;200,!

l' PepsiCo
J ohn and S he r r yRo s s Marcos TexasState University-San
j r:'i:l i"
iiliiiii:r ;lilt r ,,;;, r 1 r ,r 1:, , ,, .1 rl 'i l

The "cola wars" refers to the all-out battle between Coke and Pepsi for world cola domination. Stop now and think of the PepsiCo brand products you might consume in a typical day. For breakfastyou might have a bowl of Quaker Oats, or perhapsCap'N Crunch cereal, or perhaps pancakeswith Aunt Jemima syrup and a Tropicana juice. As you left for class you might have grabbed an Aquarian bottled water, or a bottle of Gatorade,or Propel fitnesswater. For lunch, a sandwich with a bag of Fritos or some baked Doritos chips makes a fast and enjoyable choice. Later in the afternoon a SunChips multigrain snack with an AMP energy drink will hold you over until dinner, when a Rice-A-Roni product accompanies your main course.You may be much more familiar with PepsiCo than you think. First quafter 2009 PepsiCo's net revenuesof $8,263 million were down $70 million cost of goods from the samequarterin 2008. However,PepsiCocontrolledcostsby decleasing sold by $90 million. This resultedin a net profit of $1,141 million, which is $90 million less than last year'sfust quarter.PepsiComay needto fufther adjustcoststo reflect continuingeconomic troubles as consumers shift to less costly drinks and snacks.There is also a shift away from bottled water and back to the tap. SecondquarterPepsiCoresultscontinuedthe downward trend with beveragevolume down 6 percent,Frito-Lay down 3 percent and Quaker down 4 percent. However, intemational volume was up 1 percent snacksand 6 percent in beverages. PepsiCo opened a new factory in Shanghaiin June 2009 and plans to open another five plants in China over the next two year. PepsiCo's total investmentover the 2009-2012 period is $l billion to bolster manufacturing and its salesforce throughout China. Some of PepsiCo's potato chip brands in China are Beijing Duck, Cool Lemon, and Lychee. The new plant will manufacture Pepsi-Cola, Mountain Dew, Gatorade, Tropicana juices, and bottled water. The new PepsiCoplant uses22 percentless water and 23 percentless energy than the averagePepsi plant in China. PepsiCo's strategy in China is to overtake Coke, which has a 47.3 percent market share in the country's cola market versus Pepsi' 44.5 percent, according to Euromonitor International. In overall beveragesales,Coke has a 15.3 percentmarket sharein China versus Pepsi's 6.2 percent.PepsiCohas pledgedto invest $1 billion in Russiaover the next three years, bringing its total investment to $4 billion over a ten-year time span. PepsiCo will also invest over $1 billion in China over the next 4 years.This is in addition to continued investmentsin Japan,India, Europe, Mexico, and Latin America. PepsiCo recently offered $6 billion to retake ownership of its two largest bottlers, Pepsi Bottling Group (PBG) and PepsiAmericas(PAS). Non-carbonatedproducts are today about 40 percentof Pepsi-Colavolume, versusless than 15 percent 10 years ago. Pepsi's desire to own its own bottlers is to spur its non-carbonated health and wellness products, which are often smaller-volume, slower-moving products. PBG and PAS distribute nearly 75 percent of Pepsi drinks in the United States,excluding Gatorade.

i
Pepsi-Colawas invented by Caleb Bradham in New Bern, North Carolina, in 1898 and quickly became a popular drink with some 300 bottlers by the start of World War I.

42

JOHN AND SHERRY RO SS

Bradham followed the example of Coca-Colaand used the bottling franchise system in which he produced the syrup and others bottled and distributeO. tfris businessmodel allowed for quick expansion and market penetration. However, Bradham went bankr-upt after World War I when the price of sugarplummeted and his stockpiles became worthless. Pepsi'flounderedunder various owners until 1932 when, in the midst of the Depression, it was purchased by Loft candy. rn 1933,to irnprove salesand gail mar.ket, Loft doubledthe sizeof its bottle to 12 ounces,chargingone nickel, when the standard was 6 ounces.This low-cost differentiationstrategyproved very successfuland allowed the renamedPepsi-colacompanyto expandand becomea major player in the cola industry. Since that time, Pepsi and Coke have battled to Uecoml the largest worlclwide producer of nonalcoholic beverages.However, where as Coca-Cola has kept a fairiy narrow focus,Pepsihasventuredinto conglomerate diversificationfrom van moving lines to sportinggoodsto fast foods. PepsiCoof late has a more focusedsffategyln the snack, breakfastfood, and nonalcoholicbeverage markets.After all, what goesbetterwith a cola than a salty or sweet snack? pepsi seemsto be developing syneigy between product categorieswith breakfastfoods and juices, colas and salty snacks,and at the same time moving into the water and sport beveragemarket. This strategyhas developecl over an extendedperiod of time and seemsto be working successfully,as shown by revenue growth and profitability. However, consumertaste continuesto change,and pepsi rnust also continueto change.
'1 ,- 1 ' 1 ,r ' r

