Problem and Issue Identification
PepsiCo is a global business in the beverage and snack food industry that has built its business strategy on diversification of its portfolio, optimization of processes, and innovation of products. The core segments of PepsiCo’s businesses include the beverage segment consisting of carbonated soft drinks under its Pepsi brand, juices under the Tropicana brand, and isotonic drinks, such as Gatorade among others. The other major division is the Frito-Lays that owns a wide variety of salty snacks under numerous brands that the corporation owns. The company has made strategic acquisitions entering the breakfast space with Quaker Oats products and a range of Better-For-You and Good-For-You products that are meant to target the health-oriented market.
North American Beverages remains the primary source of income for the corporation, with the Frito-Lay North America division shortly behind. Other international markets offer some revenue, but combined, the net revenue does not match the North American divisions of PepsiCo. Also, net revenues are falling annually in the years leading up to the case data (Gamble, n.d.).
The company is seemingly doing everything correctly by targeting a wide variety of consumers, expanding its product line, consistently expanding to international markets, and optimizing its production processes and synergies among its brands to create more than $1 billion in productivity savings. With these facts in mind, it can be assumed the PepsiCo is failing to strongly appeal to consumers with newer and healthier products to account for the general decline year over year in the soft-drink and salty snacks segments. International markets are seemingly struggling as well despite the company’s acquisition of local brands.
The main issue presented by this case indicates a troubling corporate strategy and positioning of PepsiCo that has overall reliance on its traditional products, underperformance in international markets, and declining revenue. It is a concerning issue since long-term strategic planning must consider elements of market performance and changing business models that account for variations in consumer trends.
The reliance on its sole profitable segment of FritoLays North America is concerning given the overall market trends that, similar to soft beverages, have been gradually shifting away from unhealthy foods. Although the company is trying to improve the health of its portfolio, it is not yet effective or pertain to niche products that are unlikely to achieve the same level of explosive growth as the traditional soft beverages and snacks did at one point for PepsiCo.
There are sub-issues that arise as well, such as the expansion to international markets, there is the sub-issue of a globalized world economy where information travels fast. Therefore, new markets where PepsiCo is attempting to expand its business are already experiencing the same phenomenon that developed markets such as North America are showing. Carbonated soft drink and salty snack consumption is decreasing due to consumer sentiments. Therefore, new emerging markets have much slower growth and lower per capita consumption before even reaching anywhere close to the peak of sales like PepsiCo had been able to in North America.
Furthermore, PepsiCo may have potentially adopted a wrong strategy of slow expansion internationally, losing out to Coca-Cola not only in the U.S. but also in China and India as the rapid growth emerging markets (Trefis Team, 2018). There is also the question of PepsiCo’s diversification strategies. Undoubtedly, diversification is necessary in the context of the market trend, but there may be potential issues with the approach that PepsiCo is taking strategically. This may include creating a portfolio that is too extensive to efficiently manage or lacking focus, which may be detrimental or taking away resources from revamping its more well-known product lines in a modern context of being more health-oriented.
Analysis and Evaluation
As a large multinational corporation, PepsiCo has a wide variety of stakeholders. Its primary stakeholder and top priority can be considered to be the consumers. Through customer behavior, the financial standing of the company is determined in terms of sales and revenues. Consumers have certain expectations regarding the quality and price of products which presents vital opportunities, but consumer behavior can rapidly change in a direction that is differing from the company expectations or directions. PepsiCo continues to innovate its processes, offer more choices, and provide healthier products to improve consumer health.
The corporate social strategy seeks to flexibly address consumer interests. Similar to consumers, communities are also a stakeholder given that communities often serve as the foundation for social events as well as offer opportunities for PepsiCo to build their factories and sell their products in local stores. Communities offer opportunities for positive community social development strategies but can be an extreme threat if PepsiCo was to face any sort of backlash or litigation regarding its community practices.
Shareholders and investors are stakeholders in the company, interested in higher financial performance and availability of additional capital. PepsiCo in times of success conducts share buybacks and dividend payouts, which pleases investors and opens up opportunities for market share increase in the future. However, shareholders are often volatile, and in times when the company stagnation may choose to sell shares, decreasing market value and capital for the company. Considering that PepsiCo is an international company, governments are a stakeholder too as such large businesses must be regulated but also have the possibility to bring jobs to a country. Governments are mostly a threat with additional regulations, but may also offer PepsiCo favorable conditions in countries to expand their manufacturing.
