on how the two main competitors are positioning their
drinks. When he/she does, show the following chart.
The key takeaways from this chart are:

• Our beverage will be in the “other” category and need to make a name for itself there.
• Our client PepsiCo should position the new drink as a sports drink or leisure beverage, since those
are the categories where “other” has the largest market share.

Interviewer: Ask the candidate to brainstorm some problems with this new venture.

Possible Answer:

• Changes in the market landscape for beverages (perhaps flavored water is a fad?)
• Product cannibalization (how many other similar products does this company make?)

Part 5: Recommendation
Interviewer: Ask the candidate to summarize his/her findings and make a final recommendation.

Possible Answer:

This is probably a questionable investment. It will take some time to break even. However, if interest in
this kind of product remains strong, and the client PepsiCo can leverage its existing strengths to get an
immediately strong market share, this has potential for being a profitable product.