Although you might have thought of pepsi as a bottler of soft drinks, the company produces Mountain Dew, Mug Root Beer, Sierra Mist, Slice, Aquafina, Dole juices, and SoBe. But thesearejust under the Pepsi-Colabrands.You also need to acldLay's potaro chips, Doritos, Tostitos, Fritos, and cheetos under the Frito-Lay brand. In adclition, PepsiCo includes the brands of Quaker (the oats company), Tropicana, anclGatorade.And this isjust a partial list ofthe brandedproductssold by pepsi. PepsiCo,Inc. is indeed a large company and is defined in the 70K as "a leading global beverage,snack and food company."Additionally it "manufacture(s)or use(s)conrract manufacturers,(to) market and sell a variety of salty, convenient, sweet and grain-based snacks,carbonatedand non-carbonatedbeveragesand foods in approximately 200 countries, with our largestoperationsin North America (United Statesand Canada),Mexico and the United Kingdom" (10K, 2008). Globally, PepsiCo operatesin Canada,Latil Agrerica, Europe, Middle East, Asia, Northern Asia, Australia, and the Asian pacific. With total revenuesover $43 billion (up from $39 billion in 2007) and ner profits over $5 billion in 2008, Pepsi continues to expand its markets in both the beverageand snack food industries through market penetration,mergers,and acquisitions.
'i 'i ,',

PepsiCo is organized using three strategicbusinessunits of PepsiCo Americas Foods, PepsiCoAmericas Beverages, and PepsiCoInternationalas indicated in Exhibit 1. This structure shows divisions along both product categories and geographical locations. PepsiCo Americas Beveragesis a separatedivision that reflects its importance to the organization. At a time when many companiesgive only lip service to inclusion and diversity, Pepsico has promotedto the position of CEo (october 1,2006) and chairman (May 2, 2007) Indra K. Nooyi. Beginning her career in India, Nooyi has held many positions including vice president (VP) corporate strategy for Motorola, senior VP of strategyand strategicmarketing for Asea Brown Boveri, and senior VP and CFO of PepsiCo, anclpresident and CFo of PepsiCo. She holds a BS from Madras Christian college, an MBA from the Indian Institute of Management in Calcutta, and a master's of public and private managementfrom Yale University.

Nooyi is leading a worldwide consumergoods manufacturingcompany that primarily uses differentiationto attractand hold customers.Although its major customersare large retailers

CASE5. PEPSICO-2009

43

[: ji

OrganizationalStructure PepsiCo's PEPSICO ,l

PePsiCo Foods Americas (PAF) Americas PepsiCo Beverages (PAB) PePsiCo lnternational (Pt)

Frito-LayNorth America (FLNA)

united Kingdom & Europe(UKEU)

Quaker FoodsNorth America(QFNA)

Middle East,Africa, & Asia (MEAA)

Latin AmericaFoods (LAF)

Sorrtr,: PepsiCo, 2A09 Fornt l 0K (2009)'

