Pepsico diversification strategy

PepsiCo was the world’s largest snack and beverage company, with 2007 net revenues of approximately $39.5 billion. The company’s portfolio of businesses in 2008 included Frito-Lay salty snacks, Quaker Chewy granola bars, Pepsi soft drink products, Tropicana orange juice, Lipton Brisk tea, Gatorade, Propel, SoBe, Quaker Oatmeal, Cap’n Crunch, Aquafina, Rice-A-Roni, Aunt Jemima pancake mix, and many other regularly consumed products. Gatorade, Propel, Rice-A-Roni, Aunt Jemima, and Quaker Oats products had been added to PepsiCo’s arsenal of brands through the $13.9 billion acquisition of Quaker Oats in 2001. The acquisition was the final component of a major portfolio restructuring initiative that began in 1997. Since the restructuring, the company had increased revenues and net income at annual rates of 7 percent and 12 percent, respectively. A summary of PepsiCo’s financial performance is shown in Exhibit 1.

Exhibit 1: Financial Summary for PepsiCo Inc., 1998–2007 ($ in millions, except per share amounts)

Through 2007, the company’s top managers were focused on sustaining the impressive performance that had been achieved since its restructuring through strategies keyed to product innovation, close relationships with distribution allies, international expansion, and strategic acquisitions. Newly introduced products such as Gatorade G2, Tiger Woods signature sports drinks, and Quaker Simple Harvest multigrain hot cereal had accounted for 15–20 percent of all new growth in recent years. New product innovations that addressed consumer health and wellness concerns were the greatest contributors to the company’s growth, with PepsiCo’s better-for-you and good-for-you products accounting for 16 percent of its 2007 snack sales in North America, 70 percent of net beverage revenues in North America during 2007, and more than 50 percent of its 2007 sales of Quaker Oats products in North America. The company also increased the percentage of healthy snacks in markets outside North America since consumers in most developed countries wished to reduce their consumption of saturated fats, cholesterol, trans fats, and simple carbohydrates.

The company’s Power of One retailer alliance strategy had been in effect for more than 10 years and was continuing to help boost PepsiCo’s volume and identify new product formulations desired by consumers. Under the Power of One strategy, PepsiCo marketers and retailers collaborated in stores and during offsite summits to devise tactics to increase consumers’ tendency to purchase more than one product offered by PepsiCo during a store visit. In addition, some of PepsiCo’s most successful new products had been recommended by retailers.

PepsiCo’s international sales had grown by 22 percent during 2007, but the company had many additional opportunities to increase sales in markets outside North America. The company held large market shares in many international markets for beverages and salty snacks, but it had been relatively unsuccessful in making Quaker branded products available outside the United States. In 2006, 75 percent of Quaker Oats’ international sales of $500 million was accounted for by just six countries. In addition, PepsiCo’s international operations were much less profitable than its businesses operating in North America. While the operating profit margins of PepsiCo’s international division had ranged from 13.4 to 15.6 percent between 2004 and 2007, operating profit margins for its Frito-Lay and North American beverage business ranged from 21.3 to 25 percent during

The same time period. Quaker Foods’ sales of Cap’n Crunch, Life cereal, Quaker oatmeal, Chewy granola bars, Aunt Jemima, and Rice-A-Roni produced the highest profit margins among all PepsiCo brands, with operating profits exceeding 30 percent each year between 2004 and 2007.

Copyright © 2008 by John E. Gamble. All rights reserved.

PepsiCo management developed a new organizational structure in 2008 to address the low relative profitability of its international operations and to produce even faster growth in international markets. The new structure that would place all brands sold in the United Kingdom, Europe, Asia, the Middle East, and Africa into a common division was expected to aid the company in its ability to capture strategic fits between its various brands and products. It was also quite possible that PepsiCo management needed to consider restructuring its lineup of snack and beverage businesses to improve overall profitability and reverse the downturn in its stock price that began in 2008. Exhibit 2 tracks PepsiCo’s market performance between 1998 and October 2008.