PepsiCo’s Diversification Strategy in 2014 (Case)

with more than $53 billion returned to shareholders

between 2003 and 2012. The company bolstered its

cash returns through carefully considered capital

expenditures and acquisitions and a focus on opera-

tional excellence. Its Performance with Purpose plan

utilized investments in manufacturing automation, a

rationalized global manufacturing plan, reengineered

distribution systems, and simplified organization

structures to drive efficiency. In addition, the com-

pany’s Performance with Purpose plan was focused

on minimizing the company’s impact on the envi-

ronment by lowering energy and water consumption

and reducing its use of packaging material, providing

a safe and inclusive workplace for employees, and

supporting and investing in the local communities

in which it operated. PepsiCo had been listed on the

Dow Jones Sustainability World Index for seven con-

secutive years and listed on the North America Index

for eight consecutive years as of 2013.

Even though the company had recorded a num-

ber of impressive achievements over the past decade,

its growth had slowed since 2011. In fact, the spikes in

the company’s revenue growth since 2000 had resulted

from major acquisitions such as the $13.6 billion acqui-

sition of Quaker Oats in 2001, the 2010 acquisition

of the previously independent Pepsi Bottling Group

and PepsiCo Americas for $8.26 billion, and the

acquisition of Russia’s leading food-and- beverage

company, Wimm-Bill-Dann (WBD) Foods, for

$3.8 billion in 2011. A summary of PepsiCo’s finan-

cial performance for 2004 through 2013 is shown in

Exhibit 1 . Exhibit 2 tracks PepsiCo’s market perfor-

mance between 2004 and July 2014.

PepsiCo’s Diversification Strategy in 2014

John E. Gamble Texas A&M University–Corpus Christi

PepsiCo was the world’s largest snack and bev-

erage company, with 2013 net revenues of

approximately $66.4 billion. The company’s

portfolio of businesses in 2014 included Frito-Lay

salty snacks, Quaker Chewy granola bars, Pepsi

soft-drink products, Tropicana orange juice, Lip-

ton Brisk tea, Gatorade, Propel, SoBe, Quaker

Oatmeal, Cap’n Crunch, Aquafina, Rice-A-Roni,

Aunt Jemima pancake mix, and many other regu-

larly consumed products. The company viewed the

lineup as highly complementary since most of its

products could be consumed together. For example,

Tropicana orange juice might be consumed during

breakfast with Quaker Oatmeal, and Doritos and a

Mountain Dew might be part of someone’s lunch. In

2014, PepsiCo’s business lineup included 22 $1 billion

global brands.

The company’s top managers were focused on

sustaining the impressive performance through strat-

egies keyed to product innovation, close relationships

with distribution allies, international expansion, and

strategic acquisitions. Newly introduced products

such as Mountain Dew KickStart, Tostitos Can-

tina tortilla chips, Quaker Real Medleys, Starbucks

Refreshers, and Gatorade Energy Chews accounted

for 15 to 20 percent of all new growth in recent years.

New product innovations that addressed consumer

health and wellness concerns were important con-

tributors to the company’s growth, with PepsiCo’s

better-for-you and good-for-you products becoming

focal points in the company’s new product develop-

ment initiatives.

In addition to focusing on strategies designed

to deliver revenue and earnings growth, the com-

pany maintained an aggressive dividend policy,

CASE 21

Copyright © 2014 by John E. Gamble. All rights reserved.

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CASE 21 PepsiCo’s Diversification Strategy in 2014 C-307

COMPANY HISTORY PepsiCo, Inc., was established in 1965 when Pepsi-

Cola and Frito-Lay shareholders agreed to a merger

between the salty-snack icon and soft-drink giant.

The new company was founded with annual reve-

nues of $510 million and such well-known brands

as Pepsi-Cola, Mountain Dew, Fritos, Lay’s, Chee-

tos, Ruffles, and Rold Gold. PepsiCo’s roots can

be traced to 1898 when New Bern, North Carolina,

pharmacist Caleb Bradham created the formula

for a carbonated beverage he named Pepsi-Cola.

The company’s salty-snack business began in 1932

when Elmer Doolin, of San Antonio, Texas, began

manufacturing and marketing Fritos corn chips and

Herman Lay started a potato chip distribution busi-

ness in Nashville, Tennessee. In 1961, Doolin and

Lay agreed to a merger between their businesses to

establish the Frito-Lay Company.

During PepsiCo’s first five years as a snack and

beverage company, it introduced new products such

as Doritos and Funyuns, entered markets in Japan

and eastern Europe, and opened, on average, one new

snack-food plant per year. By 1971, PepsiCo had more

than doubled its revenues to reach $1 billion. The

company began to pursue growth through acquisi-

tions outside snacks and beverages as early as 1968,

but its 1977 acquisition of Pizza Hut significantly

shaped the strategic direction of PepsiCo for the next

20 years. The acquisitions of Taco Bell in 1978 and

Kentucky Fried Chicken in 1986 created a business

portfolio described by Wayne Calloway (PepsiCo’s

CEO between 1986 and 1996) as a balanced three-

legged stool. Calloway believed the combination of

snack foods, soft drinks, and fast food offered con-

siderable cost sharing and skill transfer opportuni-

ties, and he routinely shifted managers among the

company’s three divisions as part of the company’s

management development efforts.