18 percent of North (wal-Mart accounts for approxim ately 12 pefcent of total revenues and extensiveadverthrough consumer ultimate the to f"p.i^Co must appeal Americanrevenues), on creative dependent is.highly strategy pull marketing tising and promotional activities.This of development continued the with along slog-ans, marketingand the developmentof cat-hy PepsiCo changed, have tastes As consumer Brands)' (Pepsi-Cola new anclreinventedUrands free, sugar free, caffeine has developedliquid refreshment products that are light, calorie Snacksnow have Aquafiry)' (Pepsi, Voltage' flavored free, sports and energy directed, and (Frito-Lay TrueNorth)' vegetables with made and lesssalt and less fat and are baked,kettled, line as product the (Tropicana) and juice Quaker segment This strategy continues into the well as the GatoradeProducts. and advertising Pepsico works closely with its bottlers and retailers in promoting approximately spent Pepsico 2006, In world. the around its entire range of products billion' and in spent it $11'3 in 2007' discounts; and $10.1billion on salesincentives expenses'which were 2008, $12.5 billion was spent. This does not include advertising these numbers may Although 2006' in billion and $1.6 $1.8 bitlion in 2008 anaiOOl, which spent Coca-Cola, (particularly competition of worldwide seemexcessive,the level and promosome$2.9 billion on advertisingalone in 2008) requiresextensiveadvertising media to tion to rernain in the minds of the ultimate consumer.PepsiCo uses all available promote its products and attempts to attract younger consumersthrough Web-related productmedia such as YouTube, and having appealing Web pageswith the latest ads and relatedgames. Advertising for both Pepsi and coca-cola has generally been built around short, memorable slogansto attract and hold the attention of consumers'Of the more than 40 slogans and songscreatedsince 1939, some of the more successfulslogansfor Pepsi have ',Twice as Much for a Nickel" (1939-1950),which allowedPepsito grow during inclucled: "Have a Pepsi Day" (1961-1963); "Pepsi Now! Take the Challenge" the depression; "Drink Pepsi.Get Stuff' (1995-1996); "For (1983-1984) was one of the most successful; "Pepsi Stuff' (2008) Super Bowl commercial; Those Who Think Young" Oggg_l;000); and today's "Refresh Everything" and "Every Generation Refreshesthe World" (2009)'
.: :,.ir.i

Recent consolidated financial data obtained from the 20A9 I1K are presented in Exhibits 2 just through 6. Although the financials appear very gootl with revenuesincreasing from

JOHN AND SHERRY RO SS

,,:i ,i l I ' r: P epsi co 2008 Income (i n mi l l i o n s ) Net Revenue

s."t"r:11., .
2008 $ 43,251 20,351 15,901 64 6 q?s 374 (32e) 4I 7,021 1,879 $ 5,142 $ $ 3.26 3.21 2007 $ 39,474 18,038 14,208 58 7,110 560 (224) 125 1,63r 7,913 $ 5,658 $ $ 3.48 3.41 $ 35,137 15,762 12,7 tl
toz

Cost of sales Selling, general and administrative expenses Amortization of intangible assets Operating Profit Bottling equity income Interest expense Interest income Income before Income Taxes Provision for Income Taxes Net Income Net Income per Common Share Basic

6,502

5s3 (23e)
173 6,989 1,347 $ s,642 $ $ 3.42 3.34

Dfluted
Source: Form I 0K (2009).

;)irii,il Bllan_ce SheetAslets : .i ..

(in millionsexceptshareamounts) ASSETS Current Assets Cash and cash equivalents Short-term investments Accounts and notes receivable,nbt Inventories Prepaid expensesand other culrent assets Total Current Assets Property,Plant and Equipment, net Amortizable Intangible Assets,net Goodwill Other nonamortizableintangible assets Nonamortizable Intangible Assets Investmentsin Noncontrolled Affiliates Other Assets Total Assets Balance Sheet Liabilities

2008

2007

2006

$ 2,064 213 4,683 2,522 1,324 10,806 1t,663 732 5,124 1,128 6,252 3,883 2,658 $ 3s,9e4

sro 1,571 4,389 2,290 99r 10,151 11,228 '/96 5,169 1,248 6,411 4,3s4 1,682

$ 1,651 r,17 |
7 ',1 ) \
1 016,

657 9,130 9,687

oJ /

4,594 r,212 5,806 3,690 980 $ 29.930

$ 34,628

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities Short-term obligations Accounts payable and other current liabilities Income taxespayable Total Current Liabilities

369 $0 8,2'/3 1,602 t45 151 7 '7 5 7 8,',l87

274 6,496 90 6,860

continued

CASE5. PEPSICO-2009

45

BalanceSheet Assets-continued
(i n millionsex c epts h a rea mo u n ts ) Long-Term Debt Obligations Other Liabilities Deferred Income Taxes Total Liabilities Commitments and Contingencies PreferredStock, no par value Preferred Stock Repurchased Common Shareholders'Equity Common stock, par value 1 2/3 per share (authorized issued 1,782shares) 3,600 shares, Capitalin excessof par value Retainedearnings Accurnulated other comprehensiveloss Repurchased common stock, at cost (229 respectively) and 171 shares, Total Common Shareholders' Equity Total Liatrilities and Shareholders' Equity
Source: Form I)K (2009).

