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TUESDAY, 20 NOVEMBER 2012
PepsiCo's Strategic Focus
I've just finished writing a case study for the recent launch of Pepsi Next into Australia in September 2012. No doubt you've probably
been touched by some aspect of their Australian launch, ranging from guitar-playing babies with inept parents, to taste-test
challenges across 300 outdoor locations, to heavy in-store promotion and discounting.

[image courtesy: http://www.pepsico.com]
By way of background, Pepsi Next is best described as a mid-calorie cola beverage, consisting of a half sugar and a half artificial
sweetener formula. Upon first consideration you would think that this new product would find itself in no-man's land as it violates the
first rule of modern marketing; appeal to a target market. And at first glance, the Pepsi Next product appears to be a good 'bad
example' of how not to do this, by offering a product mid-way between the needs of two segments and probably appealing to neither
very effectively.

However, my first glance at the product wasn't quite accurate. According to PepsiCo, this new product has a very defined target
market - lapsed cola drinkers. Since 2005 in the US, the soft drink market has been in early decline with unit volumes slightly
decreasing each year. Research has identified that sales are being predominately lost to bottled water and, to a much lesser extent,
to energy drinks, sports drinks and juices and teas.

This shift in consumer drinking preferences isn't too much of a concern for PepsiCo across the board, being the second largest food
and beverage firm in the world (behind Nestle) and boasting 22 brands that each generate over $1 billion in sales per year, including
non-soft drinks brands such as Gatorade and Tropicana.

However, the concern at PepsiCo is more related to their flagship brand, Pepsi itself. Only last year it lost its long-term second place
in the US market, with Diet Coke sales now exceeding Pepsi. In fact, Pepsi has lost about four market share points in the last ten
years in the now declining US carbonated soft drink market.

[image courtesy: http://www.pepsico.com]

Hence, they introduced Pepsi Next in the US in February 2012; a brand that they hope will become the 'choice of the NEXT
generation' and lure lapsed cola drinkers back into the market by providing a lower sugar alternative and to help re-energise the
overall Pepsi brand.

But while all this sounds like a pretty straightforward strategic response to a more challenging marketing environment, where
PepsiCo stands out in this case is with its incredible strategic focus. This is a firm that has tried and failed a number of times before
with the same product concept. In fact, this is their fifth stab at a mid-calorie cola beverage; starting with a version Pepsi Light in the
1970's, Jake's Cola in the 1980's, Pepsi XL in the 1990's and Pepsi Edge as recently as the mid-2000's.

Many firms would have got the message from the market and walked away from such a troublesome idea. However, PepsiCo's
persistence and commitment to their strategy has paid dividends throughout the corporation. Despite previous setbacks and failures
with mid-calorie beverages they introduced Gatorade G2, which became the most successful food and beverage new product entry
into the US market in 2008. This was followed by Trop50 in 2010, a mid-calorie version of Tropicana, which now generates over
$150 million in annual sales in its own right.

While it's too early to determine whether Pepsi Next will survive in the highly competitive soft drink market, the commitment of
PepsiCo's to this style of product provides a very important strategic lesson for all firms.

I think it was WC Fields who said, "If at first you don't succeed, try again, if you still don't succeed give up - there's no point being a
damn fool about it". And it appears that this is a motto that many firms adopt and there are even firms that don't even try again the
first time.

This style of approach to the market is going to lead to an organization being too flexible and inconsistent in their strategy
development, as they lack the courage to pursue the market as they see it. But, of course, there's a fine line between strategic
commitment and strategic stubbornness - the skill is in not only knowing the difference, but also convincing everyone else on the
team that we should 'keep going'.
Pepsico's 'Focus' Strategy

Our goal in taking these steps is to dramatically sharpen PepsiCo's focus. Our restaurant business
has tremendous financial strength and a very bright future. However, given the distinctly different
dynamics of restaurants and packaged goods, we believe all our businesses can better flourish
with two separate and distinct managements and corporate structures."
1

- Roger Enrico, Former CEO of PepsiCo, Commenting on the Spin-off Restaurant
Business.
"Our goal is to make the Pepsi-Cola system a lot more competitive and a lot more responsive to
our customers. This new structure will move us closer to that goal by taking greater advantage of
our excellent leaders and creating units that will be sharply focused on their respective
businesses."
2

- Roger Enrico, Commenting on the Spin-off Bottling Operations.
"The whole idea of restructuring was to focus sharply on being the world's best food and


beverage company. That means we would be a consistent and sustainable performer in terms of
both the top-line results - sales growth - and bottom-line results - earnings growth. We're pretty
much there now."
- Roger Enrico, in an interview to Money, in March 2000.
Case Details
Case Intro 1
Case Intro 2
Excerpts

Case Details: Price:
Case Code : BSTR118 For delivery in electronic format: Rs.
400;
For delivery through courier (within
India): Rs. 400 + Rs. 25 for Shipping
& Handling Charges
Themes
Operational Restructuring
Case Length : 15 Pages
Period : 1996-2004
Organization : Pepsico
Pub Date : 2004
Teaching
Note
: Not Available
Countries : USA
Industry : Consumer Packaging
Abstract:
US based PepsiCo conducted a major restructuring exercise in
1997-98 by spinning-off its restaurant and bottling business. The
restructuring was aimed at achieving improved focus on the
company's core beverage (Pepsi-Cola) and snack food operations
(Frito-Lay). By successfully adopting the 'focus' strategy since
1997, PepsiCo has emerged as the second largest consumer
packaged goods company (in terms of revenues) in the world. By
acquiring leading beverages' company like Tropicana products
(July 1998), South Beach Beverage Company (October 2000) and
Quaker Oats (December 2000), the company has significantly
strengthened its competitive position in the beverages segment. The
case examines in-depth the key elements of the focus strategy
followed by PepsiCo.



