) is a global manufacturer, distributor, and marketer of food and beverages, owning many well-known brands including Pepsi, Frito-Lay,

Tropicana, Gatorade, and Quaker Oats.[1] PepsiCo operates in over 200 countries, with its largest markets in North America and the United Kingdom.[2] Unlike its major competitor, the Coca-Cola Company (KO), the majority of PepsiCo's revenues do not come from carbonated soft drinks.[3] In fact, beverages account for less than 50% of total revenue.[3] Additionally, over 60% of PepsiCo's beverage sales come from its key noncarbonated brands like Gatorade and Tropicana.[4] PepsiCo's diverse portfolio can mitigate the impact of poor conditions in any one of its markets. Strong demand growth in international markets -- the company serves 86% of the world's population and international sales account for 48% of revenue -- is helping to offset a sluggish domestic market and provided the company with opportunities for continued expansion.[5] [6] PepsiCo is highly exposed to raw materials costs. Prices for the most important input

materials,aluminum, PET plastic, corn, sugar, and juice concentrates fluctuate widely.

Company Overview

PEP Revenues by Segment[7]

PepsiCo is the largest snack and non-alcoholic drink producer in the United States, with 39% and 25% of the respective market shares.[7] The fall in net income was attributable to two reasons. First, PepsiCo recognized a $346 millionmark-to-market loss onderivatives used to hedgeits commodity exposure.[8]Next, the company incurred restructuring costs of $543 million in relation to its Productivity for Growth program.[9] Contents

 o o o

1 Company Overview 1.1 Bottlers 1.2 Operating Segments 2 Trends & Forces 2.1 PepsiCo Must Survive a US

Slowdown While Capturing International Growth

o
Margins

2.2 Commodity Costs are Pressuring

2.2.1 Pepsi Must Face a

Declining Demand for Carbonated Soft Drinks

2.2.2 To

Grow

International Presence and Compete with Changing Industry Conditions, PEP must Sustain its Acquisition Spree

o o o

3 Competition 3.1 Beverages 3.2 Snacks and Convenient Foods 3.3 Coke vs. Pepsi

Offering

3.3.1 Global Footprint 3.3.2 Diversified Product

4 References

Bottlers
PepsiCo's beverage division manufactures concentrated syrup forms for all of Pepsi's beverage brands. PEP sells these concentrates to bottlers for production, packaging, and distribution of the final products. PepsiCo grants bottlers the use of Pepsi trademarks and other brand rights within certain geographic regions. Three companies distribute 60% of PepsiCo's North American beverage volume:[10]

The Pepsi Bottling Group (PBG) is the largest of PepsiCo's bottlers. PepsiCo has a 33% stake

inPepsi Bottling Group (PBG), and claims its share of income under the equity method of accounting.[11]

PepsiAmericas (PAS) is the second-largest bottler in the Pepsi system. PepsiCo has a 43% stake

inPepsiAmericas (PAS), and claims its share of income under the equity method of accounting.[12]

Pepsi Bottling Ventures is the third-largest domestic bottling company within the Pepsi system.

The company was formed in 1999 when five of Pepsis bottling companies consolidated to formPBV.

Operating Segments
PepsiCo operates in six divisions:

Frito-Lay North America (29% of Revenue, 43% of Operating Income)[13] manufactures,

markets and sells branded snacks. Popular products include Lay's Potato Chips, Doritos Tortilla Chips, Cheetos, Rold Gold Pretzels, and SunChips.[1] Following the company's purchase of Pepsi Bottling Group (PBG) and Whitman (PAS), company executives have said that it will lead to increased joint marketing, bundling the company's snack and beverage offerings.[14]

Quaker Foods North America (4% of Revenue, 8% of Operating Income)[13] manufactures,

markets and sells cereals, rice, pasta and other branded products. Popular products include Quaker Oatmeal, Aunt Jemima mixes and syrups, Cap n' Crunch cereal, Rice-A-Roni, and Life cereal.[1]

Latin America Foods (14% of Revenue, 13% of Operating Income)[13] manufactures, markets

and sells a number of leading salty and sweet snack brands. Popular products include Gamesa, Doritos, Cheetos, and Ruffles.[3]

