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Punit Bhanji
Provide strategic recommendations on whether, and how, PepsiCo should pursue a new product launch in the alcoholic beverage space
Hypothesis: Current conditions are favorable for PepsiCo to launch a alcoholic beverage. Sub-Hypotheses: 1. Scalability: Growing demand in the alcoholic-beverage market supports a new entrant. 2. Defensibility: There a first-mover advantage in this market. 3. Execution test: PepsiCos existing manufacturing, bottling, and distribution infrastructure can be leveraged to minimize costs through economies of scale vis--vis its competitors. Adding an alcoholic beverage to PepsiCos portfolio would not negatively impact brand equity and is compatible with core corporate values. 4. Value Proposition: Customers perceive an added value and are willing to pay a price premium for a Pepsi-branded alcoholic beverage.
Assumption Testing
Scalability
Growing demand supports a new market entrant
Defensibility
A first-mover advantage exists
Execution
Infrastructure can be leveraged without eroding the Pepsi brand
Value Prop
Customers value the Pepsi brand in the alcoholic space, and will pay a premium for it
There is sufficient space in the alcoholic beverage market for another entrant
There is significant first-mover advantage in being the first major soft drink maker to enter the alcoholic beverage space
The infrastructure for production and distribution of soft drinks is not materially different then for alcoholic beverages Adding alcohol to PepsiCo's product portfolio does not conflict with its core corporate values
Pepsi's brand equity can be successfully extended to the alcoholic beverage market Pepsi's brand yields a price premium that extends to alcoholic-beverage customers
5
SCALABILITY: Growing Demand in the Alcoholic Beverage Market will be sufficient to support a new entrant
800 700 600 Dollars ($B) 500 400 300 200
CAGR = 3% CAGR = 1% CAGR = 31% CAGR = 4%
100
0 2005
2006
2007
2008
2009
2010 (E)
2011 (E)
2012 (E)
Attractive Opportunity
DEFENSIBILITY: Pent-up demand and a large underserved market means that there is a significant first-mover advantage in being the first major soft drink brand to enter the alcoholic space
An underserved market in the pre-mixed alcoholic beverage area 20 exists Current competitors in the 15 market are small, regionalized, & unable to capitalize on the 10 demand gap 5 Should Pepsi enter the space, it should be able to immediately 0 capture a significant proportion of 2010 2014 the underserved market WKD Smirnoff ice Abcd Additionally, through targeted Xyz1 ABC2 Pepsi Hybrid advertising Pepsi should be able to accelerate overall market growth beyond what is currently possible Source: Alcoholic Beverage Industry Association, 2010
DEFENSIBILITY: Moreover, comparable launches have indicated that a time lag before competing entry will enable Pepsi to solidify its first-mover position
Anticipated Competitive Response
Who will respond? Existing regional competitors Coke, others New Entrants How have they responded earlier? 6 Months 1 Year Aggressive marketing What are their capabilities? Brand equity Supply chain parity Exclusive thirdparty tie-ups
into the energy drink, diet cola, and sports drink spaces) indicates that: The number of competitive entrants will be minimal (primarily Coca-Cola), A significant time lag will exist before any competitive response, Price wars are not a probable outcome, and Overall market growth can be sufficient to sustain multiple entries
DEFENSIBILITY: In the period before competitive response, Pepsi can strengthen its first-mover position through several defensive strategies
Potential Defensive Strategies to Minimize Competitive Response
Leverage strong distribution network to ensure access to all underserved markets (in the US and globally) Strong national marketing campaign to ensure uptake and strengthen brand in advance of competitive response
Retail Exclusivity
Distribution Channel
Lock up key retail locations and points-ofsale through exclusive, multi-year and multigeography contracts
Marketing leadership
Pursue key sponsorship opportunities, launch viral campaigns, and ensure distinctive product design
EXECUTION: The infrastructure for production and distribution of soft drinks is not materially different than for alcoholic beverages
Bottlers Operating Margins
Soft Drink Only Alcohol Only Both
8.0% 7.8%
9.0%
Source: SEC Filings, International public filings, PepsiCo internal bottling & distribution data
Conclusion: Operating margins are essentially the same for the alcoholic and non-alcoholic beverage industries. Existing bottlers and distributors of both soft drinks and alcoholic beverages cross-utilize PP&E. Significant competitive advantage should be realizable over small or regionalized 10 competitors.