Introduction
n early 1997, US based PepsiCo,
3
one of the largest packaged food companies in the world, announced a dismal financial performance for
the fiscal year 1996. Although the company's revenues had increased marginally (4%) from $30.421 billion (bn) in 1995 to $31.645 bn in the
fiscal 1996, the net income had witnessed a major decline (28.45%) from $1.606 bn to $1.149 bn in the same period.
Analysts pointed at PepsiCo's lack of focus
on its core operations as one of the major
reasons for its poor financial performance.
In its efforts to sharpen focus on its core
beverage (Pepsi-Cola), and snack food
businesses(Frito-Lay), PepsiCo underwent a
major restructuring by spinning-off its
restaurant businesses as an independent
publicly traded company. The spin-off was
completed in October 1997. In July 1998,
PepsiCo acquired Tropicana, the world
leader in the marketing and production of
branded juices, in its efforts to strengthen its
position in the non-carbonated beverages
segment. Despite its restructuring efforts,
analysts felt that PepsiCo still had a lot of
distance to cover to catch up with its about
a century old archrival, Coke.

In 1998, PepsiCo accounted for 31.4% of the US soft-drinks market as compared to Coca-Cola's 44.5%. In the same year, Coca Cola
generated 63% of its sales as compared to PepsiCo's 31% from its overseas operations. In its attempt to catch up with Coke, PepsiCo took
several initiatives throughout the late 1990s and early 2000s.
One of the major initiatives undertaken to focus on its core
businesses was hiving-off its bottling operations into a separate
new company called Pepsi Bottling Group (PBG), in September
1998. In January 1999, PepsiCo sold its 65% equity stake in
PBG to the public and raised $2.3 bn in cash. PepsiCo's
restructuring efforts paid off handsomely as its operating profits
rose from $2.584 bn in the financial year 1998 to $3.225 bn in
the fiscal 2000 (Refer Exhibit I & II). The company made
further attempts to strengthen its market position in the non-
carbonated beverages segment. This was achieved through the
acquisitions of South Beach Beverage Company (SBBC)
4
in
October 2000, and Quaker Oats, a leading food and drinks
company in December 2000.

Pepsico's 'Focus' Strategy
Case Details
Case Intro 1
Case Intro 2
Excerpts



<< Previous
Background Note
PepsiCo was formed in 1965 by the merger of Pepsi-Cola and Frito-Lay
5
(#1 maker of snack chips
in the world). The company's popular drink, Pepsi-Cola
6
had been invented in 1898. In a bid to

generate faster growth for the company, PepsiCo diversified into the restaurant business through a
series of takeovers. It purchased Pizza Hut in 1977, Taco Bell in 1978 and Kentucky Fried Chicken
in 1986. Soon, PepsiCo emerged as a world leader in the restaurant business.
In 1986, PepsiCo was
reorganized and decentralized
by combining its beverage
operations under PepsiCo
Worldwide Beverages and
snack food operations under
PepsiCo Worldwide Foods. In
1986, PepsiCo purchased 7-Up
International, the third largest
franchise soft drink outside the
US. In 1988, the company
reorganized along geographic
lines - East, West, South and
Central regions - each with its
own president and senior
management staff. Over the
years, PepsiCo took several
steps to bring its three
restaurant chains together into
a single division so that they
could grow rapidly. The
company brought all
operations under a single
senior manager and combined
many back office operations
like payroll, accounts payable
and data processing,
purchasing real estate,
construction, and information
technology.

The company also took up aggressive re-franchising to improve financial returns and restaurant
operations. With revenues of $17.80 bn, in 1990, PepsiCo was ranked among the top 25 of the
Fortune 500 companies. By 1995, PepsiCo's sales had crossed $30.42 bn, and with 480,000
employees, Pepsi had become the third largest employer in the world after Wal-Mart and GM.
Roger Enrico (Enrico) became
the CEO of PepsiCo in 1996.
Immediately afterwards,
PepsiCo's performance
deteriorated as it faced intense
competition from Coca-Cola
in both the domestic and
overseas markets. For the
fiscal year 1996, PepsiCo's
beverages division reported an
operating profit of just $582
mn on $10.5 bn in revenues as
compared to Coca-Cola, which
reported an operating profit of
$3.9 bn on $18.5 bn revenues.
In the same year, Pepsi Cola's
market share lagged behind
Coca Cola by the maximum
margin in over two decades.
According to Beverage Digest,
an industry newsletter, Coca-
Cola's Sprite brand had
replaced Diet Pepsi as the
fourth-largest selling soft
drink in the US while Diet
Pepsi had dropped to
seventh...


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...