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COMPANYOVERVIEW...................................................................................................... 3

BEVERAGES.....................................................................................................................................3SNACKFOODS.................................................................................................................................4

INDUSTRYANALYSIS....................................................................................................... 5

BEVERAGES.....................................................................................................................................5SNACKFOODS.................................................................................................................................7

COMPETITIVE POSITIONING............................................................................................... 8

BEVERAGES....................................................................................................................................8SNACKFOODS.................................................................................................................................9

CORE COMPETENCIES.................................................................................................... 10

DIVERSIFICATION STRATEGIES.......................................................................................... 11

DISRUPTIVE TECHNOLOGIES............................................................................................ 12

PEPSICOS GLOBALIZATION............................................................................................. 13

COMPETITION...............................................................................................................................13TRANSPORTATIONCOSTS..................................................................................................................13PRODUCT LIFE-CYCLE.....................................................................................................................14

Components of International Strategy ....................................... 14HANDLINGEXPANTIONINTOUNIQUEANDCHANGINGMARKETSEGMENTS.................................................... 14MERGERS, ACQUISITIONSANDPARTNERSHIPS.......................................................................................14RELOCATIONSTRATEGIES.................................................................................................................14TECHNOLOGYINTENSITY...................................................................................................................15

ADVERTISINGANDMARKETINGSTRATEGIES..........................................................................................15

Implementation of International Strategy .................................. 15

ECONOMIES

OF

SCALE

......................................................................................................................15COSTSOFGLOBALCOMMUNICATION....................................................................................................16BARRIERSWITH BUSINESSCULTURESANDGOVERNMENTPOLICIES............................................................. 16

COLLABORATIONAND ALLIANCES...................................................................................... 16

DOMESTIC COLLABORATION STRATEGIES.............................................................................................17INTERNATIONAL COLLABORATION STRATEGY........................................................................................18DISTINCTIONOF COLLABORATION STRATEGYBETWEEN ESTABLISHEDAND EMERGING MARKETS................... 20

STRATEGIC ANALYSIS CONCLUSIONS.................................................................................. 20

STRATEGIC RECOMMENDATIONSAND ALTERNATIVES............................................................... 20

MARKETING/ADVERTSINGRECOMMENDATIONS.....................................................................................20

RESEARCHAND DEVELOPMENT.........................................................................................................21DIVESTITURE.................................................................................................................................21ACQUISITION.................................................................................................................................22

Sample of Jones Sodas current portfolio ................................... 24


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Executive Summary


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COMPANYOVERVIEW

PepsiCo is a large international consumer products company focusing onconvenient foods and beverages. PepsiCo has two key industries: beverages,

defined as non-alcoholic and non-dairy, and snacks, defined as salty, sweet,and grain-based. PepsiCos worldwide beverage operations include Pepsi-Cola North America (PCNA), Gatorade/Tropicana North America (GTNA), andPepsiCo Beverages International (PBI). Frito-Lay is PepsiCos operatingdivision in the snack food industry. PepsiCo has a third operating division,Quaker Oats, which competes in the ready-to-eat cereal and otherconvenient food markets. Quaker Oats is the smallest division andcontributed less than 10% of the revenues to PepsiCo. As such it has notbeen analyzed in depth as the beverage and snack food divisions andindustries have been for this report.

PepsiCo in total had revenues of $27 billion and net income of $2.7 milliondollars. PepsiCo achieved return on sales, assets and equity of 9.8%, 12.5%and 32.8%, respectively. The company has a current ratio of 1.17 and a debtto equity ratio of .3 and liability to equity ratio of 1.5. Based upon theseratios it appears that PepsiCo is in good financial health.

BEVERAGES

PCNA promotes and manufactures concentrates for sale to franchisedbottlers and also sells syrups for many Pepsi brands to national fountainaccounts. It receives a royalty fee for licensing the distribution and sale of

Aquafina bottled water and also involved in joint ventures with Lipton andStarbucks to produce and distribute tea and coffee products. PCNAmanufactures and sells SoBe and Dole beverages for distribution and sale toits bottlers. GTNA produces, markets, sells and distributes a host of productsincluding Gatorade, Tropicana and Dole juices. PBI manufacturesconcentrates for Pepsi, 7-Up, Mountain Dew and other brands internationallyfor sale to both franchised and company owned bottlers. PBI also operatesbottling and distribution facilities in certain international markets. Finally, PBIalso produces, markets, sells and distributes Gatorade and Tropicana juices.

Each of PepsiCos beverage operation units contributed to the overall growth

of the company. Worldwide beverage operations totaled over $10.44 billionor 39% of total net sales in 2001. Worldwide beverage operations (beforeaccounting for merger-related costs, restructuring, and other corporatecosts) totaled 35% or $1.68 billion of PepsiCos operating profit.

PCNA reported increases of 4% in sales volume, 18% in revenue, and 13% inprofit. In addition, PCNA was able to gain market share away from Coca-Colathrough innovative new products such as Pepsi Twist, Sierra Mist, and


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US Snack Chip Industry

Other

29%

Frito-Lay

59%

Private

Label

9%Procter

and

Gamble

3%

Mountain Dew Code Red. The non-carbonated drink segment experiencedtremendous volume growth of 30% in 2001. PBI, which was formed after thePepsiCo-Quaker merger, had increases in operating profit of 31%, revenue of2%, and volume of 5%. PBI gained market share in most of its top markets

including significant progress in Lebanon, Russia, Vietnam, Venezuela, andEgypt. Just as in PCNA, innovation and brand extensions helped fuel growthin a number of key markets. However, the real key to PBIs success in 2001was the substantial cost savings yielded by combining the general andadministrative functions of the Pepsi-Cola, Gatorade, and Tropicana productlines. GTNAs 2001 had increases in revenue 5%, operating profit of 7%, andvolume of 4%. The increases resulted from Gatorades brand extension,which helped increase Gatorades 2001 volume growth of 6%. Gatorade sellsmore than six times as much as its nearest competitor in major US channels(supermarkets, convenience, and drug stores). Tropicana not only has twicethe market share of its leading competitor, but also sells four of the top ten

refrigerated juice brands in US supermarkets.