PepsiCo Americas Beverages (25% of Revenue, 29% of Operating Income)[13] manufactures,

markets and sells beverage concentrates, fountain syrups and finished goods, under various beverage brands. Popular products include Pepsi, Mountain Dew, Gatorade, Tropicana, and Izze.[3]

United Kingdom & Europe (15% of Revenue, 10% of Operating Income)[13] manufactures,

markets and sells a number of leading salty and sweet snack brands. Popular products include Lay's, Walker's, Doritos, and Cheetos.[3]

Middle East, Africa, and Asia (13% of Revenue, 8% of Operating Income) [13] manufactures,

markets and sells a number of leading salty and sweet snack brands. Popular products include Lay's, Smith's, Doritos, and Cheetos.[15]

Trends & Forces

PepsiCo Must Survive a US Slowdown While Capturing International Growth

Soaring food and energy prices[16], the housing slump[17] and a weakening job market[18] are putting the breaks on consumer spending in North America, even in the typically recession proof drinks and snacks market. Emerging markets such as China, India, Eastern Europe and Latin America present strong growth

opportunities for Pepsico. Pepsi purchased Wimm-Bill-Dann Foods, a Russian food and beverage company, for $5.4 billion[19] Wimm-Bill-Dan is the leading producer of dairy products in Russia and they also have a large market share for juice; the purchase significantly expands Pepsi's presence in Eastern Europe and Central Asia. In addition to making international acquisitions, PepsiCo is investing significant resources in expanding their manufacturing capabilities in developing markets. The company has pledged to invest $3.5 billion in China through 2013, mainly through the construction of 10 to 12 new manufacturing facilities (in addition to the 27 it currently operates). In China, Pepsi is also pursuing a strategy of buying back stakes in its Chinese operations from local partners. These acquisitions will give the company greater control over its operations while increasing profits. Unlike the saturated North American market, China's carbonated drink market is growing at almost 20% annually.[20] In the past two years, the company invested in two other manufacturing plants in Vietnam, and it currently operates five plants in the country. [21] In Latin America, the company has pledged $3 million over the next three years to create an agriculture research center in Peru, which will focus on the discovery of new potato and other vegetable varieties.[22] Pepsi's expects their global nutrition business will be worth $20 billion by 2020.[23]

Commodity Costs are Pressuring Margins

PepsiCo's profitability can be affected directly and indirectly by the costs of various production inputs. PEP is responsible for purchasing the raw materials used to make its products in all its markets and also acts as an agent for the purchase of its bottlers' raw materials. Some of the raw materials used by PEP include grains such as corn, wheat flour, oats and rice; fruit and vegetable products like oranges, potatoes, and juice concentrates; sugar; and vegetable and essential oils. Changes in the prices of such raw materials could impact total production costs and the companys profit margins. Changes in bottlers' production input costs can also indirectly impact PEP's profits. If a bottler's raw materials become more expensive, it might pass on the increase to customers, which could lead to a loss of market share as customers switch to more affordable alternatives. The primary raw materials used by bottlers are high fructose corn syrup, which is used as a sweetener, aluminum, used to make cans, and PET Resin, used for plastic bottles. In an effort to insulate itself from market forces, PepsiCo has invested $29.3 million in five farms in China, making it one of the country's largest agricultural companies.[24] The farms primarily produce potatoes for the

company's potato chip brands[25] In addition to its farms in China, Pepsi has 12,000 contract farmers in India growing potatoes on 16,000 acres of land. In addition to potatoes, the company is hoping to expand its contract farming initiative to include oats in the near future.[26]

Pepsi Must Face a Declining Demand for Carbonated Soft Drinks

Consumer demand for CSD has been negatively affected by concerns about health and wellness. Carbonated soft drinks have dropped from 60% to 35% of total US beverage volume.[27] Rising health and wellness concerns can be attributed to increasing concern for obesity as well as education campaigns on the part of the FDA as well as non-profit groups. Public campaigns to ban sales of soft drinks and fatty snacks in schools have also negatively impacted demand for sugary sodas. These factors have driven a shift in consumption away from CSD to healthier alternatives, such as tea, juices, and water. Even within the CSD segment, consumers have been moving away from the sugared drinks, opting instead for diet beverages, which do not generally contain any sugar or calories. In response to this shift in consumer demand, PEP has increased its development of both diet CSD and non-CSD beverages. With its popular Tropicana and Gatorade brands, PepsiCo is much better situated than Coca-Cola Company (KO) to react to these changing trends. Facing lower Gatorade sales, Pepsi developed a social marketing department to track the brand's performance and online reputation. By tracking user discussions online and Gatorade groups on Facebook, the company has been able to quickly respond to consumer demands.

