Pepsico's 'Focus' Strategy
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Case Code: BSTR118 Case Length: 15 Pages Period: 1996-2004 Pub Date: 2004 Teaching Note: Not Available |
Price: Rs.400 Organization: Pepsico Industry: Consumer Packaging Countries: USA Themes: Operational Restructuring |
Abstract Case Intro 1 Case Intro 2 Excerpts
Excerpts
The Restructuring & Acquisition
PepsiCo announced plans, in early 1997, to restructure its business. As a first step, the company decided to spin-off its restaurant business as an independent publicly traded company. PepsiCo also decided to sell-off its food distribution company. Justifying his decision to spin-off the restaurant business, Enrico said that when the company acquired the restaurant business in the 1970s, the company had many reasons to do so. PepsiCo had enough cash, quality people, and the ability to build restaurant brands. When PepsiCo bought them, the brands like Pizza Hut and Taco Bell were very small businesses. The company allocated its resources to them and soon became the leader in the restaurant business. According to the executives of PepsiCo, the restaurant business had sufficient cash and quality personnel working for it. However, the restaurant culture and processes did not align with PepsiCo's organizational culture. Another reason for the spin-off was the management's efforts to make PepsiCo a focused packaged foods company, to compete with its archrival Coca-Cola...
The Spin-Off
In September 1998, in continuation of its restructuring efforts, PepsiCo decided to separate its bottling operations from the company. PepsiCo's Pepsi-Cola business included two units - a bottling company and a concentrate company. The bottling operations, which were called Pepsi Bottling Group (PBG) after the spin-off, consisted of certain North American, Canadian, Russian, and other selected overseas bottling operations. With sales of more than $7 bn, PBG was the world's largest Pepsi Cola bottler accounting for more than half of Pepsi Cola's North American volume. The concentrate company focused on product innovations and marketing Pepsi Cola's brands. It manufactured and sold beverage concentrate syrup to PBG and other Pepsi-Cola bottlers. The company also supported PBG and other bottlers in advertising, marketing, sales, and promotion programs. Analysts felt that PepsiCo's decision to spin-off its bottling operations would help the company compete more effectively in the beverage business and serve its retail customers better. PepsiCo was also expected to improve margins on its beverage operations, as bottling operations were less profitable than the supplying of beverage concentrate...
The Aftermath
Through the spin-off of the restaurant business and bottling operations, PepsiCo aimed to bring consistency in financial performance and improve market performance. In the fiscal 1998, Pepsi Cola's volume grew by 7% worldwide with a growth of 10% in North America. This growth was attributed to the strong sales of Pepsi One, Mountain Dew, Brand Pepsi, Aquafina, and Lipton Brisk. The volume growth of Frito-Lay was 5%, in the same year. Although the restructuring resulted in lower sales for the first year it led to higher profits. The margins and return on investment were also high. After spinning-off the bottling business, PepsiCo's return on equity increased from 17% in the fiscal 1996 to 30% in the fiscal 1998. According to the executives of the company, the company had strengthened its financials and wanted to concentrate on innovations and productivity improvements. PepsiCo seemed to have strengthened its position in the 'cola wars,' in the late 1990s. In 1998, the company witnessed soft-drink volume gains of 6%, which was the biggest gain since the fiscal 1994...
Pepsico - Gaining Ground
Even though PepsiCo had spun off its unrelated businesses, a few analysts argued that PepsiCo needed to further strengthen its competitive position in the beverages business, which made up about one-third of the company's total revenues in the fiscal year 1998-1999. In its efforts to enhance the revenues from its beverages business, PepsiCo acquired a majority equity stake in SBBC in October 2000. SBBC had emerged as one of the successful companies in the non-carbonated beverages industry after the launch of its brand SoBe. SBBC offered a variety of drinks with herbal ingredients and SoBe was one of the fastest growing brands in the non-carbonated beverages market. PepsiCo, in December 2000, acquired Quaker Oats, a leading food and drinks company, in a deal worth $13.4 bn. In an all-stock deal, one share of Quaker was swapped for 2.3 shares of PepsiCo, up to a value of $105 for each Quaker share. According to analysts, this acquisition was expected to increase PepsiCo's beverages revenues significantly...
Exhibits
Exhibit I: Pepsico's Consolidated Statements of Income (1996-99)
Exhibit II: Pepsico's Business Segments Performance
Exhibit III: Pepsico's Restaurants Business Spin-Off
Exhibit IV: Pepsico's Acquisition of Quaker - Key Benefits
Exhibit V: Pepsico's Consolidated Statements of Income
Exhibit VI: Pepsico's Business Segments Performance
Exhibit VII: Pepsico's Stock Price Chart (May 1994 - April 2004)
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