SNACKFOODS

Frito-Lay, PepsiCos largest division, sells products in the salty, sweet grain-based snack foods industry. An undisputedleader in these markets, the company haseight of the ten biggest selling snack brands inthe United States. Some of these include Lays,Doritos, Tostitos, Cheetos, Ruffles, Rold GoldPretzels, Sunchips, Funyuns, and Quaker Oats

granola bars. Outside the US, Frito-LayInternational sells in several countries, mostnotably Mexico, Australia, and the U.K.

Financially, the Frito-Lay division contributed toPepsiCos 32.8% return-on-equity by providing61% of the companys total sales (65% of total operating profit) in 2001.These sales represented a 6% increase in 2001, totaling more than $9.3billion. In terms of market share, Frito-Lay controls 59% of the US snack chipmarket, with P&G holding the second market position at only 3% marketshare.

PepsiCo began its international snack food operations in 1966. Today, withoperations in more than 40 countries, it is the leading multinational snackchip company, accounting for more than one quarter of international retailsnack chip sales. Products are available in some 120 countries. Frito-LayNorth America includes Canada and the United States. Major Frito-LayInternational markets include Australia, Brazil, Mexico, the Netherlands,South Africa, the United Kingdom and Spain.


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Pepsi-Cola soft drink operations beverages are available in about 160countries and territories. Pepsi-Cola began selling its productsinternationally in 1934 with its operations in Canada. Operations grew rapidlybeginning in the 1950s. In addition to brands marketed in the United States,

major products include Mirinda and Pepsi Max. Pepsi-Cola North Americaincludes the United States and Canada. Key international markets includeArgentina, Brazil, China, India, Mexico, Philippines, Saudi Arabia, Spain, Thailand and the United Kingdom. PepsiCo Beverages International alsoproduces, sells and distributes Gatorade sports drinks as well as Tropicanaand other juices internationally. Pepsi-Cola International includes thebusiness of Seven-Up International.

Major Frito-Lay products include Ruffles, Lay's and Doritos brands snackchips. Other major brands include Cheetos cheese flavored snacks, Tostitostortilla chips, Santitas tortilla chips, Rold Gold pretzels and SunChips

multigrain snacks. Frito-Lay also sells a variety of snack dips and cookies,nuts and crackers.

INDUSTRYANALYSIS

BEVERAGES

The first model deals with the bargaining power of suppliers. Overall, there isa low force on the beverage industry because each of the three unitsperforms several key operations in the production and distribution of itsproducts. As stated above, PCNA promotes and manufactures the

concentrates, which are sold to the franchised bottlers, of which they arepart owners domestically. PBI manufactures concentrates for sale tocompany owned bottlers internationally, where the product is then produced,distributed, and sold. Internationally, they own and operate the entire supplychain which helps explain why the bargaining power of suppliers is low. ForGTNA, the force is also low due to its low commodity base. Essentially, thefour key units of GTNA are sugar, water, oranges, and its machinery forproduction and distribution of product. For the most part, the input costs arequite low on a product unit level and relatively easy to obtain. Granted,GTNA does rely on farmers worldwide to produce quality fruits for itsTropicana juices and it is possible that bad weather may impact crops and

thus, lead to higher costs down the road. However, these higher costs, whichcan be passed directly to the end customer, are only temporary. GTNA willacquire its oranges, apples, and other fruits from other farmers in a differentgeographic area in order to produce its products.

The second force deals with the threat of new entrants into the industry.Overall, there is a low-to-medium force in the worldwide beverage operationsindustry for a number of reasons. First, there are significant barriers to entry


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is also a high but declining force as Pepsi continues to expand its productline. Switching costs remain low as consumers will continue to purchasebeverages whether they are carbonated or non-carbonated. While customerscannot directly negotiate on the price of the products, they can influence the

purchasing activity of the distribution channel, which in turn, can affect therevenues and market share for PepsiCo and the rest of the firms within theindustry. For example, if demand declines in a particular region, then a firmmight either increase its advertising in a given market or engage in a pricewar with its competitors.

SNACKFOODS

Suppliers for the snack foods industry produce ingredients, packaging, andmanufacturing tooling and equipment. While most of these products arecommodities, specialty agricultural products and food manufacturing

equipment require heightened supplier relationships. For example,partnering farmers produce proprietary/patented potatoes for Frito-Layschip business. In spite of these partnerships, suppliers for this industrygenerallyhave little power and as a result put little pressure on the salty,sweet snack food industry.

Consumers in this industry are characterized as fickle and price conscious.As a result, low switching costs and fads cause huge variation in productdemand. For example, in the early 90s SunChips by PepsiCo were wildlypopular, but subsequently demand quickly faded. The fickle tastes ofconsumers results in high pressure on the snack foods industry.

There are a large variety of substitutes to the snack food industrys products.Some of these include candy, fruits and vegetables, bread and dairyproducts, home cooked meals, and pre-cooked restaurant or concessionfoods. Market pressure from these substitutes is high.

Competition in this industry is divided into two groups. Top-tier producersare large multinational snack foods companies such as PepsiCo (Frito-Lay)and Procter and Gamble. Bottom-tier snack foods producers make privatelabel, boutique, novelty, and regional snacks. Examples of these producersinclude Tims Cascade Chips, Poore Brothers, Tillamook, and Obertos.

Competition in these sub-industries (Top and Bottom) differs because ofthe varying barriers to entry characteristic of each. In addition, competitionis increased by slow market growth (especially domestically) and the abilityof entrenched competition to retaliate. For example, PepsiCos control of anoverwhelming 59% of the US market allows them to successfully wage pricewars to punish competitors.