EXECUTION : Pepsi's brand equity will not be damaged by entering the alcoholic beverage market Consumer Reactions to Alcohol Proposal Survey: Please rate how this product affects your perception of the Pepsi brand where -5 means negative affect on brand perception, 0 means no impact, and 5 means positive impact on brand perception
3.6
0.8
(0.3)
Loyal Pepsi Drinkers Non-Loyal Customers Loyal Pepsi Drinkers Non-Loyal Customers (21-39) (21-39) (40+) (40+)
Source: Focus Group, January 7, 2010
(0.7)
Conclusion: Overall, the Pepsi brand is not damaged by introducing an alcoholic beverage, although there are slight negative brand impacts among older loyal customers. Younger loyal and non-loyal Pepsi customers 11 perception of the brand should actually improve.
EXECUTION: Adding alcohol to PepsiCo's product portfolio may conflict with its core corporate values
Survey: A Pepsi-branded alcoholic beverage is not at odds with PepsiCos corporate strategy. 1 = Strongly Disagree, 3 = Neutral, 5 = Strongly Agree Division/Team
Executive Management Internal Marketing Corporate Strategy Group Select Key Shareholders Board of Directors Asia/Pacific Executive Management Latin American Executive Management
Rating
4.1 1.3 0.5 2.7 1.8 2.2 2.9
Conclusion
Strongly Agree Strongly Disagree Strongly Disagree Neutral Disagree Disagree Neutral
0.9
Strongly Disagree
12
EXECUTION: Moreover, key stakeholders within the organization oppose the launch as being incompatible with the Companys commitment to healthier products The goal of PepsiCos human sustainability effort is to nourish consumers with a range of products, from treats to healthy eats. We are proud to give consumers choices across the spectrum. Our products deliver joy as well as nutrition. Member of Corporate strategy We are committed to be a company that offers food and drinks that are fun for you, better for you, and good for you. I do not believe adding an alcoholic beverage would be better or good for either our current or potential customers. Member of Internal M&A I would be concerned about how an alcoholic beverage might cause backlash in my markets, particularly in the Middle East and Northern Africa. Division Head, EMEA
Conclusion: Critical PepsiCo stakeholders believe an alcoholic beverage is not compatible with the Corporations core corporate values 13
VALUE PROPOSITION: While brand commands a price premium in the non-alcoholic segment, pricing power in the Alcoholic segment is driven primarily by Quality
Assumption: Key drivers of consumer purchasing behavior in the alcoholic beverage market will parallel those in the non-alcoholic space.
Non-Alcoholic Bev Market
H Impact on Price Tolerance Impact on Price Tolerance Availability Size H Brand
Brand Size L
Conclusion: While some variation is seen across sub-segments, consumers in the alcoholic beverage space generally place more of a premium on quality than on brand. Pepsis existing brand equity will not translate well to alcoholic drinks.
14
Inimitability / Defensibility
Supports Hypothesis
Execution
Value Proposition
15
Giving a different dimension to the case 1) We as a team feel in USA where beer is consumed like water so if you dont launch an alcoholic product thinking the repute will tarnish, then someone else will do the same 2) Pre mix cola with some content of alcohol will be the latest buzz so the better option is to launch it but under some other name like what Pepsi did for Gatorade 3) Today we see alcohol brands getting diversified in various sectors & they are doing really well, if kingfisher is accepted as a big brand in India then why not Pepsi globally. 4) So the final word will the pre mix should not be Pepsi Hybrid but something else very elegant & the focus of the media campaign should be on premium quality not on the brand .