PepsiCo strengthened its portfolio of snack

foods and beverages during the 1980s and 1990s

with the acquisitions of Mug Root Beer, 7-Up Inter-

national, Smartfood ready-to-eat popcorn, Walker’s

Crisps (United Kingdom), Smith’s Crisps (United

Kingdom), Mexican cookie company Gamesa, and

Sunchips. Calloway added quick-service restaurants

Hot-n-Now in 1990; California Pizza Kitchens in

1992; and East Side Mario’s, D’Angelo Sandwich

Shops, and Chevy’s Mexican Restaurants in 1993.

The company expanded beyond carbonated bever-

ages through a 1992 agreement with Ocean Spray to

distribute single-serving juices, the introduction of

Lipton ready-to-drink (RTD) teas in 1993, and the

introduction of Aquafina bottled water and Frappuc-

cino ready-to-drink coffees in 1994.

By 1996 it had become clear to PepsiCo man-

agement that the potential strategic-fit benefits

existing between restaurants and PepsiCo’s core

beverage and snack businesses were difficult to cap-

ture. In addition, any synergistic benefits achieved

2013 2012 2011 2010 2009 2008 2007 2006 2005 2004

Net revenue $66,415 $65,492 $66,504 $57,838 $43,232 $43,251 $39,474 $35,137 $32,562 $29,261

Net income 6,740 6,178 6,443 6,320 5,946 5,142 5,599 5,065 4,078 4,212

Income per common share—basic, continuing operations

$4.37 $3.96 $4.08 $3.97 $3.81 $3.26 $3.38 $3.00 $2.43 $2.45

Cash dividends declared per common share

$2.24 $2.13 $2.03 $1.89 $1.78 $1.65 $1.42 $1.16 $1.01 $0.85

Total assets $77,478 74,638 72,882 68,153 39,848 35,994 34,628 29,930 31,727 27,987

Long-term debt 24,333 23,544 20,568 19,999 7,400 7,858 4,203 2,550 2,313 2,397

Source: PepsiCo 10-K reports, various years.

EXHIBIT 1 Financial Summary for PepsiCo, Inc., 2004–2013 (in millions, except per share amounts)



C-308 PART 2 Cases in Crafting and Executing Strategy

Saudi Arabian salty-snack market), and the Quaker

Oats Company.

The 2001 Acquisition of Quaker Oats At $13.9 billion, Quaker Oats was PepsiCo’s larg-

est acquisition and gave it the number-one brand

of oatmeal in the United States, with more than a

60 percent category share; the leading brand of rice

were more than offset by the fast-food industry’s fierce

price competition and low profit margins. In 1997,

CEO Roger Enrico spun off the company’s restaurants

as an independent, publicly traded company to focus

PepsiCo on food and beverages. Soon after the spin-

off of PepsiCo’s fast-food restaurants was completed,

Enrico acquired Cracker Jack, Tropicana, Smith’s

Snackfood Company in Australia, SoBe teas and alter-

native beverages, Tasali Snack Foods (the leader in the

EXHIBIT 2 Monthly Performance of PepsiCo, Inc.’s Stock Price, 2004–July 2014

05 06 07Year

08 09 10 11 12 13 14

Sto

ck P

rice

($)

45

50

55

60

65

70

75

80

85

90(a) Trend in PepsiCo, Inc.’s Common Stock Price

Year

Per

cent

Cha

nge

(199

8 =

0)

05 06 07 08 09 10 11 12 13 14

190

170

160

150

140

130

120

110

10

210

230220

180PepsiCo’s Stock Price

S&P 500

(b) Performance of PepsiCo, Inc.’s Stock Price versus the S&P 500 Index




cakes and granola snack bars; and other well-known

grocery brands such as Cap’n Crunch, Rice-A-Roni,

and Aunt Jemima. However, Quaker’s most valuable

asset in its arsenal of brands was Gatorade.