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New entrants to the top-tier of this industry face formidable barriers to entry.These barriers include substantial investment requirements, economies ofscale, branding, market share, and shelf-space. Large investmentrequirements for manufacturing and distributing on an international level

preclude many from competing in this industrys top-tier. Similarly,economies of scale recognized in the distribution channels, research anddevelopment, production facilities, and learning curve, allow large producersto minimize unit cost and reduce competitive pressures. Branding in thisindustry is vital. Well-known brands in this industry, such as Frito-LaysDoritos and P&Gs Pringles deter competition by increasing the costs ofmarket share. Finally, new entrant must overcome existing producersrelationships with chain-retailers such as Wal-mart. These relationships resultin lowered transaction costs and manufacturers control of large blocks ofshelf-space

Bottom-tier suppliers compete at regional levels or and in specialty goodsunattractive to large producers. At this level, economies of scale (while stillsubstantial) are decreased and distribution channel requirementsdiminished. However, growth is limited by threats that undue success wouldinduce retaliation or buy-outs from top-tier producers. As a result, threats toentry are low for top-tier suppliers and moderate for bottom-tier suppliers.

In the US, slow market growth and high market pressure from buyers,substitutes, and competitors will reduce the profit potential of competitors inthis market. However, smaller bottom-tier producers, with modest coststructures, have greater opportunity to realize profits if they focus on

specialty or regional products.

COMPETITIVE POSITIONING

BEVERAGES

A firm in any industry can obtain a competitive advantage over itscompetitors by doing something that is unique in some valuable way. ForPepsiCo, some examples of a differentiation strategy include the innovationssuch as product design (ex: Pepsi contour bottles), brand extensions (ex:Mountain Dew Code Red), and research institutions listed in Porters third

force. This strategy increases the consumers willingness to consumePepsiCos products and hopefully add a long-term Pepsi consumer. Anotherpotential way to gain a competitive advantage is by entering in exclusiveagreements where PepsiCo products are exclusively served. By purchasingthese rights, PepsiCo has a captive audience devoid of any competitors. Oneexample of this is PepsiCos allowance with United Airlines in which onlyPepsi products will be served on all domestic flights. Another example isPepsis multiyear agreement with Baja Fresh Mexican Grill. In this situation,


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both PepsiCo and Baja win whenever customers order a beverage to go withtheir meal. PepsiCo wins by adding another steady customer and Baja winsby getting its beverage products and supplies at a lower price per unit orperhaps getting better service than its previous supplier. A third example

deals with pouring rights at sporting events, concerts, and other venues.Once again, both the venue/foodservice operator and PepsiCo win becausethe operator gets a reduced wholesale price from PepsiCo, thus increasingits profit margins. PepsiCo wins by adding increased sales, and exclusivemarketing and other brand exposure at the stadium, arena, or other venue.For example, think of the marketing value when the Pepsi logo is affixed nextto an arena or a sports league. In fact, in 1997 PepsiCo purchased thenaming and pouring rights to the Denver area (aptly named the PepsiCenter), which is the new home of the Denver Nuggets and ColoradoAvalanche. Throughout the arena, and even on the arena floor, the Pepsiname and logo is everywhere adding exposure and brand recognition. In the

past few years, PepsiCo has been very aggressive and successful (especiallyin MLB and the NHL) in outbidding Coca-Cola for pouring rights at a numberof sports stadiums.

SNACKFOODS

PepsiCos Frito-Lay division focuses on product innovation to differentiate itssnack foods from those of other producers in the market. Premium productssuch as Frito-Lay Doritos, Cheetos, and Sunchips demonstrate thisdifferentiation strategy. These products are comparatively high-priced,offering more than just a typical salty snack. This strategy effectively

creates a competitive advantage, increasing the consumers willingness-to-pay while maintaining or decreasing costs.

In order to increase the consumers willingness-to-pay, Frito-Lay focuses onadding product value through product innovation. For example, to find theperfect chipping potato Frito-Lay develops thousands of proprietarypotato seed varieties not available to other manufacturers.1 Frito-Lay hasalso patented a process that intensifies flavoring by coating both sides of itspotato chips. Both of these examples show efforts to differentiate potatochips (an unlikely candidate) in order to increase prices.

While Frito-Lay works to differentiate its products by adding value, it also isinvolved in aggressive cost cutting measures. Investments in improveddistribution channels, such as through the merger with Quaker Oats, willreduce lead times and inventory carrying costs. Maintaining or loweringproduct costs allows PepsiCo/Frito-Lay to further gain a competitiveadvantage and increase operating profits.


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Competitors in the salty snack foods industry use a variety of positioningstrategies. Proctor and Gamble, Frito-Lays largest competitor, uses a similardifferentiation strategy to position its Pringles potato chip line. Theinnovative Pringles round cylinder packaging adds customer value by

improving quality (less broken chips) and increasing product awareness(branding). Alternatively, generic chip producers pursue a low cost position.These generic products come in plain packaging and are sold at a discount.In these companies, competitive advantage will be gained through theefficient operation of their production and distribution facilities.

CORE COMPETENCIES

A core competency is driven by the resources and capabilities a companyhas at its disposal. As such to understand the core competency of PepsiCo, itis required to first understand the resources and capabilities of PepsiCo.

A resource is any physical or intangible item that a company has to use.Examples are the people, plants and ideas a company will use to create itsproduct or service. Analysis of PepsiCo shows the following major resourcesit has at its disposal.

Institutional knowledge of the snack market and consumer snackconsumption patterns and behaviors.

Proprietary potatoes and oranges developed to use in productproduction

Secret formulas for the PepsiCos soft drinks.

Significant financial resources at its disposal.

Celebrity endorsements

Brand equityA capability is a process in which the company uses some of its resources atits disposal.Some of PepsiCos capabilities are as follows.

Special manufacturing processed for its products.

Ability to create new and innovative products based upon theinstitutional knowledge it has obtained.

Ability to build and keep brand equity.

The core competence of the corporation is the use of capabilities andresources to create value for the customers. Through the analysis it wasdetermined that PepsiCo has two major core competencies, branding andnew product innovation.