PepsiCo is an exemplary instance of a company following corporate social responsibility. Economic responsibility comes into play when Pepsi adopts environmentally friendly manufacturing processes and materials, reducing its impact on plastics and encouraging adopting recycling programs. Pepsi also utilizes sustainable sourcing for its agricultural ingredients as well as responsible use of water in its processes by improving water efficiency and replenishing as much water as the company consumers.
As an ethical responsibility also, PepsiCo seeks to provide water sources to water-ridden communities and ensures that wastewater and other waste from operations meet appropriate environmental standards and do not endanger local communities. From legal social responsibility, PepsiCo engages in following all local and international regulations on elements of environment and labor, while also seeking to improve labor policies and maintaining fair practices in many of its facilities around the world. For some discretionary activities, PepsiCo contributes to important causes such as women-empowered education in developing countries, as well as strengthening communities through disaster recovery and food security efforts (PepsoCo, 2017).
In terms of company actions, PepsiCo has been taking concrete actions for a number of years to address its issues. PepsiCo’s broad strategies to continue growth and achieve competitive advantage revolve around two main aspects of cost leadership and widespread differentiation. Cost leadership is utilized through cost minimization as a method of improving financial performance, both through its pricing strategy for some of its products but also its operational processes.
According to the case study, PepsiCo highly optimizes manufacturing and constantly attempts to update and improve its systems for efficiency while also sharing assets between its various brands and segments when possible. This a smart approach in a market where profit margins are typically low and rely on scale for profitability. Therefore, by reducing costs in initial stages of the supply chain, the business is able to effectively maximize profits to the best extent.
The other strategy utilized by PepsiCo was diversification of its product offerings and range. PepsiCo has continuously strived to make strategic acquisitions in recent years to supplement its primary soft drink and salty snacks divisions. These acquisitions included companies that offered healthier drinks such as juices, isotonic drinks, and sparkling water and healthier snacks, as well as completely new categories such as oatmeal. This strategy is considered to be extremely effective long-term for the company’s growth and survival as by all indications, the traditional soft-drink and salty snack consumption will continue to fall, despite innovations in the products that these companies are attempting to make by reducing calorie, sugar, and sodium counts.
This is beneficial by providing alternatives to consumers and potentially other sources of income, particularly in contexts of a more health-oriented market. However, this strategy can also be criticized as PepsiCo is purchasing some brands to its portfolio where it is unlikely to be very competitive, such as with the recent acquisition of Bubbly sparkling water, a segment with very established players. Meanwhile, other acquisitions are extremely niche to exist within the larger PepsiCo brands and can take away focus from main products.
As the case discussed, the actions that the company has taken are in the right direction in maintaining the business and general strategy of PepsiCo, but there could be a need for further improvements and deeper corporate strategy changes. In regard to current actions, PepsiCo could take a bold step of vertically integrating its supply chain, practically all the way from agricultural producers with whom it could work closely. Starbucks is a company that did this, although on a smaller scale but still boasts thousands of product deliveries around the world on an efficient and timely basis.
This may allow PepsiCo to further optimize its manufacturing and logistics systems to cut long-term costs. When addressing diversification, PepsiCo needs to take a balanced approach in acquisitions to make sure that the investment is able to make the return on investment. The company needs to adopt a multilayered approach of balancing the portfolio but also invest heavily in marketing of its key brands of Pepsi, Gatorade, Mountain Dew, and the Frito-Lays lines that have developed new products for health conscious consumers as well. This approach to marketing worked well in Q3 of 2018 and will succeed in the future (Ferguson, 2017).
Other recommendations for PepsiCo include to diversify its businesses in a manner that reduces market risk exposure and find methods to penetrate developing markets, particularly countries such as China and India where explosive revenue growth is possible if successful. This may include potentially not fully tapped markets such as the UK, Australia, and Europe as well.
This may be done through marketing efforts or partnerships with local companies that will be complementary to PepsiCo products, enhancing a long-term cultural adaptation to the markets as well. Meanwhile, diversity of PepsiCo businesses to minimize market exposure refers to potential corporate restructuring that will be able to even out the current reliance of PepsiCo on its North American drink and snack divisions for operating income.
Ferguson, E. (2017). PepsiCo’s generic and intensive growth strategies. Web.
Gamble, J. E. (2018). PepsiCo’s diversification strategy in 2018: Will the company’ s new businesses restore its growth?
PepsiCo. (2017). Performance with purpose. Web.
Trefis Team. (2018). Pepsi’s focus on diversifying drinks portfolio to help steady beverages revenue. Web.