Gatorade was developed by University of Flor-

ida researchers in 1965, but it was not marketed

commercially until the formula was sold to Stokely-

Van Camp in 1967. When Quaker Oats acquired the

brand from Stokely-Van Camp in 1983, Gatorade

gradually made a transformation from a regionally

distributed product with annual sales of $90 mil-

lion to a $2 billion powerhouse. Gatorade was able

to increase sales by more than 10 percent annually

during the 1990s, with no new entrant to the sports

beverage category posing a serious threat to the

brand’s dominance. PepsiCo, Coca-Cola, France’s

Danone Group, and Swiss food giant Nestlé all were

attracted to Gatorade because of its commanding

market share and because of the expected growth

in the isotonic sports beverage category. PepsiCo

became the successful bidder for Quaker Oats and

Gatorade with an agreement struck in December

2000, but the merger would not receive U.S. Fed-

eral Trade Commission (FTC) approval until August

2001. The FTC’s primary concern over the merger

was that Gatorade’s inclusion in PepsiCo’s portfo-

lio of snacks and beverages might give the company

too much leverage in negotiations with convenience

stores and ultimately force smaller snack-food and

beverage companies out of convenience store chan-

nels. In its approval of the merger, the FTC stipu-

lated that Gatorade and PepsiCo’s soft drinks could

not be jointly distributed for 10 years.

Acquisitions after 2001 After the completion of the Quaker Oats acquisi-

tion in 2001, the company focused on integration of

Quaker Oats’ food, snack, and beverage brands into

the PepsiCo portfolio. The company made a number

of “tuck-in” acquisitions of small, fast-growing food

and beverage companies in the United States and

internationally to broaden its portfolio of brands.

Tuck-in acquisitions in 2006 included Stacy’s bagel

and pita chips, Izze carbonated beverages, Nether-

lands-based Duyvis nuts, and Star Foods (Poland).

Acquisitions made during 2007 included Naked

Juice fruit beverages, Sandora juices in the Ukraine,

New Zealand’s Bluebird snacks, Penelopa nuts and

seeds in Bulgaria, and Brazilian snack producer

Lucky. The company also entered into a joint ven-

ture with the Strauss Group in 2007 to market

Sabra—the top-selling and fastest-growing brand

of hummus in the United States and Canada. The

company acquired the Russian beverage producer

Lebedyansky in 2008 for $1.8 billion, and in 2010 it

acquired Marbo, a potato chip production operation

in Serbia.

In 2010 and 2011, the company executed its

largest acquisitions since the 2001 acquisition of

Quaker Oats. In 2010, PepsiCo acquired the previ-

ously independent Pepsi Bottling Group and Pep-

siCo Americas for $8.26 billion in cash and PepsiCo

common shares. The acquisition was designed to

better integrate its global distribution system for its

beverage business. In 2011, it acquired Russia’s lead-

ing food and beverage company, Wimm-Bill-Dann

Foods, for $3.8 billion. The combination of acquisi-

tions and the strength of PepsiCo’s core snacks and

beverages business allowed the company’s revenues

to increase from approximately $29 billion in 2004

to more than $66 billion in 2013. Exhibit 3 presents

PepsiCo’s consolidated statements of income for

2011–2013, while the company’s consolidated bal-

ance sheets for 2012–2013 are presented in Exhibit

4 . The company’s calculation of free cash flow for

2011–2013 is shown in Exhibit 5 .

BUILDING SHAREHOLDER VALUE IN 2014 Three people had held the position of CEO since the

company began its portfolio restructuring in 1997.

Even though Roger Enrico was the chief architect of

the business lineup as it stood in 2007, his successor,

Steve Reinemund, and Indra Nooyi, the company’s

CEO in 2007, were both critically involved in the

restructuring. Nooyi joined PepsiCo in 1994 and

developed a reputation as a tough negotiator who

engineered the 1997 spin-off of Pepsi’s restaurants,

spearheaded the 1998 acquisition of Tropicana, and

played a critical role in the 1999 IPO of Pepsi’s

bottling operations. After being promoted to chief

financial officer, Nooyi was also highly involved

in the 2001 acquisition of Quaker Oats. Nooyi was

selected as the company’s CEO upon Reinemund’s

retirement in October 2006. Nooyi had emigrated

to the United States in 1978 to attend Yale’s Grad-

uate School of Business, and she worked with the




develop good-for-you and better-for-you products

would create growth opportunities from the intersec-

tion of business and public interests.

PepsiCo was organized into six business divi-

sions, which all followed the corporation’s general

strategic approach. Frito-Lay North America manu-

factured, marketed, and distributed such snack foods

as Lay’s potato chips, Doritos tortilla chips, Cheetos

cheese snacks, Fritos corn chips, Grandma’s cook-

ies, and Smartfood popcorn. Quaker Foods North

America manufactured and marketed cereals, rice and

pasta dishes, granola bars, and other food items that

were sold in supermarkets. Latin American Foods

manufactured, marketed, and distributed snack

foods and many Quaker-branded cereals and snacks

in Latin America. PepsiCo Americas Beverages

manufactured, marketed, and sold beverage con-

centrates, fountain syrups, and finished goods under

such brands as Pepsi, Gatorade, Aquafina, Tropi-

cana, Lipton, Dole, and SoBe throughout North

and South America. PepsiCo Europe manufactured,

Boston Consulting Group, Motorola, and Asea

Brown Boveri before arriving at PepsiCo in 1994. In

the eight years under Nooyi’s leadership, PepsiCo’s

revenues had increased by nearly 90 percent, and its

share price had grown by 50 percent.

