Analysis of Pepsi Co in India

Analysis of Pepsi Co in India PepsiCo is the largest snack and non alcoholic beverage manufacturing company in the world. Its product range includes grain based snacks, carbonated and non- carbonated beverages and foods. It operates through four operating segments: Frito-Lay North America (FLNA), PepsiCo Beverages North America (PBNA), PepsiCo International (PI) and Quaker Foods North America (QFNA).It sells its products in 200 countries with major operations in the US, Canada, Mexico and the UK. It distributes its branded products through multi channels such as direct stores, broker warehouses, food service centers and vending machines. PepsiCo in India PepsiCo entered India in 1988 and concentrated on three focus areas soft drink, snack foods and food processing. PepsiCo got permit to import cola conecnterate and to sell soft drink under Pepsi label in Indian market and in return to export juice concenterate from Punjab. Main objective put forward was To promote the development and export of Indian made and agro based products and to foster the introduction and development of PepsiCo products in India. Pepsico entered in India in the form of joint venture with PAIC holding 36.11%, voltas 24%, PepsiCo holding 36.89%. ISSUES: PepsiCo was coupled with the punjab card. They made certain commitments to Indian cental government.PepsiCo specifically supported national priorities in area like export and agriculture. Some of the commitments are as follows: 1) the project will create employment for 50000 peope nationally, including 25000 jobs in Punjab alone. 2) 74% of total investment will be in food and agro processing. 25% will be in manufacturing of soft drinks. 3) PepsiCo will bring advanced technology in food processing and provide thrust by marketing Indian products abroad and giving them global market. 4) 50% of total production will be exported. 5) an agro research center will be established by PepsiCo with ICAR and PAU. 6) no foreign brand name will e used for domestic sales. 7)export import ratio will be 5:1. FAILED COMMITMENTS: Within few years pepsi was recorded as one of non compliance companies that did not fulfill the commitments it made to Indian government. The company nowhere met its obligations. On September 4,1991 george fernandes said that Pepsi co has failed to meet its commitments and the company became a challenge to the government. The failed commitments are as follows: 1)EMPLOYMENT COMMITMENT: Employment generated by PepsiCo 1990-91 1991-92 direct indirect direct Food processing 169 9903 170 Administration 117 432 179 Bottling 497 15115 560 Total 783 25450 909 Source: data taken from balance sheets of pepsi foods ltd. Pepsico by 1996 increased the employment figure to 2400 which was just 3% of the commitment made. Branch name commitment Pepsi committed not to use its brand name pepsi in india. During first year pepsi used Indian brand name Lehar pepsi bt with the introduction of new policy in 1991 pepsi immediately changed its drink name from lehar pepsi to pepsi. Export commitment: Pepsi commited that 50% total product will be exported but instead of exporting its own products it exported basmati rice, tea, leather products Agro research center: No agro research center was established. PepsiCo, Inc., SWOT Analysis Strengths Weaknesses Strong Growth Prospects Efficient Use of Resources Expanding Operating Margin Declining Market Share in Sector Overdependence on Few Customers Geographical Concentration Opportunities Threats Huge Potential in the Emerging Markets Increasing Bottled Water Market Growing Organic Foods Market Highly Competitive Market Private Label Brands Gaining Momentum Global Economic Conditions PepsiCo, Inc. PepsiCo, Inc.- Financial and Strategic Analysis Review Reference Code: GDCPG35119FSA Page 2 PepsiCo, Inc. SWOT Analysis SWOT Analysis Overview PepsiCo, Inc. (PepsiCo) is one of the leading snack and beverage companies in the world. Dominant market position and diversified brand portfolio are its strengths. Further, the rising demand for bottled water and strategic acquisitions could ensure a strong future. However, poor profitability and overdependence on a few customers are areas of concern to the company. Highly competitive market and growing demand for private label products coupled with global economic slowdown could also impede the companys growth. PepsiCo, Inc. Strengths Strength Strong Growth Prospects The company was trading at a price/earnings (P/E) ratio of 16.16 at the end of fiscal year 2009. This was above the SP 500 companies average* of 9.2. A higher than SP 500 companies average P/E may indicate that the company may have high growth prospects which is reflected in its stocks premium pricing. Investors may be expecting higher earnings growth in the future compared to other companies in the SP 500 index. Strength Efficient Use of Resources The companys