2008 7,858 7,0r7 226 23,888 4l -138

2007 4,203 4,792 646 17,394 4r

2006 2,550 4,624 528 14,562 4l (120)

-r32
30 450 28,t84 -952 -10,387 17,325 $ 34,628 30 584 24,837 (2,246) (7,758) 15,44',7 $ 29,930

30 351 30,638 -4,694 -14,122 12,203 $ 35,994

;.,;: 'ii.:i",,'. Net Revenuesand Percentages of Net Revenuesby Division

Net Revenueand Percent PepsiCototal Division Frito-Lay North America (FLNA) Quaker Foods North America (QFNA) Latin American Foods (LAF) (PAB) PepsiCoAmericas Beverages United Kingdom & Europe (UKEU) Middle East, Africa, & Asia (MEAA)
: Form I 0K (2009). Source

2008

Percent

Percent

2006 $ 35137 $ 10,844 $ 1,769 $ 3,9t2 $ 10,362 $ 4,750 $ 3,440

Percent

s 43,25r
$ 12,507 $ 1,902

l00Vo 28.9 4.3 t3.6 25.2 t4.8 12.8

$ 39,474 $ 11,s86 $ 1,860 $ 4,872 $ I1,090 $ s,492 $ 4.s74

I0OVo 29.3
^1

I0OVo 30.8 5.0 11.3 29.9 13.s 9.7

$ s,89s
$ 10,937 $ 6,435

12.3 28.0 13.9 1i.5

Division operatins PlgfT.q.y

2008
Total Net Revenue OperatingProfit by Division FLNA QFNA LAF PAB

2007 $ 39,4',74 $ 2,845 568 714 2,487 174 535

2006

$ 43,2sr $ 2,9s9 582 891 2,026 811 667

$ 3s,137
2,615 554 6s5 2,3t5 700

UKEU MEAA
Form l1K (2009). Source:

u:9:

46

JOHN AND SHERRY RO SS

ffiK&{nBfrT 6 World Demand for the NonalcoholicBeverageMarket

$160,000.00 40,000.00 $1 $120.000.00
gl

S ports dri n k s

$100,000.00 $80,000.00 $60,000.00 $40,000.00 $20,000.00

:iffi fiffi #' ;Y's;'i'ii;i"r I !ri'rr'rs;a *s$'ils's

Carbonates juice Fruit/vegetable Bottled water E nergydri n k s Concentrates RTDtea

$0.00

2003

2004

2005

2006

2007

2008

Source: Euromonitor Intemational (2008).

over $35 billion in 2006 to over $43 billion in 2008, a closerlook revealssomenegarive trcnds. On the income statement, cost of saleshas increasedas would be expected.However,these costshave increased from 41.32percentof salesto 43.43percentof salesand net income has decreased from $5.6 billion to $5.1 billion. Also during this time retum on assets has dropped from 18.81percentto 15.17percent,inventorytumover has decreased from 8.02 times to 7.81 times, and long term debt has increasedfrom $4.203 billion (24.45 percent of common equity) in2D7 to $7.858in 2008 (65.13percentof common equity). None of the changes necessarily indicate a company in trouble. However, the trends might indicate future problem areas.It shouldalsobe notedthat in 2008 some9543 million was chargedto net income in conjunction with the "Productivity for Growth" program,which included closing six planrs,upgradingthe product portfolio, and creating a more streamlinedorganization structure. Divisional financial results for the yearc 2006-2008 show the importance of snack and breakfastfoods as well as the decline in carbonatedbeverases.Also shown is the increasein international revenues.

&ffifissriorr,,r
The following is PepsiCo's mission and vision as taken directly from their Web site (PepsiCo Mission and Vision, March 2009): Our Mission our mission is to be the world's premier consumer products company focused on convenient foods and beverages.We seek to produce financial rewards to investoLsas we provide opportunities for growth and enrichment to our employees, our businesspartners and the communities in which we operate.And in everything we do, we strive for honesty,fairness and integrity. Our Vision PepsiCo's responsibility is to continually improve all aspectsof the world in which we operate-environment,social, economic-creating a better tomomow than today. Our vision is put into action through programs and a focns on environmental stewardship, activities to benefit society, and a commitment to build shareholdel value by making PepsiCo a truly sustainablecompany. Performance with Purpose At PepsiCo,we're committed to achieving businessand financial sllccesswhile leaving a positive imprint on society-delivering what we call Pelfolmance with Purpose.