In 2014, PepsiCo’s corporate strategy had diver-

sified the company into salty and sweet snacks, soft

drinks, orange juice, bottled water, ready-to-drink

teas and coffees, purified and functional waters,

isotonic beverages, hot and ready-to-eat breakfast

cereals, grain-based products, and breakfast condi-

ments. Most PepsiCo brands had achieved number-

one or number-two positions in their respective food

and beverage categories through strategies keyed to

product innovation, close relationships with distri-

bution allies, international expansion, and strategic

acquisitions. The company was committed to pro-

ducing the highest-quality products in each category

and was working diligently on product reformu-

lations to make snack foods and beverages less

unhealthy. The company believed that its efforts to

2013 2012 2011

Net revenue $66,415 $65,492 $66,504

Cost of sales 31,243 31,291 31,593

Selling, general, and administrative expenses 25,357 24,970 25,145

Amortization of intangible assets 110 119 133

Operating profi t 9,705 9,112 9,633

Interest expense (911) (899) (856)

Interest income and other 97 91 57

Income before income taxes 8,891 8,304 8,834

Provision for income taxes 2,104 2,090 2,372

Net income 6,787 6,214 6,462

Less: Net income attributable to noncontrolling interests 47 36 19

Net income attributable to PepsiCo $ 6,740 $ 6,178 $ 6,443

Net income attributable to PepsiCo per common share:

Basic $4.37 $3.96 $4.08

Diluted $4.32 $3.92 $4.03

Weighted-average common shares outstanding:

Basic 1,541 1,557 1,576

Diluted 1,560 1,575 1,597

Cash dividends declared per common share $2.24 $2.1275 $2.025

Source: PepsiCo, Inc., 10-K report, 2013.

EXHIBIT 3 PepsiCo, Inc.’s Consolidated Statements of Income, 2011–2013 (in millions, except per share data)




2013 2012

Assets

Current assets

Cash and cash equivalents $ 9,375 $ 6,297

Short-term investments 303 322

Accounts and notes receivable, net 6,954 7,041

Inventories 3,409 3,581

Prepaid expenses and other current assets 2,162 1,479

Total current assets 22,203 18,720

Property, plant, and equipment, net 18,575 19,136

Amortizable intangible assets, net 1,638 1,781

Goodwill 16,613 16,971

Other nonamortizable intangible assets 14,401 14,744

Nonamortizable intangible assets 31,014 31,715

Investments in noncontrolled affiliates 1,841 1,633

Other assets 2,207 1,653

Total assets $ 77,478 $74,638

Liabilities and Equity

Current liabilities

Short-term obligations $ 5,306 $ 4,815

Accounts payable and other current liabilities 12,533 11,903

Income taxes payable — 371

Total current liabilities 17,839 17,089

Long-term debt obligations 24,333 23,544

Other liabilities 4,931 6,543

Deferred income taxes 5,986 5,063

Total liabilities 53,089 52,239

Commitments and contingencies

Preferred stock, no par value 41 41

Repurchased preferred stock (171) (164)

PepsiCo common shareholders’ equity

Common stock, par value 12/3¢ per share (authorized 3,600 shares, issued, net of repurchased common stock at par value: 1,529 and 1,544 shares, respectively) 25 26

Capital in excess of par value 4,095 4,178

Retained earnings 46,420 43,158

Accumulated other comprehensive loss (5,127) (5,487)

Repurchased common stock, in excess of par value (337 and 322 shares, respectively) (21,004) (19,458)

Total PepsiCo common shareholders’ equity 24,409 22,417

Noncontrolling interests 110 105

Total equity 24,389 22,399

Total liabilities and equity $ 77,478 $ 74,638


EXHIBIT 4 PepsiCo, Inc.’s Consolidated Balance Sheets, 2012–2013 (in millions, except per share data)




five times greater than runner-up Kellogg’s market

share of 6.9 percent. Convenience foods included

both salty and sweet snacks, such as chips, pretzels,

ready-to-eat popcorn, crackers, dips, snack nuts and

seeds, candy bars, and cookies.

PepsiCo’s Performance with Purpose goals applied

to all of its business units. Frito-Lay North Ameri-

ca’s (FLNA’s) revenues increased by 3 percent dur-

ing 2013, but its net revenue increased by 4 percent

and its operating profit increased by 6 percent. The

division’s management believed that growth in

snack foods remained possible since typical indi-

viduals, on average, consumed snacks 67 times per

month. On average, consumers chose Frito-Lay

snacks only eight times per month. To increase its

share of snack consumption, FLNA was focused on

developing additional better-for-you (BFY) snacks

like Baked Cheetos and Doritos packaged in smaller

portion sizes. Between 2008 and 2013, improving

the performance of the division’s core salty brands

and further developing health and wellness prod-

ucts were key strategic initiatives. The company had

eliminated trans fats from all Lay’s, Fritos, Ruffles,

Cheetos, Tostitos, and Doritos varieties, marketed a

wide variety of gluten-free products, and was look-

ing for further innovations to make its salty snacks

more healthy. The company had introduced Lay’s

Classic Potato Chips cooked in sunflower oil that

retained Lay’s traditional flavor but contained 50%

less saturated fat.