return on equity (ROE) was 35.4% for fiscal year 2009. This was above the SP 500 companies average* of 12.9%. A higher than SP 500 companies average* ROE may indicate that the company is efficiently using the shareholders money and that it is generating high returns for its shareholders compared to other companies in the SP 500 index. Strength Expanding Operating Margin The companys operating margin was 18.61% for the fiscal year 2009. This was above the SP 500 companies average* of 14.7%. A higher than SP 500 companies average* operating margin may indicate efficient cost management or a strong pricing strategy by the company. The companys operating profit was USD 8,044.00 million during the fiscal year 2009, an increase of 15.59% over 2008 while the net profit was USD 5,946.00 million, an increase of 15.64% over 2008. The operating margin has increased 252 basis points (bps) over 2008, which may indicate managements high focus on improving profitability. Strength Strong RD Activities PepsiCo has a strong RD arm that focuses on various activities, which could help the company in cost reduction and process improvement, quality assurance, process control, and system development. The company also places emphasis on developing new manufacturing methods, improving on the existing manufacturing processes, new product developing and improving the existing products. For the fiscal year 2008, the company spent USD 388 million on its RD initiatives, against USD 364 million in 2007. Thus, such a strong focus on RD activities provides the company with an edge over its competitors in generating higher operational performances. New product and technology innovations also strengthen the companys innovating capabilities and provide a source of future revenues for the company. Strength Diversified Brand Portfolio PepsiCo boasts of a broad brand portfolio in the beverages and snacks categories, which helps it cater to the diverse needs of its customer base. The top 18 brands of the company generate USD 1 billion or more each in annual retail sales. Some of the major brands offered by the company include Pepsi, Mountain Dew, Diet Pepsi, Gatorade, Tropicana Pure Premium, Aquafina water, Sierra Mist, Mug, Tropicana juice drinks, Propel, SoBe, Slice, Dole, Tropicana Twister and Tropicana Seasons Best. This diversified brand portfolio of the company provides it with the economic stability and an edge in attracting and retaining a diverse customer base. It also helps the company to mitigate the risks associated with overdependence on a particular brand or product category. Strength Dominant Market Position PepsiCo enjoys a leading market position that helps it attract and serve a diverse customer base. The company is one of the leading snack and beverage companies in the world. It is engaged in manufacturing, marketing and sale of a variety of salty, convenient, sweet and grain-based snacks, carbonated and non-carbonated beverages and foods. The company sells its products in more than 200 countries. It is the market leader in the US savory snacks market with a market share of about 39%. It is also the leader in the US liquid refreshment beverage category with a market share of 25%. Furthermore, the company occupied 52nd position in the Fortune 500 rankings in 2009. The Frito-Lay brand is the worlds leading manufacturer of snacks. This dominant market position helps the company diversify its risks associated with the cyclical nature of most of these markets and puts the company at an advantage over its rivals while expanding its product lines. PepsiCo, Inc. PepsiCo, Inc.- Financial and Strategic Analysis Review Reference Code: GDCPG35119FSA Page 3 PepsiCo, Inc. Weaknesses Weakness Declining Market Share in Sector The companys compound annual growth rate (CAGR) for revenue was 7.34% during 2005-2009. This was below the SP 500 companies average* of 11.1%. Further, the company reported revenue of USD 43,232.00 million during the fiscal year ended December 2009, a decrease of 0.04% from 2008. A lower than SP 500 companies average* revenue CAGR may indicate that the company has underperformed the average SP 500 companies growth and lost market share over the last four years. The companys underperformance could be attributed to a weak competitive position or inferior products and services offering or lack of innovative products and services. Weakness Overdependence on Few Customers Overdependence on a few customers has been a major area of concern to the company. A significant portion of the companys revenues are generated from few customers. For instance, in 2008, sales to Wal-Mart and Sams West, Inc. represented 12% of the companys net revenue. The top five retail customers represented about 32% of its 2008 North American net revenue, of which Wal-Mart (including Sams) accounted for about 18%. The loss of one or more of the top customers in any of these segments could