CASE5. PEPSICO-2009

47

o ur appr oac ht o s u p e ri o rfi n a n c i a l p e rfo rma ncei sstrai ghtforw ard_dri ve s har eholder v a l u e .B y a d d re s s i n g s o c i a l a n d envi ronmental i ssues,w eal so andtalent of human'environmental, which consists agenda, our purpose deliver.on susa tinabilit Y. plan to make The final "Perfbrmance with Purpose" is part of PepsiCo's 2008 restructuring the company more efficient and profitable. Additionally, PepsiCo has extensive statementson sustainability, the environment, topics are crithealthand wellness, and diversity (seeweb site, Pepsico-Purpose). These product is primary its of ingredient principal ical to the long-term successof PepsiCo.The becomes water clean fresh, of supply water. Both nationally and globally, an adequate (either real contamination of News countries. paramount,particularly in lesser developed provide to ability a company's in confidence or perceived;can quickly destroy consumers' projects a safe,liealthy product.r To help in this effor.t,Pepsico has undertakennumerous at Institute Earth the groups as such with working and alliances around the world, and Energy The Foundation' Development Woman's Columbia University, the Chinese within ResourcesInstitute, Keep America Beautiful, Exnora, and UNICEF. Divisions pepsiCohave also initiated projects to increaseuse of recycled materials and reduce materialsusedin packaging.

or PepsiCois a global company operating in the non-alcoholic beverageindustry, the salty may industries these Although industry. food breakfast the and industry, sauorysnack food be seenas concentrically related, they are analyzedseparately'
:'''j

The global nonalcoholic beverageindustry is composedof carbonatedSoft drinks' fruit and vegetablejuices, bottled watef, sports and ehergy drinks, concentrates,and ready-to-drinkcoffee and teas.These drinks make up a $395 billion world market with drinks the largest shareof the market at $150 billion (seeExhibit 6). World carbonated demandhas continued a slow but steadyoverall growth for the last five years of around 9 percent with sports drinks, bottled water, and energy drinks showing the largest growth. However, in the United States,the carbonatedsoft drink market has shown a decline of 0.4 percent in 200':- as consumers shifted from soft drinks to bottled water and sportsdrinks. In the United States,the carbonatedsoft drink market shrank to $63.4billion in2001and is projected to continue to diminish to a value of $61.5 billion by 2012, ir clecreaseof 21 percent. Growth in the carbonated drink market was largest in Asia and Europe. the industry is highly Although there are many producers of nonalcoholic beverages, concentrated,with Coca-Cola and PepsiCo holding the largest shareof the U.S. market at alcl 25 percent, respectively.Coca-Cola, however,holds the largest shareof the 23 per:cenf U.S. cola market at 41 percentwith Pepsi secondat36.7 percent' This industry continues to operate in the same general manor as it has for over 100 years. Both Pepsi and Coke manufacture the concentratesand syrups, which are then sold to bottlers. Bottlers then distribute the finished product to grocery stores, convevending machines,and so on. Pepsiand Coke spendheavily on nlencestores,restaurants, national advertising as well as provide large-promotionalincentivesto the bottlers. The market for these products dependson the changing taste of consumersand requires manufacturesto constantlydevelopnew productsto meet those changingdeman$s.In recent years we have seen the introduction of diet, free, and zero colas as well as flavored water spol.tsand energy drinks. These companies are also highly dependenton supplies of clean water.The downturn in the economy has also affected the sale of colas and water as some consgmershave switched to store brands and tap water as cheaper alternativesto the national brands. Additionally, a recent environmental campaign against plastic containers has impacted the sale of bottled water and forced manufacturesto develop more environmentally friendly contalners.

4a

JOHN AND SHERRY RO SS

World Chip Market

$2s,000
{r+
f

$20,000 $1s,000
Chips/crisps

* E

$10.000 $5,ooo $o 2004 200s 2006 2007 2008

Tortilla/cornchips Pretzels

Source: Eummonitor Inte rnationat (200g\.