Good-for-you (GFY) snacks, such as Flat Earth

fruit and vegetable snacks, offered an opportunity

for the company to exploit consumers’ desires for

healthier snacks and address a deficiency in most

diets. Americans, on average, consumed only about

50 percent of the U.S. Department of Agriculture’s

recommended daily diet of fruits and vegetables.

Other GFY snacks included Stacy’s Pita Chips,

marketed, and sold snacks and beverages through-

out Europe, while the company’s Asia, Middle East,

and Africa division produced, marketed, and distrib-

uted snack brands and beverages in more than 150

countries in those regions. A full listing of Frito-Lay

snacks, PepsiCo beverages, and Quaker Oats prod-

ucts is presented in Exhibit 6 . Select financial infor-

mation for PepsiCo’s six reporting units is presented

in Exhibit 7 .

Frito-Lay North America As of 2014, three key trends that were shaping the

industry were convenience, a growing awareness

of the nutritional content of snack foods, and indul-

gent snacking. A product manager for a regional

snack producer explained, “Many consumers want

to reward themselves with great-tasting, gourmet

flavors and styles. . . . The indulgent theme carries

into seasonings as well. Overall, upscale, restaurant-

influenced flavor trends are emerging to fill con-

sumers’ desires to escape from the norm and taste

snacks from a wider, often global, palate.” 1 Most

manufacturers had developed new flavors of salty

snacks such as jalapeno and cheddar tortilla chips

and pepper jack potato chips to attract the interest of

indulgent snackers. Manufacturers had also begun

using healthier oils when processing chips and had

expanded lines of baked and natural salty snacks to

satisfy the demands of health-conscious consumers.

Snacks packaged in smaller bags not only addressed

overeating concerns but also were convenient to

take along on an outing. In 2013 Frito-Lay owned

the top-selling chip brand in each U.S. salty-snack

category and held more than a 2-to-1 lead over the

next-largest snack-food maker in the United States.

Frito-Lay’s 36.6 percent market share of conve-

nience foods sold in the United States was more than

2013 2012 2011

Net cash provided by operating activities $9,688 $8,479 $8,944

Capital spending (2,795) (2,714) (3,339)

Sales of property, plant, and equipment 109 95 84

Free cash fl ow $ 7,002 $5,860 $5,689


EXHIBIT 5 Net Cash Provided By PepsiCo’s Operating Activities, 2011–2013




EXHIBIT 6 PepsiCo, Inc.’s Snack, Beverage, and Quaker Oats Brands, 2014 Snack Brands Beverage Brands Quaker Oats Brands

• Lay’s potato chips

• Maui Style potato chips

• Ruffles potato chips

• Doritos tortilla chips

• Tostitos tortilla chips

• Santitas tortilla chips

• Fritos corn chips

• Cheetos cheese-fl avored snacks

• Rold Gold pretzels and snack mix

• Funyuns onion-fl avored rings

• Go Snacks

• Sunchips multigrain snacks

• Sabritones puffed-wheat snacks

• Cracker Jack candy-coated popcorn

• Chester’s popcorn

• Grandma’s cookies

• Munchos potato crisps

• Smartfood popcorn

• Baken-ets fried pork skins

• Oberto meat snacks

• Rustler’s meat snacks

• Churrumais fried corn strips

• Frito-Lay nuts

• Frito-Lay, Ruffles, Fritos, and Tostitos dips and salsas

• Frito-Lay, Doritos, and Cheetos snack crackers

• Fritos, Tostitos, Ruffles, and Doritos snack kits

• Grain Waves

• Lay’s Stax potato crisps

• Miss Vickie’s potato chips

• Munchies snack mix

• Stacy’s Pita Chips

• Flat Earth fruit and vegetable chips

• Red Rock Deli Chips

• Sabra hummus

Outside North America

• Bocabits wheat snacks

• Crujitos corn snacks

• Pepsi-Cola

• Mountain Dew

• Mountain Dew AMP energy drink

• Mug

• Sierra Mist

• Slice

• Lipton Brisk (partnership)

• Lipton Iced Tea (partnership)

• Dole juices and juice drinks (license)

• FruitWorks juice drinks

• Aquafi na purifi ed drinking water

• Frappuccino ready-to-drink coffee (partnership)

• Starbucks DoubleShot (partnership)

• SoBe juice drinks, dairy, and teas

• SoBe energy drinks (No Fear and Adrenaline Rush)

• H2OH!