have a material adverse effect on the results of these segments. Due to overdependence on a few customers, the company may not be able to find suitable alternatives to sell its products in time if any of these customers is unable to buy the products on terms favorable to the company. Weakness Geographical Concentration PepsiCos overdependence on the US market for its revenues exposes the company to various risks associated with geographical concentration. Though PepsiCo has operations in various geographic regions, a majority of its revenues still comes from the US. During the fiscal year 2008, the company generated 52% of its total revenue from the US region. Further, during the fiscal year 2009, PepsiCo generated over 71% of its revenues from North America. This dependence on the US could impact its operational and financial performance in the event of any economic, political or climatic change. It also could restrict its market share and growth opportunities. PepsiCo, Inc. Opportunities Opportunity Huge Potential in the Emerging Markets The company could benefit from the growing markets in the Asia Pacific region. According to the World Bank, the GDP growth rate of high income countries came down from 2.6% in 2007 to 0.4% in 2008. The economies of these countries are expected to have contracted by 3.3% in 2009. Despite the global economic slowdown, the emerging and developing economies recorded a GDP growth rate of 8.1%, 5.6% and 1.2% during 2007, 2008 and 2009, respectively. Growth in the East Asia and Pacific region (especially China) as well as in South Asia (especially India) has been resilient. This was mainly due to the massive fiscal stimulus package in China and Indias skillful macroeconomic management. Chinas GDP grew at 9% in 2008 and 8.4% in 2009, while Indias grew at 6.1% and 6% respectively, during the period. The growing economy in these countries has generated new employment opportunities for the residents and has provided a boost to their earnings. Rise in disposable income has changed their buying behavior. Now more and more people are buying luxury and lifestyle goods unlike in the past when they used to confine their spending to basic necessities. Customers in the emerging countries are becoming more brand conscious and prefer to buy branded goods. With competition at its peak and markets getting saturated, the company can look out for new growth avenues in these regions. Opportunity Increasing Bottled Water Market The strong growth in the bottled water market is emerging as a major boon for the company. The global bottled water industry has been witnessing strong growth over the past few years, especially in the US. Bottled water is sold mostly in the industrialized countries where it costs between USD 500 and USD 1,000 per cubic meter, compared to USD 0.50 for municipal water in states such as California, US. With the strong profitability offered by the segment, many players have started foraying into the bottled water business. The demand for bottled water has also been on the rise in emerging countries. PepsiCos established presence in the bottled water segment, along with its strong brand image puts the company at a competitive edge over its rivals in attracting and retaining a loyal customer base. The strong distribution network also helps the company to cater to a geographically diverse customer base. Opportunity Growing Organic Foods Market The company has a significant opportunity to grow as the demand for organic food is set to rise by an average of 18% in the US by 2010, according to the Organic Trade Association (OTA). Rising Health consciousness in the US has made the organic foods segment one of the fastest growing segments in the food retailing industry. Though, the organic food segment represented a mere 2.8% of the US food and beverage market, the organic food market in the region generated USD 21.2 billion in 2007. According to a recent report from the OTA, the global demand for organic products has been growing at USD 5 billion a year. PepsiCo offers its all natural and organic product line under the Tropicana and Quaker brands in the US. The company can thus capitalize on its distribution network and organic food offerings to increase its market share and revenues. PepsiCo, Inc. PepsiCo, Inc.