Branding is important for PepsiCo in that its products have significantcompetition and are not highly differentiated from each other without the


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brand differences. In addition the products are in markets that are highlyprice sensitive and little competition can be made on the basis of price.PepsiCo uses its brand equity and celebrity endorsements to create value forits customers in many ways through branding. Customers enjoy wanting to

be like celebrities and one way to do so is to use the same products thecelebrities do. PepsiCos branding of its products has created a sense ofcommunity between its customers. The branding also gives the consumer asense of the quality of the product. The consumer knows the product will beof high quality and taste no matter where the buy the product because of thesignificant efforts PepsiCo has made in branding and producing its products.

The other major core competency is product development. PepsiCo is mustconstantly develop new products because consumers tastes andpreferences are constantly changing as discussed in the industry analyses.The constant changes forces PepsiCo to create new and different products to

maintain its competitive advantages.

DIVERSIFICATION STRATEGIES

PepsiCo diversification strategy uses most diversification strategy rationales.The major diversification rationales include dominant logic, synergies andcore competencies. These rationales can be seen when reviewing the recentacquisition of the Quaker foods brands, which included Gatorade.

PepsiCo appears to use the dominant logic rationale, which is the belief thatmanagers can share methods and practices across businesses and

industries. Before the acquisition PepsiCo was in the two major industries asdiscussed above beverage and snack food. Each requires a specificknowledge, but is related in many ways such as low cost, high volume, soldat many of the same locations, and similar distribution chains. Quaker foodsacquisition fits into this management needs almost exactly. The Gatoradeproducts fit into PepsiCos beverage markets to fill in existing product gaps.Quaker foods are slightly different but in many ways the same. Thedistribution chain is the same as PepsiCo snack foods and product productionis going to be similar. The significant difference is the slight change inproduct Quaker foods are not in the snack food market, but in a similarconvenience food market, where PepsiCo should be able to leverage its core

competencies.

PepsiCo also uses the core competency rationale, which is the belief thatcompanies have the ability to gain a competitive advantage from a processand can move that competency to the new business to gain an advantagethere. The acquisition of Quaker and Gatorade also falls in with PepsiCoscore competencies. Both have significant brand names that PepsiCo will be


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able to grow and use. In addition both require constant innovations to keepconsumers happy and buying the products.

PepsiCo is using the synergy rationale also. Synergy is the thought that a

business is worth more than the sum of its parts. PepsiCo is in the non-alcoholic, non-diary beverage market. The acquisition of the Gatorade brandand products allows PepsiCo to fill in a gap in its product offerings. This willallow PepsiCo to take advantage of its supply chain and helps its vendor byhaving to deal with only company to get a wide range of product offerings.

PepsiCo has tried many diversification strategies that have not worked in thepast. The most telling example is its purchase and divesting of TriCon foodchains. In the 80s PepsiCo had acquired these food chains, which includeTaco Bell, KFC and Pizza Hut, in the belief that it could obtain synergies.Unfortunately because the industries are so different PepsiCo was having

problems managing the chains correctly and had to divest them in 1997. These food chains did not match well with any of the diversificationstrategies expect for the core competency rationale, but PepsiCo was notable to leverage that into a competitive advantage.DISRUPTIVE TECHNOLOGIES

In the snack foods and beverages industries disruptive technologies mighttake the form of new or drastically improved food additives or preservatives.These additives would become disruptive if they improve at a quick rate andsubstantially increase demand. A recent example of this type of disruptive

technology is Olestra, used inPepsiCo Frito-Lays WOW Tostido and Dorito chips.Olestra is a low-calorie fatsubstitute. Unfortunately,due to minor side effects,Olestra has recently beenthe subject of mediaattention. As a result, thecurrent performance of theproduct is somewhat low

(see graph). However, asthese side effects areeliminated the steepperformance trajectory willresult in a disruptive technology. In other words, in the long run the use ofOlestra will reduce calories quicker than required by the market. Theseperformance increases will result in drastically increased demand for thoseproducts that use the Olestra additive.

Time

Performance

Expected Trajectory of

Olestra Performance

(I.e. Calorie and

Fat reduction)

Current Olestra Performance

PerformanceIm

provement

RequiredbyM

arket

(I.e.TypicalR

eductionsin

Calories)


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PEPSICOS GLOBALIZATION

COMPETITION

Coca-Cola has hindered PepsiCos worldwide growth much more substantiallythan their domestic expansion. Coke is the current global leader, dominatingthe worldwide soft drink industry with a 58% market share. Comparatively,Pepsi maintains a distant second position with 21% of the market.2 Coke hassucceeded at maintaining their leadership position through worldwidechanging business environments with their expertise in branding power,which can be attributed to universal availability, universal awareness, andstrong trademark protection, which Pepsi has not yet been able to achieve.For this reason, Coca-Cola has taken over the Russian market, which used tobe entirely controlled by Pepsi.3

Multi-Domestic Pepsi utilizes the multi-domestic strategy, modifying itsproduct-lines worldwide to accommodate local tastes and preferences. OftenFrito-Lay products are known by local names. These names include Matutanoin Spain, Sabritas and Gamesa in Mexico, Elma Chips in Brazil, Walkers in theUnited Kingdom and others. The company markets Frito-Lay brands on aglobal level, and introduces unique products for local tastes. The TropicanaBrand differs in offering Frui'Vita, Loza and Copella.4 The biggest new brandentrant is the international lemon cola drink, domestically named PepsiTwist, which is likely to be branded in India as Pepsi Aha.5

Numbers of types offered differs among countries Today the Tropicanabrand is available in 63 countries, and in contrast to North Americasprincipal brands of Tropicana Pure Premium, Tropicana Seasons Best, DoleJuices and Tropicana Twister, these countries principal brands include onlyTropicana Pure Premium and Dole juices.

Chauvinism Where chauvinism benefits companies domestically, it worksagainst them globally. Pepsi has managed this hindrance by labelingproducts under localized brand names.