• Gatorade

• Propel

• Tropicana

• Tropicana Twister

• Tropicana Smoothie

• Izze

• Naked Juice


• Mirinda

• 7UP

• Pepsi

• Kas

• Teem

• Manzanita Sol

• Paso de los Toros

• Fruko

• Evervess

• Yedigun

• Shani

• Fiesta

• D&G (license)

• Mandarin (license)

• Quaker Oatmeal

• Cap’n Crunch cereal

• Life cereal

• Quaker 100% Natural cereal

• Quaker Squares cereal

• Quisp cereal

• King Vitaman cereal

• Quaker Oh’s! cereal

• Mother’s cereal

• Quaker grits

• Quaker Oatmeal-to-Go

• Aunt Jemima mixes & syrups

• Quaker rice cakes

• Quaker rice snacks (Quakes)

• Quaker Chewy granola bars

• Quaker Dipps granola bars

• Rice-A-Roni side dishes

• Pasta Roni side dishes

• Near East side dishes

• Puffed Wheat

• Harvest Crunch cereal

• Quaker baking mixes

• Spudz snacks

• Crisp’ums baked crisps

• Quaker Fruit & Oatmeal bars

• Quaker Fruit & Oatmeal Bites

• Quaker Fruit and Oatmeal Toastables

• Quaker Soy Crisps

• Quaker Bakeries


• FrescAvena beverage powder

• Toddy chocolate powder

• Toddynho chocolate drink

• Coqueiro canned fi sh

• Sugar Puffs cereal

• Puffed Wheat

• Cruesli cereal

• Hot Oat Crunch cereal

• Quaker Oatso Simple hot cereal

• Scott’s Porage Oats

(Continued)




declined between 2011 and 2013. Quaker Oats was

the star product of the division, with a command-

ing share of the North American market for oatmeal

in 2013. Rice-A-Roni also held a number-one mar-

ket share in the rice and pasta side-dish segment

of the consumer food industry. More than one-half

of Quaker Foods’ 2013 revenues was generated by

BFY and GFY products.

Latin American Foods PepsiCo management believed international markets

offered the company’s greatest opportunity for growth

since per capita consumption of snacks in the United

States averaged 6.6 servings per month while per

capita consumption in other developed countries aver-

aged 4 servings per month and in developing countries

averaged 0.4 serving per month. PepsiCo executives

expected China and Brazil to become the two largest

international markets for snacks. The United Kingdom

Sabra hummus, salsas and dips, and Quaker Chewy

granola bars. In 2013, FLNA manufactured and mar-

keted baked versions of its most popular products,

such as Cheetos, Lay’s potato chips, Ruffles potato

chips, and Tostitos Scoops! tortilla chips.

Quaker Foods North America Quaker Foods produced, marketed, and distributed

hot and ready-to-eat cereals, pancake mixes and

syrups, and rice and pasta side dishes in the United

States and Canada. The division recorded sales of

approximately $2.6 billion in 2013. The sales vol-

ume of Quaker Foods products decreased by nearly

1 percent annually between 2011 and 2013 with

Quaker Oatmeal, Life cereal, and Cap’n Crunch

cereal volumes competing in mature industries with

weak competitive positions relative to Kellogg’s and

General Mills. Sales of Aunt Jemima syrup and pan-

cake mix and Rice-A-Roni rice and pasta kits also

Snack Brands Beverage Brands Quaker Oats Brands

• Fandangos corn snacks

• Hamka’s snacks

• Niknaks cheese snacks

• Quavers potato snacks

• Sabritas potato chips

• Smiths potato chips

• Walkers potato crisps

• Gamesa cookies

• Doritos Dippas

• Sonric’s sweet snacks

• Wotsits corn snacks

• Red Rock Deli

• Kurkure

• Smiths Sensations

• Cheetos Shots

• Quavers Snacks

• Bluebird Snacks

• Duyvis Nuts

• Müller yogurts

• Lucky snacks

• Penelopa nuts and seeds

• Marbo

• Wimm-Bill-Dann

• Radical Fruit

• Tropicana Touche de Lait

• Alvalle gazpacho fruit juices and vegetable juices

• Tropicana Season’s Best juices and juice drinks

• Loóza juices and nectars

• Copella juices

• Frui’Vita juices

• Sandora juices

• Scott’s So Easy Oats

• Quaker bagged cereals

• Quaker Mais Sabor

• Quaker Oats

• Quaker oat fl our

• Quaker Meu Mingau

• Quaker cereal bars

• Quaker Oatbran

• Corn goods

• Magico chocolate powder

• Quaker Vitaly Cookies

• 3 Minutos Mixed Cereal

• Quaker Mágica

• Quaker Mágica con Soja

• Quaker pastas

• Quaker Frut

Source: Pepsico.com .

