Pepsico’s “Focus” Strategy

Introduction• PepsiCo witnessed a major decline in Net Income

(28.45%) from $1.606Bn to $1.149Bn in FY 1996• Lacked Focus in core operations ( Pepsi-cola and

Frito-Lay)• It underwent major restructuring by spinning off its

restaurant business in 1997.• In 1998 PepsiCo acquired Tropicana to strengthen

its position in non carbonated beverages.• Major initiative was hiving off bottling operations

into a new company called Pepsi Bottling Group(PBG)

PepsiCo Background

• Formed in 1965 by the merger of Pepsi-Cola and Frito- Lay

• Pepsi-Cola( Company's Popular Drink) was invented in 1898

• Diversified into restaurant business through a series of takeovers- Pizza Hut(1977), Taco Bell(1978) and KFC(1986).

• In 1986 PepsiCo was reorganized and decentralized by combining its Beverage operations under Worldwide Beverages and snack food operations under Worldwide Foods

Continued…..• In 1986 PepsiCo purchased 7-Up International.• In 1988 company reorganized along

geographic lines- East, West, South and Central Regions- Each with its own President and senior management staff.

• Brought all operations under a single manager and combined many back office operations.

• By 1995 PepsiCo sales crossed $30.42 bn and had 480,000 employees( 3rd Largest Employer)

Continued.....

Continued…….• In 1996, PepsiCo faced intense competition

from Coca Cola in both domestic and overseas markets.

• Analyst felt that PepsiCo should spin off its restaurant business, this would allow company to give more attention and capital to its beverages business.

THE RESTRUCTURING AND ACQUISITION

The Restructuring and Acquisition

1997, PepsiCo announced plans of restructuring

• Spin off –Restaurant business into separate legal entity and market entity

• Sell off food distribution business

Justifications:

• Culture compatibility of restaurant business with PepsiCo

• Currently Restaurant business has enough resources and manpower to be handled standalone

• Managements vision to make PepsiCo a focused packaged food company for countering Coke

1997, Enrico appointed a committee to look after restructuring:Carl Vonder Heyden, CFO and VP - PepsiCoJohn Antiaco, President and CEO - Taco bellJames O’Neal - CEO International restaurant

business

(Trican global restaurant)

Appointed

• Andral E. Pearson operating partner of CD and R as chairman of board and CEO of new company

• Novak–Vice chairman

• Tried to consolidate the operations of three major chains into one independent company

• Become one unit abroad

• One senior manager to handle

• IT, Payroll, Real state purchase, Data processing,

accounts payable consolidated

• October 1997, Restructuring completed

• Tricon - Pizza Hut, KFC, Taco Bell

• No 1-29000 stores worldwide

• Share division - 10:1

• Tax free for PepsiCo and shareholders also

• Tricon paid PepsiCo 4.5 Billion for debt and repurchase

• After spin off PepsiCo entered into the league of large packaged foods companies of US

• Two units - Pepsi Cola(World’s 2nd largest) and Frito lays(World’s largest)

• Together annual revenue of 20 Billion USD

• Pepsi - 1/4th of total international sales of cold drinks

• PepsiCo cold drinks contributes for 1/3rd of total US cold drinks sales

• 1997,Frito lay contributes for 60% of PepsiCo’s operating profit

• Motive behind focusing on Frito lays -

• 1998, Seagrams Tropicana brand acquired by PepsiCo

Analysts views: Bottling operations should also be hived off and made a separate company like Coke

PepsiCo said acquiring Wimm-Bill-Dann will increase its annual revenue from nutritious and "functional" foods from around $10 billion today to nearly $13 billion, bringing it closer to its goal of $30 billion in annual sales of health-oriented drinks and snacks by 2020.

THE SPIN OFF

The Spin-off• Refers to a type of corporate action where a company "splits

off" sections of itself as a separate business

• September 1998 – decision for separation of bottling operations

• PepsiCo’s Pepsi-Cola business – 2 units- a bottling company (Pepsi Bottling Group)- a concentrate company

• PBG – had operations in North America, Canada, Russia & overseas

• Sales of more than $ 7 bn• Concentrate company – product innovation, marketing,

branding. • It manufactured & sold beverage syrup to PBG & others

• Reason: improve PepsiCo’s financial performance

• As, PBG was low margin, capital intensive operations

• Focus on selling high margin soft-drink concentrates & marketing of different brands

• Jan. 1999 – PepsiCo sold its 65% stake in PBG through an IPO

• Total PO of $2.3bn was amongst the biggest IPOs in US

• PBG brought small bottlers, listed on NYSE

• Agreement with Whitman Co. – realign bottling territories – a new master Pepsi-Cola bottler

• Transferred to Whitman Co. bottling operations & US territories

• Whitman Co transferred to PBG some territories in USTook all liabilities for PBG’s US operations

• Whitman Co acquired PBG’s international operations for cash - $300mn to PepsiCo

• PepsiCo received 54 mn shares in Whitman Co – ownership of 35%

• Whitman Co underwent share repurchase program – which raised PepsiCo’s stake to 40 %

• Enrico said “Whitman is an excellent bottler with tremendous capabilities. This partnership will strengthen the Pepsi-Cola bottling system & provide better and more efficient service to our customers ”

Five year average revenue growth: 12%Five year average income growth: 9%Five year average cash flow growth: 7.5%Dividend Yield: 3.26%Most Recent Dividend Increase: 7.3%

The Aftermath

• In 1998 Pepsi cola volume grew by 7% worldwide

• Restructuring resulted in lower sales but it led to higher profits

• Return on equity increased from 17% in 1996 to 30% in 1998

• Soft drink volume gains of 6% which was biggest gain since 1994

Cont…..

• Pepsi market share in the year 1998 was 31.7% as compared to Coke’s 37.1%

• This all was done by the cash that was generated by the spin offs of the restaurant and bottling business

• Pepsi saw an opportunity in fountain soda sales

• this helped to develop Pepsi as a brand

Cont….

• Food chains as a new platform for competition with Coke

• This contributed to one of the fastest growing distribution channel with a margin of 15%

• In this platform Pepsi had 25% market share only

• Invested money in vending operations

PepsiCo gaining strength

• Need of strengthening of core business• SBBC acquisition • Dec 2000, acquisition of Quaker oats(13.4 Billion)

all stock 2.3-1• Gatorade• Target-Morning meal• Out performed Coke in many segment• 2001, Steven Reinemund continued health

strategy

Data Crunching

• Good financial performance 2001-2003 due to..

• Net income from 2.4 to 3.5 Billion USD• Stock price from 30 to 55 USD