TRANSPORTATION

COSTS

Because the addition of water substantially increases the weight of the soda,and hence increases the shipping costs, Pepsi only ships their secretlyformulated syrup, and then delegates the addition of the water to the localdistribution centers. This also allows the local Pepsi subsidiaries to performthe product development and quality control.


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PRODUCTLIFE-CYCLE

Because Pepsi does not have a limited product life cycle, and is theoreticallyendless as long as there is a demand for soda, this factor is not a substantialdeterminate of the companys global expansion.

Components of International Strategy

HANDLINGEXPANTIONINTOUNIQUEANDCHANGINGMARKETSEGMENTS

Unique Markets PepsiCos international division has seen tremendousgrowth because they have expanded into regions with no competition due topolitical or logistical barriers to entry. Pepsi enters countries considered tohave oppressive regimes, with subsidiaries in Burma, Mexico, the Philippinesand Turkey, and operates bottling plants in China. Pepsi has recentlyinvested $40 million into Russia to expand their system to reach 70% of the

country. During the years of economic sanctions against South Africa,PepsiCo continued a sales and licensing agreement with a South Africancompany. The company receives about 29 percent of their revenue fromthese foreign sales. Changing Markets A rise in worldwide carbonated softdrink is expected, advancing by an annual average of 3.4% from 1999 to2004, with per-capita consumption growing from 7.8 to 10.6 gallons. ForPepsiCo Beverages International, growth was led by Russia, China and Brazil.North America's share is expected to decline, along with that of Europe,Africa and Oceania, while growth will be strong in Asia and South America,and moderate in the Middle East. 6

MERGERS, ACQUISITIONSANDPARTNERSHIPS

Merging, acquiring and partnering with local companies have been a keycomponent of Pepsis international expansion. It has helped them create orbuy local brands, and re-label as these brands in order to take advantage ofthese companys brand equities and reduce the effects of chauvinism.Acquisitions accounted for 2% of salty snack growth from 2000-2001, mostlyfrom European joint ventures. Additionally, a joint venture with EmpressasPolar SA has allowed Frito-Lay to expand into nine Latin America countries.7

RELOCATIONSTRATEGIES

Pepsi has no incentive to move because there is no relocation cost savings.Shipping across the globe is expensive, so the company opens numeroussmall plants around the world instead of large operations in fewer key areas.


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TECHNOLOGYINTENSITY

Pepsis use of very detailed consumer buying patterns, preferences andtastes research is with the use of advanced technologies. This plays asubstantial role in their globalization strategy.

ADVERTISINGANDMARKETINGSTRATEGIES

Global advertising strategy Pepsi modifies its domestic advertising to beutilized internationally, such as a multi-decade TV commercial starring popstar Britney Spears and footballer David Beckham that was tailored andplaced into local ad showings. Its Sumo spot is already proving a hit withurban India. With two global advertising campaigns known for falling in thetop 100 of the century, Pepsi has developed a core competency in itsreputation as a solid brand image.

Global marketing strategy Pepsis marketing is their internationalcompetitive advantage, so the company heavily relies on expanding andimproving this for continued success. To sustain growth, they rely on theiradvertising firm of 42 years, BBDO Worldwide Advertising, to leverage itsvast international business network to make tighter connections withconsumers around the world. Pepsi requires a very diversified capabilityscope from the firm. BBDO is needed to provide everything from the overallstrategy development and coordination for the market in Paris, to adaptingPepsi campaigns for the very different segment in the Philippines. Also, thead firm has creative resources in such countries as Spain, Brazil, Australiaand France that offers an international perspective on execution.8 Along with

Pepsi cola, 7UP and Mirinda are the key drivers in Pepsis internationalmarkets. Because of this, BBDO offers 7UP and Mirinda the same level ofintensive creative support as brand Pepsi in the international markets.

Recently Pepsi has been making international marketing headway over theworldwide web. Pepsi-Cola International partnered with StarMedia Network,Inc. to co-brand a Latin American website called pidemasonline.com, whichmeans ask for more in Spanish. The site was aimed at the Spanish andPortuguese-speaking audiences, which is StarMedia's bread and butter. ThePepsi arrangement exemplifies how the company is utilizing joint marketingagreements with online media players in search of new niche markets.9

Implementation of International Strategy

ECONOMIESOFSCALE

Consistent brand equity creates synergy internationally Over the past 100years, Pepsi has established a few of the world's best-recognized globaltrademarks. The formula for the successful globalization of the companys


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brands has been to implement a synergistic marketing strategy that includesforging consistent goals, developing compelling positionings that translateacross the marketing mix, brand development and a wide variety of cultures,delivering global imagery, events and properties, and maintaining a

structured innovation process and common tracking models.10

A global advertising agency creates efficiencies BBDO Worldwide'sinternational network offers Pepsi-Cola International organizationalcapabilities and media buying efficiencies which supports continuedinternational growth across the entire Pepsi brand portfolio. The ad firm isalso always working to develop any other marketing synergies that supportPepsis business. For example, BBDO and Pepsi decided to consolidate PepsiInternational's 7UP and Mirinda brands with the Pepsi brand because it wouldprovide extensive integrated international resources to stimulate the growthof all of the brands.

COSTSOFGLOBALCOMMUNICATION

Pepsi has paid substantial costs associated with their global marketingstrategies. The company spends about $1.7 billion dollars spent inadvertising annually. In addition to the standard marketing costs, there areother costs of communicating globally. An example of this is in Pepsisfamous global marketing mistake with their Come Alive With the PepsiGeneration campaign, which, when translated into Chinese, meant PepsiBrings Your Ancestors Back From the Grave. This cost the company withlost sales and a damaged reputation.

Communications has cost Pepsi a profit in some markets. The companysinvestment in China has failed to produce a profit so far because of thesubstantial spending on marketing. Since it started its first plant in Shenzhenin 1982, Pepsi has set up nearly 30 businesses there, with a total investmentof $500 million. Without the marketing expenditures, the investment wouldhave turned a profit. However, Pepsi believes in the potential of the Chinesemarket, and the possibility of a profit for Pepsi in the near future. 11

BARRIERSWITH BUSINESSCULTURESANDGOVERNMENTPOLICIES

Blurb about Pepsi in India.