EXHIBIT 6 (Continued)




EXHIBIT 7 Select Financial Data for PepsiCo, Inc.’s Business Segments, 2011–2013 (in millions)

2013 2012 2011

Net revenues

Frito-Lay North America $14,126 $13,574 $13,322

Quaker Foods North America 2,612 2,636 2,656

Latin American Foods 8,350 7,780 7,156

PepsiCo Americas Beverages 21,068 21,408 22,418

Europe 13,752 13,441 13,560

Asia, Middle East, Africa 6,507 6,653 7,392

Total division 66,415 65,492 66,504

Operating profi t

Frito-Lay North America $ 3,877 $ 3,646 $ 3,621

Quaker Foods North America 617 695 797



Europe 1,293 1,330 1,210


Total division 11,158 10,414 10,866

Capital expenditures

Frito-Lay North America $ 423 $ 365 $ 439


Latin American Foods 384 436 413

PepsiCo Americas Beverages 716 702 1,006

Europe 550 575 588

Asia, Middle East, Africa 531 510 693

Total division 2,642 2,625 3,182

Total assets

Frito-Lay North America $ 5,308 $ 5,332 $ 5,384

Quaker Foods North America 983 966 1,024



Europe 18,702 19,218 18,461


Total division 65,926 67,146 66,770

Depreciation and other amortization




PepsiCo Americas Beverages 863 855 865

Europe 525 522 522


Total division 2,553 2,570 2,604

(Continued)




market share. Dr. Pepper Snapple Group was the

third-largest beverage seller in 2013, with a market

share of 8.9 percent. Private-label sellers of bever-

ages collectively held an 8 percent market share in

2013. As with Frito-Lay, PepsiCo’s beverage busi-

ness contributed greatly to the corporation’s overall

profitability and free cash flows.

In 2013, PepsiCo Americas Beverages (PAB)

accounted for 32 percent of the corporation’s total

revenues and 26 percent of its operating profits. The

PAB division’s $1 billion brands included Gatorade,

Tropicana fruit juices, Lipton ready-to-drink tea,

Pepsi, Diet Pepsi, Mountain Dew, Diet Mountain

Dew, Aquafina, Miranda, Sierra Mist, Dole fruit

drinks, Starbucks cold-coffee drinks, and SoBe.

Gatorade was the number-one brand of sports drink

sold worldwide; Tropicana was the number-two

seller of juice and juice drinks globally; and PAB

was the second-largest seller of carbonated soft drinks

worldwide, with a 29 percent market share in 2014.

Market leader Coca-Cola held a 40.5 percent share of

the carbonated soft-drink (CSD) industry in 2014.

Carbonated soft drinks were the most consumed

type of beverage in the United States, with industry

sales of $20.4 billion, but the industry had declined

by 1 to 2 percent annually for nearly a decade. The

overall decline in CSD consumption was a result of

consumers’ interest in healthier food and beverage

choices. In contrast, flavored and enhanced water,

energy drinks, ready-to-drink teas, and bottled water

were growing beverage categories that were cap-

turing a larger share of the stomachs in the United

States and internationally.

PepsiCo’s Carbonated Soft-Drink Business Among Pepsi’s most successful strategies to sustain

was estimated to be the third-largest international mar-

ket for snacks, while developing markets Mexico and

Russia were expected to be the fourth- and fifth-largest

international markets, respectively.

Developing an understanding of consumer taste

preferences was a key to expanding into interna-

tional markets. Taste preferences for salty snacks

were more similar from country to country than

were preferences for many other food items, and this

allowed PepsiCo to make only modest modifications

to its snacks in most countries. For example, clas-

sic varieties of Lay’s, Doritos, and Cheetos snacks

were sold in Latin America. In addition, consumer

characteristics in the United States that had forced

snack-food makers to adopt better-for-you or good-

for-you snacks applied in most other developed

countries as well.

PepsiCo operated 50 snack-food manufactur-

ing and processing plants and 640 warehouses in

Latin America, with its largest facilities located in

Guarulhos, Brazil; Monterrey, Mexico; Mexico

City, Mexico; and Celaya, Mexico. PepsiCo was

the second-largest seller of snacks and beverages in

Mexico, and its Doritos, Marias Gamesa, Cheetos,

Ruffles, Emperador, Saladitas, Sabritas, and Tosti-

tos brands were popular throughout most of Latin

America. The division’s revenues had grown from

$7.2 billion in 2011 to $8.3 billion in 2013 and

accounted for 12 percent of 2013 total net revenues.

PepsiCo Americas Beverages PepsiCo was the largest seller of liquid refreshments

in the United States, with a 24 percent share of the

market in 2013. Coca-Cola was the second-largest

nonalcoholic beverage producer, with a 21 percent

2013 2012 2011

Amortization of other intangible assets


Quaker Foods North America — — —


PepsiCo Americas Beverages 58 59 65

Europe 32 36 39


Total division 110 119 133


EXHIBIT 7 (Continued)




while its operating profit declined from $1,210 to

$1,174 over the same period of time.

