Pepsico's 'Focus' Strategy


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Case Details:

Case Code : BSTR118
Case Length : 15 Pages
Period : 1996-2004
Organization : Pepsico
Pub Date : 2004
Teaching Note :Not Available
Countries : USA
Industry : Consumer Packaging

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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"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.

Introduction

In 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 - Next Page>>

1] Press Release, www.pepsico.com, January 23, 1997.

2] Press Release, www.pepsico.com, September 25, 1998.

3] With net revenues of $26.97 bn and a net income of $3.57 bn in the fiscal 2003, PepsiCo was one of the largest consumer packaged goods company in the world. PepsiCo and its subsidiaries operated in about 170 countries across the globe.

4] Norwalk, CT-based SBBC is one of the leading companies in the 'Healthy Refreshment' category of the beverage industry. The company produces and markets a line of ready-to-drink, non-carbonated juice blends and exotic teas under the brand name, 'SoBe.'

 

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