COLLABORATIONAND ALLIANCES

The spectrum of Pepsis collaboration strategy varies widely between itsdomestic and international divisions. As part of its collection of domesticcollaboration strategy, Pepsi pursues alliances with distribution channels,sports sponsorships, celebrity partnership, and movie co-promotion. WhilePepsi also pursues promotional alliances internationally, much of its strategy


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involves developing corporate partnerships with local companies. Thisdistinction in the way Pepsi approaches corporate partnerships or alliances inits domestic versus its international strategy is notable and will be examinedin more detail after we examine each of these markets separately.

DOMESTIC COLLABORATION STRATEGIES

Pepsis domestic collaboration strategy in the United States is consistentwith industry rivals. A look at the main competition shows that while Coke isnot as active with sports sponsorship and celebrity partnerships, they use awide variety of distribution channel alliances. Of note recently are theireight-year strategic marketing and beverage agreement with Skyteammember airlines and their five-year global marketing and product alliancewith Blockbuster Inc.12 While Pepsi is lagging behind Coke in distributionalliances with the airline industry, its recent alliance with United Air Lines is

notable for the fact that its a switch from Coke to Pepsi. The deal withUnited only represents about 3 million cases per year, which is a very smallportion of the billions of cases that Pepsi sells yearly. More importantlythough, the deal can be seen as a positive step for Pepsis effort to gainconsumer mindshare from Coke, or as Brown analyst Marc Greenberg puts it,Its more about mindshare than income contribution.13

Pepsis other notable distribution alliance is with its spin-off TriconRestaurants. Tricon owns the chains Taco Bell, Pizza Hut, and Kentucky FriedChicken, where Pepsi has an exclusive beverage distribution alliance. Thisdistribution alliance is very important to Pepsi in the soda fountain market

within fast food restaurant chains as it represents nearly 44% of the market.Coke owns the other 66% with its deals to distribute to McDonalds, Wendys,and Burger King. The importance of this channel is very important as eachof Tricons restaurant chain provides Pepsi with the sole opportunity to gaincustomer mindshare.

Looking at most of Pepsis other collaboration strategy for its brands revealsa strategy that relies heavily on its branding core competency. Most of itscollaborations are with partners who are independently recognizable in thesports and entertainment mass media.

Pepsis sports partnership strategy includes sponsorships and alliances withthe NationalFootball League, the National Collegiate Athletic Associations nationalcollege basketball championship tournament, stadium naming rights with the Tampa Bay Buccaneers football stadium, and the Fiesta Bowl footballchampionship game. These alliances with sports entities provide Pepsi withthe opportunity to market their brands and also further network to a marketsegment that historically has associated with both their soft drink and salty


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snack food products. In a lot of cases, many of Pepsis brands of productsare promoted as a complimentary product required by consumers for the fullenjoyment of their sports entertainment experience.

Pepsis entertainment partnership strategy centers around its advertisementand the promotion of an image associated with their celebrity partner. Themost recent of these programs is their promotion with Britney Spears, whichdebut in television commercial form during this years Super Bowl. Pastpromotions include commercials with Halle Eisenburg for the Pepsi brand,Halle Barry for Pepsi Twist, Barry Boswic for Diet Pepsi Twist, and Ali Landryfor Doritos. Other promotional partnership includes the promotion ofMonster, Inc. with Disney and Pixar studios, where Doritos introduced aspecial version of its 3D product, which changes color when consumed.Another unique twist to Pepsis entertainment partnership was Doritos titlesponsorship of Drew Careys pay-per-view special, which was promoted in

conjunction with Drew Careys appearance in Super Bowl commercials withJohn Elway and Jim Kelly.

The success of Pepsis recent partnership with Britney Spears will bewatched very carefully as it is a result of Pepsis merchandising andpromotion partnership with Tracy Locke Partnership. The partnership, whichwas announced by Frito-Lay on December 17, 2001, will consolidate PepsisU.S. promotional and retail merchandising as well as marketing activities. AsJohn Compton, Frito-Lay Senior Vice President of Marketing, indicated, Webelieve this agency consolidation will provide a more potent, more efficientmarketing force that will help us achieve bigger and better growth-driving

ideas.14

A recent landmark partnership between Pepsi and Cooper Aerobics Centerannounced on April 03, 2002, paves a way for Pepsis expansion of itsportfolio of products into functional food and beverages. The partnershipagreement is intended to promote nutrition, fitness, and wellness. As Dr.Cooper said, Through our collaborative efforts, we hope people all over theworld will benefit and PepsiCo will become known as the internationalcorporate leader in the field of health promotion.15

INTERNATIONAL COLLABORATION STRATEGY

Internationally, Pepsi has historically on developing long-term partnershipswith strong local companies and leveraging their partners local knowledgeand locally recognized brands. Pepsis method of operation internationallystarts with the development of smaller businesses to gain experience in thelocal market prior to making larger investments. With successfuldevelopment of these smaller businesses, Pepsi historically expandedoperations through synergetic joint ventures with local partners. Their


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partnerships with Suntory in Japan and Empresas Polar SA are primeexamples of this line of collaboration strategy.