Value Chain Alignment between PepsiCo Brands and Products PepsiCo’s management team was dedicated to

capturing strategic-fit benefits within the business

lineup throughout the value chain. The company’s

procurement activities were coordinated globally

to achieve the greatest possible economies of scale,

and best practices were routinely transferred among

its more than 200 plants, over 3,500 distribution sys-

tems, and 120,000 service routes around the world.

PepsiCo also shared market research information

with its divisions to better enable each division to

develop new products likely to be hits with consum-

ers, and the company coordinated its Power of One

activities across product lines.

PepsiCo management had a proven ability to

capture strategic fits between the operations of new

acquisitions and its other businesses. The Quaker

Oats integration produced a number of noteworthy

successes, including $160 million in cost savings

resulting from corporatewide procurement of prod-

uct ingredients and packaging materials and an esti-

mated $40 million in cost savings attributed to the

joint distribution of Quaker snacks and Frito-Lay

products. In total, the company estimated that the

synergies among its business units generated approx-

imately $1 billion annually in productivity savings.

PEPSICO’S STRATEGIC SITUATION IN 2014 For the most part, PepsiCo’s strategies seemed to be

firing on all cylinders in 2014. PepsiCo’s chief man-

agers expected the company’s lineup of snack, bev-

erage, and grocery items to generate operating cash

flows sufficient to reinvest in its core businesses,

provide cash dividends to shareholders, fund a $15

billion share-buyback plan, and pursue acquisitions

that would provide attractive returns. Nevertheless,

the low relative profit margins of PepsiCo’s inter-

national businesses created the need for a continued

examination of its strategy and operations to better

exploit strategic fits between the company’s interna-

tional business units.

The company had developed a new divisional

structure in 2008 to combine its food and beverage

volume and share in soft drinks was its Power of One

strategy, which attempted to achieve the synergistic

benefits of a combined Pepsi-Cola and Frito-Lay

envisioned by shareholders of the two companies in

1965. The Power of One strategy called for super-

markets to place Pepsi and Frito-Lay products side

by side on shelves. The company was also focused

on soft-drink innovation to sustain sales and market

share, including new formulations to lower the calo-

rie content of nondiet drinks.

PepsiCo’s Noncarbonated Beverage Brands Although carbonated beverages made up the largest

percentage of PAB’s total beverage volume, much

of the division’s growth was attributable to the suc-

cess of its noncarbonated beverages. Aquafina was

the number-one brand of bottled water in the United

States. Gatorade, Tropicana, Aquafina, SoBe, Star-

bucks Frappuccino, Lipton RTD teas, and Propel

were all leading BFY and GFY beverages in the

markets where they were sold.

PepsiCo Europe All of PepsiCo’s global brands were sold in Europe,

as well as its country- or region-specific brands such

as Domik v Derevne, Chjudo, and Agusha. PespiCo

Europe operated 125 plants and approximately

525 warehouses, distribution centers, and offices in

eastern and western Europe. The company’s acquisi-

tion of Wimm-Bill-Dann Foods, along with sales of

its long-time brands, made it the number-one food and

beverage company in Russia, with a 2-to-1 advantage

over its nearest competitor. It was also the leading

seller of snacks and beverages in the United King-

dom. PepsiCo Europe management believed further

opportunities in other international markets existed,

with opportunities to distribute many of its newest

brands and product formulations throughout Europe.

Asia, Middle East, and Africa PepsiCo’s business unit operating in Asia, the Mid-

dle East, and Africa manufactured and marketed all

of the company’s global brands and many regional

brands such as Kurkure and Chipsy. PepsiCo oper-

ated 45 plants, 490 distribution centers, warehouses,

and offices located in Egypt, Jordan, and China and

was the number-one brand of beverages and snacks

in India, Egypt, Saudi Arabia, United Arab Emirates,

and China. The division’s revenues had declined

from $7.4 billion in 2011 to $6.5 billion in 2013,




be required to improve the profitability of Pep-

siCo’s international operations and to help restore

previous revenue and earnings growth rates. Pos-

sible actions might include a reprioritization of

internal uses of cash, new acquisitions, further

efforts to capture strategic fits existing between the

company’s various businesses, or the divestiture of

businesses with poor prospects of future growth

and minimal strategic fit with PepsiCo’s other

businesses.

businesses in Latin America into a common divi-

sion. Also, the company’s international businesses

were reorganized to boost profit margins in Europe

and Asia, the Middle East, and Africa. However,

more than five years after the reorganization, the

performance of the company’s international busi-

nesses continued to lag that of its North American

businesses by a meaningful margin. Some food

and beverage industry analysts had speculated that

additional corporate strategy changes might also

ENDNOTES 1 As quoted in “Snack attack,” Private Label Buyer, August 2006, p. 26.



Education

PepsiCo’s Diversification Strategy in 2014 (Case)