,.1

The U'S' savorysnackmarket is composedof over 400 companies with combinedannual revenuesof $23 billion. This industry is also highly concentrated with the top 50 compantes controlling 75 percent of the market. The largest competitors in this industry include Pepsico's Frito-Lay (with 39 percenr),Kraft's Nabisco lwitrr r l percent),and Kellogg's Retail Snacksdivision. By itself, the global chip marketis over $32 billion, wirh an annual growth rate of approximately 6.35 percent (see Exhibit 7). This market is also driven bv consumertaste and health considerations. The largestproduct segmentof this market is potato chips (30 percent of industry revenues) followed by tortilla chips (20 percent)and bulk nurs (10 peicent;. The remainder of the market is composedof cannednuts, corn chips, peanui butt"r, popcorn, and hard pretzels. It is estirnated that 99 percent of all American households have salty snacks and the averagehousehold spendsapproximately $g0 yearly on 32 pounds of theseproducts. Companies in this industry must compete against each other through extensive advertising' product promotions, and product innovation. As consumer tastes have changed,we have seenthe introduction of products with less salt, sea salt. bakecl.zero trans fat, made of vegetables,low carb, organic, hot, sweet, black, green, and with chili or cheeseadded. Some of the new products are designedto compete on taste; others are designedto reflect a particular consumerconcern such as obesityor hypertension. The global breakfastfoods market is composedof more thanjust cereals:it aiso includes bread,pastries,breakfastbars, and spreads.Bread is by far the largest segmentof this market followed by pastriesand then cereals.However, growth for bread is low at 1.6 percent, with pastries at 3.5 percent and cereals at 2.6 percent.The greatest growth for breakfast food appearsto be in breakfast bars, and the fastest regional growth is the Asian-pacific market. The largest markets continue to be Europe and America, but both are mature with low growth rates. PepsiCois primarily in the U,S. breakfastcereal market with the Quaker division generating approximately 4 percent of total revenues,down from 5 percent in 2007 and 2006. This market is a highly concentrated$9 billion market with the top four companies accounting for 80 percent of the market. The major competitors in this rnarket are Kellogg and GeneralMills. Demand is driven by consumerdemographics(age ancllifestyie) and health considerations because a fast-paced life and health concernsshapeour perceptions of the first meal of the day.Ready-to-eat cerealscompriseabout 90 percentof total industry revenue.

-L-

CASE5. PEPSICO-2009

49

Coca-Cola
Annual IncomeStatement Two-Year (a l ln u m ber sin m illio n s ) Sales Costof Goods Sold Depreciation,Depletion & Amortization GrossIncome Selling, General & Admin Expenses Total Operating Expenses Operating Income Non-Operating Interest Income EarningsBefore Interest & Taxes InterestExpenseon Debt PretaxIncome IncorneTaxes Equity Intelest Earnings Net Income Available to Common
Source: Thontpson Banker (20O8)

12t31t08 3r,944.00 10,146.00 1,228.00 20,570.00 rt,774.00 23,266.00 8,678.00 333.00 8,751.00 438.00 8,313.00 t,632.00 -874.00 5,807.00

1.2t31107

28,857.00 9,229.00 1,163.00 18,465.00 10,945.00 2r,337.O0 '7,520.00 236.00 7,661.00 456.00 7,205.00 1,892.00 668.00 5,981.00

Coca-Cola, the brand known around the world, is the largest producer and distributor of dark colas in the world and as such is PepsiCo's major competitor. With net revenuesof $31.944billion and net profits of $5.807 billion in 2008 as seenin Exhibit 8, the CocaCola Company continues to expand even in the current monetary crises.The financials for Coca-Colashow a strongcashposition of $4.919billion and long-termdebt of only $2.781 billion. Coca-Cola has also investedin purchasing bottlers and streamlining its operations. "Rather, our entire Coca-Cola system is focused on what critically matters to our business:investing in our brands enhancing our communications to the customerswho sell our beveragesand the consumerswho invite us into their lives each day; and streamlining Annual Report). Coca-Cola seemsto be following our operations" (President'sletter, 2OO8 a very concentratedstrategyby focusing almost exclusively on nonalcoholic beverages with little, if any, tendency to diversify. This strategy is enhancedby extensiveadvertising ($3 billion expensein 2008) through the bottling and distribution network and toward the ultimate consumer.Additionally, as the demand for dark colas has diminished, Coca-Cola has continued to strengthentheirjuice, ready-to-drink tea and coffee products, water and sport drinks along with the introduction of Truvia as a sweetener. Coke generatesmost of its operating revenueoutside the United Stateswith international concentratesales accounting for 77 percentand U.S. sales23 percent.Coke is a strong,well-known competitorand spent,in additionto advertising, $4.4 billion in promotion to bottlers and resellers in 2008. This amount of spending on promotion and advertising has led to volume growth in Eurasia of 7 percent, Europe of 3 percent, Latin America of 8 percent, and the Pacific of 8 percent. However, in the North America.market volume growth was down I percent. This follows the global trends of a mature and declining market in North America with growth in other parts of the world. Advertising for Coca-Cola is similar to Pepsi in that they also rely heavily on short catchyslogans,songs,and celebrity endorsements. with Since 1886Coke hasbeensuccessful such slogansas "Delicious and Refreshing" (1904), "The PauseThat Refreshes"(1929), "Things Go Better With Coke" (1963), "It's the Real Thing" (one of the most successful: 1969),"Have a Coke and a Smile" (1979), "Life ThstesGood" (2001), and currently "Open Happiness"(2009).