The partnership with Suntory in Japan started in 1998 and has a term of 30

years. Suntory was named Pepsis master franchisee and had theresponsibility of doing all marketing, production, and distribution of Pepsisoft drink in Japan. Suntory was also responsible for managing the existingrelationships with 9 existing franchise bottlers. Pepsi also transferred allexisting company owned bottlers to Suntory. Pepsi Japan would continue toprovide Suntory with concentrate for the Pepsi, Diet Pepsi, 7Up, and Mt. Dewproducts. As former Pepsi CEO Craig Weatherup indicated, Newrelationship with Suntory fits perfectly with our strategy to align with stronglocal franchisees. The deal with Suntory also created the #2 beveragecompany in Japan, behind Coke, and would boost the current vending abilityby 3 times. This local distribution capability offered by Suntory was key to

providing a synergetic relationship, as Mr. Weatherup further indicated that,Suntorys proven ability to build powerhouse brands in Japan throughdynamic marketing and ubiquitous distribution is the envy of the industry.16

Following the partnership with Suntory in Japan, Frito-Lay entered into asimilar joint venture with Empresas Polar SA in Latin America at the end of1998. The annual sales of the joint venture in Latin America were estimatedat $3 Billion and would be operated by Frito Lay. Each company would own50% of the joint venture, which encompassed 9 Latin American countries:Venezuela (Polars headquarters), Chile, Colombia, Ecuador, Guatemala,Honduras, Panama, Peru, and El Salvador, and Polar would transfer its

popular local brands, Pepitos and Cheese Trix, to Frito-Lay. The synergyfrom the joint venture was seen as a way to improve operational economy ofscale to lower cost and as the means to make and distribute their productsmore economically.Pepsis only notable global alliance that even resembled its entertainmentpartnership strategy domestically was the promotional alliance withPokemon. The alliance with Pokemon was intended leverage the Pokemonproduct fad to drive product sales growth in the Mexican and Latin Americanmarkets in 2000. This alliance effort was intended to promote growth in theEuropean, Middle Eastern, and African markets in 2001.17

Evidence of the success of these international collaborations is clearly shownby the growth of sales versus profit for both PepsiCo Beverages Internationaland Frito-Lay International. Over the past three years, from 1999 to 2001,the net sales growth for PepsiCo Beverages International and Frito-LayInternational during this period was 7.2% and 20%, respectively. However,the operating profit grew at a much faster rate. PepsiCo BeverageInternationals operating profit grew by $113 million or over 51%, and Frito-Lay Internationals operating profit grew by $172 million or 37.8%. While


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these gains cannot be fully attributed to their joint ventures, it is evident thatat least some of this difference is the result of the synergy created from jointventures internationally with strong local and regional companies.

DISTINCTIONOFCOLLABORATION STRATEGYBETWEEN ESTABLISHEDAND EMERGING MARKETS

When analyzing Pepsis collaboration strategy, its also important to take alook at how Pepsi fills and expands its portfolio offering. Clearly in theinternational arena, Pepsi favors a strategy of establishing a small businessin the local market and developing a joint venture with an established localcompany. In the case of Suntory, Pepsi handed over the control of the jointventure to Suntory, while with Polar, Frito-Lay controlled the joint venture. Inthe much more established local market in the United States, Pepsi seems tofavor partnerships where its core competency of branding can be put to use.As noted with the examples of sports and entertainment partnerships, Pepsi

domestically favors a strategy where they ally with an image consciouspartner in other industries. In case of sports and cinema entertainment, theconsumption of Pepsi products even adds to the overall customer value ofthe experience.

STRATEGIC ANALYSIS CONCLUSIONS

STRATEGIC RECOMMENDATIONSAND ALTERNATIVES

MARKETING/ADVERTSINGRECOMMENDATIONS

1. Focus efforts in expansion and improvements in marketing and

advertising. Pepsis core competency is in their marketing andadvertising, and it is the driving force behind the strong brand imageand global recognition. Since most of the potential expansion lies inexpanding into new and changing markets, this global recognition ispertinent to growth. Additionally, because Pepsis marketing expertiseinferior to Coca-Colas, Pepsi continues to lose out to Coke in revenuesand market share. (Considering Pepsi beats Coke in actual tastetests.) For these reasons, Pepsi would want to take drastic steps inimproving their marketing. Specifically, Pepsi could:

a. Continue BBDO partnership because of their global expertise, butconsider bringing in a multi-national advertising staff for specific,

local campaigns to better target each segment.b. Continue multi-domestic strategy, with strong marketing

research in keeping up to date with changing consumers tastesand preferences. Continue to apply these finding to internationalproduct diversification. Additionally, Pepsi could begin to applythis global research more heavily into branding and trademarkstrategies.


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c. Utilize guerilla marketingIt is not necessarily the dollaramounts spent on advertising, but the methodology used. Foradvertising to be successful, it needs to be new and different,and something that stands out. The most successful advertising

is sometimes free when it is press related. Pepsi needs to thinkout of the box, and find guerilla tactics to create a substantialbuzz and rise above their tough competitors.

d. Continue with their specific campaigns in utilizing musical talent,sponsors, NFL partnership, and web-based media contracts. Theirtrack record indicates a very successful history in creating thesecampaigns. (See Exhibit 2.)

e. Use philanthropy to create a first rate brand image, and increasedonations to charitable organizations around the globe.

f. Consider repackaging materials in order to utilize the severaldifferent product offerings PepsiCo has. This would include

bundling, multiple purchase price discounting and crossmarketing. This uses the brand equity of one product tostimulate growth in another.

RESEARCHAND DEVELOPMENT

An innovator in the snacks and beverages industries, Frito-Lay continuallyleads the development of unique preservatives, additives, and packagingtechnologies. As a result, it is likely that they will be the developers of futuredisruptive products. However, as in other industries, large companies likeFrito-Lay are often married to existing methods of doing business and are

vulnerable to disruptive technologies. To mitigate this vulnerability, it isimportant that Frito-Lay continues investing in R&D and incorporating newpotentially disruptive technologies into its products.

DIVESTITURE

Because we do not see the Quaker Oats division recently acquiredcompletely fitting into Pepsicos core competencies and existing industries,we recommend that PepsiCo consider divesting the Quaker Oats division intoa new company or sell to a competitor. It appears the major reason QuakerOats was acquired was to obtain the Gatorade beverage brands that Quaker

Oats owned. The Gatorade brand completely fits into the beverage industryin which PepsiCo competes and should allow PepsiCo to use its corecompetencies and industry knowledge to gain market share and earningsgrowth. Keeping the Quaker Oats division requires the PepsiCo managementto learn an additional industry, while although in some ways similar to thesnack food industry has major differences. The ready to eat meal industry inwhich Quaker competes is much more highly competitive and low profitsshould be expected from the division. We can see from PepsiCos past


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problems they have encountered in dealing with new industries that do notrelate well with their existing industries. As shown by the Tricon divestiturePepsiCo could not adequately acquire the necessary knowledge in the fastfood industry to have a competitive advantage. PepsiCo should remember

this and should consider whether they can obtain a competitive advantage inthe ready to eat market, which we do not believe they can and should thendivest Quaker Oats.