To Grow International Presence and Compete with Changing Industry Conditions, PEP must Sustain its Acquisition Spree
PepsiCo hopes to streamline manufacturing and distribution through the acquisitions, allowing it to bring new products to market more quickly and efficiently. The company expects to gain full control of 80% of its North American market and increase pre-tax profit by $300 million, increasing eps by $.15.[27] The deal adds $4 billion in debt to PepsiCo's balance sheet. According to PepsiCo CEO Indra Nooyi, the acquisition is necessary to consolidate profit as there is not enough total profit in the North American beverage industry to support investments in several different companies.[28] The acquisition closed on March 1, 2010.[29] With the purchase of Pepsi Bottling Group (PBG) and Whitman (PAS) in 2010, company executives have said that it will lead to increased joint marketing that will bundle the company's snack and beverage offerings together.[30]

Competition
Beverages
In the domestic beverage market, the Coca-Cola Company (KO) is PepsiCo's main competitor. Coca-Cola Company (KO) has a higher worldwide share of carbonated soda beverages, but PepsiCo has a more diverse product line and leads the industry in non-carbonated soft drink innovations. [31] PepsiCo's revenues

are also substantially higher than Coca-Cola's, due to PepsiCo's snack and convenient foods business, a market in which KO does not participate. PepsiCo's presence in the snack and convenient food industries, as well as its industry-leading innovations in the non-carbonated soft drink segment, gives it a somewhat more balanced portfolio than Coca-Cola and provides the company with some protection against further declining demand for CSD. Pepsi also pays the Dr Pepper Snapple Group (DPS) for the rights to sell its products, along with Coca-Cola Company (KO).

Snacks and Convenient Foods

PepsiCo's Frito-Lay and Quaker brands compete in various parts of the larger food industry. Its snack foods manufactured by the Frito-Lay segment hold a commanding share of the U.S. market, accounting for around 39% of domestic snack food sales. PepsiCo's main competitor in the food market overall is Kraft Foods (KFT). Kraft's products include snacks, cheese, diary, and cereal products, which puts it in competition both with Frito-Lay and Quaker products. Much like the Coca-Cola Company (KO), Kraft does not participate in both the food and soft drink markets, giving PEP the advantage of having a more diverse offering of products.

Coke vs. Pepsi

For decades now, Coke and Pepsi have battled for our hearts and minds... but what about our capital? Which company will add the best flavor to your investment portfolio? Although both companies share powerful brand names and global franchises, there are two important distinctions between Pepsico and Coca-Cola that any investor should consider before choosing between these comestible titans:

Global Footprint
When it comes to international presence, Coca-Cola easily trumps Pepsico. Coca-Cola's impressive global footprint puts it in a better position to benefit from strong growth across the globe, particularly in the developing world. Furthermore, because Coke generates so much of its revenue abroad, it stands to benefit greatly from the continuing weakening of the dollar as sales denominated in foreign currencies are suddenly worth more dollars back home. At the same time, Pepsico's heavy dependence on North America makes it much more susceptible to a slowing US economy.

Diversified Product Offering

Another important distinction between the two companies is their product offering. While KO is essentially a one-product company that focuses on beverages, Pepsico has a much broader product base that includes beverages, foods and snacks. Coca-Cola's heavy dependence on beverages, particularly carbonated beverages, makes it more susceptible than Pepsico to a growing aversion to soda which is perceived as fattening and unhealthy. On the other hand, Pepsico's extensive portfolio of beverages, foods and snacks puts it in a better position from the trend to healthier eating.