50

JOHN AND SHERRY RO SS

Coca-cola will continue to concentrateon its cola businessbut expand its water and juice sales and continue growth in international markets. However, the North American market generates25.7 percentof revenue,and coke will continue a ,p*a heavily on pro_ motion and advertising in this market. Interestingly, Coke's ."""ni p'u."rrasesof bottling facilities account for 27 percentof revenues. euroi" is the seconJ iirgest market; ir contributes 15 percent to revenuesand it should also seecontinued promotronai activity.
'r ':,,'

Kraft Foods is currently in the processof reinventing itself by restructuring the organization into two'major divisions, North America and International. The North American division is composedof Beverages, cheese & Foodservice, convenient Meats, Grocery,and Snacks& cereals' The International division consistsof European union and Developing Markets. Additionally they have brought in new top managementand six new independent board directors' These changesare designed to strengthenthe position of Kraft in the highly competitive and dynamic markets in which it cuiently op".u*. The Kraft financials in Exhibit 9 for 200g show a tz.iz p"r"*r, irr"r"ur" in net rev_ enuesover 2007 to $42.20-l-billion.This growth is a continuation of increasinggrowth ftom200l' Growth from 2004 to 2006 wai relatively stagnant rlitr grortt rates of 3.76 percent,6.02 percent,and 0.71 percent,respectively. Kraftis new stratelgies seemto be pay_ ing off in increasedrevenueand possible future growth. The North American Snacks and Cereals division produced $5.025 billion in revenuesin 2008, an increaseof 3 percent over 2007 revenue of $4.g79 billion. This division'sproductsinclude oreo, Chips Ahoyl, Newtons, Nilla, Nutter Butter and snackweil,s :' .i ,i ,' r t' K f aft

Two-Year Annual IncomeStatement (a l l n u m b e rsi n m i l l i ons) Sales Cost of GoodsSold Depreciation. Depletion & Amortization GrossIncome Selling, General & Admin Expenses Total Operating Expenses Operating Income Non-Operating Interest Income Earnings Before Interest & Taxes Interest Expenseon Debt Pretax Income Income Taxes Minority Interest Equity Interest Earnings Net Income Before Extraordinary Items& Disc Ops Extraordinary Items & Gain(Loss) Saleof Assets Net Income Before PreferredDividends PreferredDividend Requirements Net Income Available !o Common

12/31/08 $ 42,201.00 27,185.00 986.00 14,030.00 9,992.00 37,163.00 s,038.00 0.00 3,949.00 1,2',12.00 2,s77.00 728.00 0.00 0.00 1,849.00 1,0s2.00 2,90r.00 0.00 l,849.00

12/31t07

$ 37,241.00 23,1tL00 886.00 r2,644.00 1,749.0A 32,346.00 4,895.00 20.00 4,351.00 624.00 3,727.00 1,137.00 0.00 0.00 2,590.00 0.00 2,s90.00 0.00 2,590.00

Source: ThompsonBanker (2O08).

CASE5. PEPSICO-2009

51

cookies;Ritz, Premium, Triscuit, wheat Thins, cheese Nips, Honey Maid Grahams, TeddyGrahams and Kraft macaroni and cheesecrackers;Nabisco 100 Calorie Packs; SouthBeach Living (under license) crackers, cookies, and snack bars; Planters nuts and trail mixes; Handi-Snacks two-compartment snacks;Back to Nature granola, cookies, nuts, and fruit and nut mixes; and Balance nutrition and energy bars. crackers, As Kraft continuesto improve in the coming years,it should becomea strongercomperitorin all divisions. However,with long-term debt of $18.5 billion (LTD to common equityof 83.73 percent),debt coveragecould slow its progress'
ii