ACQUISITION

Pepsi has had recent consistency in identifying successful merger andpartnering targets. Much of this success derives from identifying andimplementing proper synergy strategies and from utilizing andsupplementing their branding core competency with their targeted partners.

As a continuation of these successful strategies, we researched and analyzedseveral companies who presented probably alternatives for either acquisitionor partnership. We researched both domestic and internationalopportunities. International opportunities were difficult to identify as overallanalysis of each national market and its growth opportunities needed to bedetermined. We suggest detailed research of each country, its beverage andready-to-eat snack consumption, existing competition, and future growthpotential, prior to making entry decision for each specific country. With thiscondition in mind, we focused on analysis of domestic partners or acquisitiontargets.

After an analysis of the current beverage portfolio, we felt that the mostlogical extension would be towards the premium soda niche of the market.After reviewing several alternatives, Jones Soda appears to offer the bestsynergy and growth opportunity. Jones Soda offers a unique portfolio ofproducts, termed New Age Beverage, based on its lines of juice, soda, andenergy drink products. What makes Jones Soda unique are the variety ofsoda flavors and wide range of labels. (See Exhibit #) The labels areproduced from a portfolio of unique user submitted photos and allow buyersto collect a wide variety of unique products. This variety of flavors and labelsallows Jones Soda to command a price premium for its products. Jones Sodahas a cult following based on its offering of a variety of labels. Collecting its

unique bottles is a hobby for many loyal consumers.

We believe that this unique blend of product offering will enhance thebeverage product portfolio and that Pepsi can leverage the existingdistribution system to bring the product to more markets. This New AgeBeverage was determined to be a $10 billion market in 2000, with anaverage growth rate of 12.7% over the past three years.18 During 2000,Jones Sodas return on equity was 49.70 with total revenues of $19.1 million


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and profits of $1.5 million. In analyzing the Jones Sodas finances, webelieve that acquisition can be made for about $15.2 million. At presentgrowth rates and conservative profit margin, the net present value of JonesSodas profit over the five years returns nearly $20 million. We believe that

this profit margin can be greatly increased when the benefits of consolidationof distribution channels and marketing are realized.

After the analysis of the current snack food portfolio we believe that aproduct line extension through acquisition would be appropriate. As stated inthe 2001 annual report PepsiCo is trying to increase the product offerings ofFrito-Lay and hope that the Quaker Oats acquisition will be able to helpthem. As we noted above, we do not necessarily agree with this assessmentas the product lines and distribution channels are different. We recommendthat PepsiCo extend the snack food portfolio into sugary type foods throughthe acquisition of Interstate Bakeries Corporation (IBC). IBC owns the

Hostess, Wonderbread and Dolly Madison brand names. The Hostess andDolly Madison products we believe completely fit into the Frito-Lay productline as being a snack food. We also believe that PepsiCo would be able toachieve synergies through its distribution channels as Hostess and DollyMadison are sold in all the same locations that Frito-Lay products are sold.The sugar snack foods would appear to fit into a strategic diversificationstrategy through dominant logic as well. Frito-Lay should be able to use itsexisting practices and methods in the new product line. This acquisitionwould also fit PepsiCos core competencies. Hostess and Dolly Madison aresignificant brand names and PepsiCo should be able to leverage itcompetency in branding and marketing to increase those brands. Also the

products will require significant new products to stay competitive. PepsiCowill be able to use it customer research to bring new products to market andobtain a competitive advantage through differentiation.


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Exhibit #

Sample of Jones Sodas current portfolio


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1 Pepsi Corporations 10K Financial Report2 Soft Drink Markets in 174 Countries Worldwide,Beverage Marketing Press, New York, NY, 15 June 2001.3 http://www.southwestern.edu/~stepheng/fob2.html4 PepsiCo: Conquering the Asian Snack Market,Retail Asia, May/June 1996, pp. 10-16.5 India's Summer Cola WarsCoke, Pepsi Fight It Out,Ad Age Global, April 2002.6 http://www.southwestern.edu/~stepheng/fob2.html7 Frito-Lay Announces Major Joint Venture in Latin America with Empresas Polar SA,Pepsico Press Release, Piano,

TX, Nov. 25, 1998.8 Pepsi-Cola International Consolidates Advertising With BBDO Worldwide To Sustain Steady Growth,PepsiCo Press

Release, Purchase, N.Y., November 8, 2000.9 StarMedia, Pepsi Ask For More Latino Teens,NY Staff, May 24, 2000.10 Similar advertising, M. D'amore, Somers, NY, May 2001.11 Pepsi Confident in China,Xinhua News Agency, April 09, 2002.12 Coca-Cola and Delta Expand Worldwide Partnership, Announce New Marketing Agreement with Skyteam, and

Blockbuster Inc. and the Coca-Cola Company Announce Global Marketing and Product Alliance, Coca-cola press

release, April 10, 2002 and March 11, 2002.13 Pepsi Lands United,Forbes.com, March 25, 2002.14 Frito-Lay Selects Tracy Locke Partnership as Promotions/Merchandising Agency of Record,Frito-Lay Press Releases,

December 17, 2001.15 PepsiCo and Dr. Kenneth Cooper Form Partnership,PepsiCo Inc. Press Releases, April 2, 2002.16 Pepsi Names Suntory Japan Master Franchisee,Beverage Digest, October 3, 1997.17 Frito-Lay International Report18 Jones Soda, 2000 Annual Report

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