- Financial and Strategic Analysis Review Reference Code: GDCPG35119FSA Page 4 Opportunity Strategic Acquisitions Strategic acquisitions offer a strong growth opportunity for the company, especially while foraying into new markets or launching new products or services. The company has grown over the years by acquiring or merging with some of the major brands like Frito Lays, Quaker Oats, Gamesa and Sabritas. Further, in October 2009, the companys Pepsi Bottling Ventures, LLC signed a Letter of Intent to acquire the assets of Pepsi Cola Bottling Company of Conway-Myrtle Beach, Inc., the Pepsi-Cola franchise bottler based in Conway, South Carolina. Earlier, in August 2009, PepsiCo Inc. entered into definitive merger agreements with its two largest bottlers, The Pepsi Bottling Group, Inc. (PBG) and PepsiAmericas, Inc. (PAS). Under the agreement, PepsiCo will acquire all of the outstanding shares of common stock of these two bottlers. Currently, the company owns 33% and 43% of the outstanding shares of PBG and PAS respectively. During the same period, the company also announced an agreement to acquire Brazils largest coconut water company, Amacoco Nordeste Ltda. and Amacoco Sudeste Ltda. (Amacoco). Earlier, in April 2008, PepsiCo acquired the UK based vitamin water brand, V Water. These mergers and acquisitions offer a steady revenue source, apart from geographical expansion for the company. PepsiCo, Inc. Threats Threat Highly Competitive Market Growing competition could impact the business operations of the company. The company faces stiff competition from the various companies that are in the business of beverages, snack and food products. Key competitors include General Mills, Inc., Groupe Danone, Hershey Foods Corporation, Nestle S.A., Coca-Cola Company, The Procter Gamble Company, The Kraft Foods, Inc., National Beverage Corp., Jones Soda Co. and Kellogg Company. Apart from the established players in the developed countries, the players from emerging countries too are competing hard to garner maximum market share in their respective regions. If the company fails to maintain product quality and consumer loyalty, this intense competition could reduce the sales volume of the company, thereby hampering its market position. Threat Private Label Brands Gaining Momentum The growing demand for private label products has been a major area of concern to the company. According to a report by the Confederation of the Food and Drink Industries of the EU (CIAA), there is a shift in the consumer spending towards private label products. Also, it is observed that the private label products have reached as high as 48% in traditional retailers and 94% in discounters. In the UK, almost all the top 30 retailers witnessed an increase in the private label share in 2008. Private labels may become even more popular due to the current economic slowdown. Apart from low prices, the increasing quality of private label products has been driving away the sales of branded products. Thus PepsiCo faces a major challenge from these private label manufacturers in sustaining its growth. Threat Global Economic Conditions The company faces a major challenge in sustaining its revenue growth due to the slowdown in the global economy, especially the US. The banks have tightened their credit lending process thereby affecting the consumers shopping ability. Even the market volatility concerns have made them shop only for basic and essential goods, thereby creating a major challenge to the goods manufacturers whose sales have been on the decline. According to The World Bank, overall global GDP contracted by 2.2% in 2009, with 1.2% growth rate in the developing economies well below the 5.6% growth rate in 2008. In 2009, the GDP growth in the US weakened to -2.4% while in the Eurozone, GDP contracted more sharply by 3.9% from 0.5% in 2008. Further, the global output is expected to expand by 2.7% in 2010, and 3.2% in 2011 still below the 5% generated in 2007. Thus, adverse economic conditions could adversely affect the demand for the companys products, which poses a major challenge to the company in sustaining its revenue growth. Growth strategies Transforming its beverage portfolio PepsiCo sought to transform its beverage portfolio by increasing the health and wellness quotient of its products through RD. It has strengthened. its carbonated soft drinks (CSDs) segment, comprised of Pepsi, Diet Pepsi and Mountain Dew. In 2007, it launched Diet Pepsi Max in the US. It is a zero calorie energy drink and targets young men. It also introduced the high caffeine Mountain Dew Game Fuel in 2008, aimed at video gamers. PepsiCo has also introduced new carbonated juice drinks such as Izze, which is free of caffeine, refined sugars and artificial ingredients and is naturally sweetened with fruit juice. Izze fruit juices primarily targets carbonates customers who want alternatives to artificially sweetened soft drinks. Growth through partnerships PepsiCo concentrates on partnerships and joint ventures to expand its operations. In 2007, it extended the scope of its partnerships with Starbucks and Unilever on RTD beverages, and is expanding into other categories through acquisitions. In January 2008, it announced plans to acquire Penelopa nuts and seeds in Bulgaria, and in 2006, it purchased Duyvis nuts business. Also In 2006, the company entered the salted snacks business in New Zealand with the acquisition of Bluebird Foods, and expanded its snacks business in Brazil with the purchase of Lucky snacks.