pepsi and Coke have fought the cola wars for decades,and Coke has generally beatenout pepsifor market share.However, today we seethat PepsiCois a larger and more diversified companythan Coca-Cola with numerousopportunitiesand directions for growth. Although the internationalmarketsfor colas themarketfor colasnationally may be somewhatstagnant, in double-digit figures. increased these have andsnackscontinue to grow. In somecounffies, foods that seem to in noncola to expand Additionally, PepsiCo has continued water and sports snacks, salty and colas between enhancethe opportunities for synergy PepsiCo'sbotallow promotions juices. and coinbinations These drinks, and breakfast and products for proliferation of the However, space. gain shelf retail tlers enhancedability to use of the increasing etc') and free, (light, free, caffeine sugar specific market segments products and at new to innovate PepsiCo force to will continue housebrancisby retailers product offerings. cuffent the sametime reevaluate pepsiCo spent $650,000 in the secondquarter of2009 to lobby on sugar,food safety, patent reform, energy, taxes, and other issues.Besides Congress,PepsiCo labeling, food Department, Executive Office of the President,and other entities, the Agriculture lobbied clerk's office accorclingro a report filed July 20,2009, with the House of Representatives D.C. in Washington, In late 2009, PepsiCo acquired Amacoco NordesteLtda and Amacoco SudesteLtda, Brazil's largestmakels of packagedcoconut water drinks. PepsiCois expandingits presBrazilian companies make the Kero Coco encein South America's largest nation. Thes_e andTrop Coco clrinks. Also in \ate 2009, PepsiCo acquired and combined its two largest independent bollers for $7.8 billion-PepsiAmericas and the Pepsi Bottling Group. This forward integration strategyhas been a major initiative of PepsiCo for many months. Develop a clear three-yearstrategicplan for PepsiCo. I .1 ,1' , 1; ; r ; r ' r iliur l 1. J. Slater, "Coke, Pepsi Fight Product Contamination Chargesin India" Wall Street Journal(August15,2003):B1.

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CT A S EA N A L Y S I S PART6 . STRATEG I C- M ANAG EM EN

1 Oral Presentation-SteP
(2 minutes) Introduction
Prepare andanalysis' thetime settingof your case yourselves by nameandmajor.Establish a. Introduce plan for the three yearc20lO-2Q12' your strategic captureinterest' your companyandits products/services; Introduce b. andtell who is doing what parts. c. Showthe outline of your presentation

Oral Presentation-SteP2
(4 minutes) MissionA/ision
Web site, or annual report' a. Show existing mission and vision statementsif availablefrom the firm's or elsewhere. b. Show your "improved" mission and vision and tell why it is improved' c. compare your mission and vision to a leading competitor's statements. you envision for d. Comment on your vision and mission in terms of how they support the strategies your firm.

Oral Presentation-SteP3
(8 minutes) lnternalAssessment
give definitions a. Give your financial ratio analysis.Highlight especiallygood andbadratios' Do not ofthe ratios anddo not highlight all the ratios. titles." Identify chart'foundor "createdbasedon executive b. Showthe firm's organizational the chart' comprise males white all Unless aspects. good and bad the type of chart as well as people come as structure positions reveal importantbecause generally not are peoples'names go. and chart.Tell why you feel it is improvedover the organizational your improved/recommended c. present chart. existing you Discussthe map in light of strategies d. Showa marketpositioningmapwith firm and competitors. envisionfor firm versuscompetitors'strategies. andin e. Identify the marketingstrategyof the firm in termsof good andbad pointsversuscompetitors firm. you envisionfor the light of strategies you envision.Also, perhaps Discussin light of strategies f. Showa maplocatingthe firm's operations. chart. showa ValueChainAnalYsis effons/abilitiesin termsof goodand show)the firmls Web site ande-commerce g. Discuss(andperhaps badpoints. h. Showyour "valueof thefirm" analysis. Go over eachonelisted without "reading" them i. List up to 20 of the firm's stengths andweaknesses. verbatim. j. Showandexplainyour Intemal FactorEvaluation(IFE) Matrix'

HOW TO PREPARE AND PRESENT A CASE ANALYSIS

ri
a.

b.

l:i

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CA S EA N A L Y S I S PART6 . STRATEG I C- M ANAG EM ENT

Show your projected balance sheet. Relate changes in your items to your recommendations Be sure to show the retained earnings calculation and the results of your EPS/EBIT decision. d. Show your projected financial ratios and highlight severalkey ratios to show the benefits of your strategic plan.

7 Oral Presentation-Step
(2 minutes) Evaluation Strategy
objectives financialandnonfinancial a Balanced to showyour expected a. Prepare Scorecard for the firm. recommended

8 Oral Presentation-Step
(4 minutes) Conclusion
a. Compareandcontrastyour strategicplan versusthe company'sown plansfor the futire questions. for their attention. Seekandanswer members b. Thankaudience