Case - Pepsico’s Diversification Strategy in 2015 PDF

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Principles of Marketing (PoMktg)

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Pepsico’s Diversification Strategy in 2015 Overview Pepsico was the world’s largest snack and beverage company with 2014 net revenues of approximately $66.7 billion. The company’s portfolio of businesses in 2015 included FritoLay 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 were added to PepsiCo’s arsenal of brands through the $13.9 billion acquisition of Quaker Oats in 2001. PepsiCo underwent a major portfolio restructuring initiative that began in 1997, and from 1997 to 2011, the company had increased revenues and net income at annual rates of 7 percent and 12 percent respectively. In 2010, PepsiCo acquired the previously independent Pepsi Bottling Group and PepsiCo Americas for 8.26 billion, and Wimm-Bill-Dan, Russia’s leading food and beverage Company, for $3.8 billion. Although the company had impressive achievements over the past decade, its growth began to slow in 2011. Through 2013, 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 Mountain Dew KickStart, Tostitos Cantina tortilla chips, Quaker Real Medleys, Starbucks Refreshers, and Gatorade Energy Chews had accounted for 15%-20% of all new growth in recent years. New product innovations that addressed consumer health and wellness concerns were important contributors to the company’s growth, with PepsiCo’s better-for-you and good-for-you products becoming focal points in the company’s new product development initiatives. . In addition to focusing on strategies designed to deliver revenue and earnings growth, the company maintained an aggressive dividend policy, with more than $53 billion returned to shareholders between 2003 and 2012. Pepsi increased its dividend for the 42nd consecutive year in 2014 and paid $8.7 billion to its shareholders through dividends and stock repurchases, which was a 36 % increase over 2013. The company increased its cash returns through carefully considered capital expenditures and acquisitions and a focus on operational excellence. Its Performance with Purpose plan used investments in manufacturing automation, a rationalized global manufacturing plan, reengineered distribution systems, and simplified organization structures to drive efficiency. Additionally, the company’s Performance with Purpose plan was focused on minimizing the company’s impact on the environment by lowering energy and water consumption and reducing its use of packaging material, providing a safe and inclusive workplace for employees, and supporting and investing in the local communities in which it operated. PepsiCo had been listed on the Dow Jones Sustainability World Index for eight consecutive years and listed on the North America Index for eight consecutive years as of 2014. Even though the company had recorded a number of impressive achievements over the past decade, its growth had slowed since 2011. In fact, the spikes in the company’s revenue growth since 2000 had resulted from major acquisitions such as the $13.6 billion acquisition of Quaker Oats in 2001, the 2010 acquisition of the previously independent Pepsi Bottling Group and PepsiCo Americas for $8.26 billion, and the acquisition of Russia’s leading foodand- beverage company, Wimm-Bill-Dann (WBD) Foods, for $3.8 billion in 2011. PepsiCo’s strategies appeared to be doing well in 2014. PepsiCo’s chief managers expected the company’s 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

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returns. Nevertheless, the low relative profit margins of PepsiCo’s international businesses created the need for a continued examination of its strategy and operations to better exploit strategic fits between the company’s international business units. PepsiCo developed a new divisional organization structure in 2008 which combined businesses in Latin America into a common division. Also, the company’s 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 company’s 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 be required to improve the profitability of PepsiCo’s international operations and to help restore previous revenue and earnings growth rates.

Questions 1. What is PepsiCo’s corporate strategy? Briefly identify the business strategies that PepsiCo is using in each of its consumer business segments in 2014. 2. What is your assessment of the long-term attractiveness of the industries represented in PepsiCo’s business portfolio?

3. What strategic actions should Indra Nooyi take to sustain the corporation’s impressive financial and market performance? Should its free cash flows be used to fund additional share repurchase plans, pay higher dividends, make acquisitions, expand internationally, or for other purposes? What other strategic actions should be pursued by corporate level management?

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