Pepsi Company’s Issues and Solutions

Introduction

PepsiCo Inc. is a leading multinational beverage and snack company that has its headquarters in Purchase, New York. The company was founded in 1898 by Caleb Bradham as a soft drink company and was first incorporated in 1919 in the state of Delaware (Hall, 2015). However, the company faced numerous challenges in its initial years of operation. After a series of acquisitions and mergers, PepsiCo was founded in 1965.

The company has since registered impressive success in the local and international market. The United States remains its single most important market, but it has successfully penetrated the global market. The firm currently has a market presence in North and South America, Europe, Asia-Pacific, Middle East, and Africa. It is one of the leading multinational beverage companies in the global market, fiercely competing against other top companies in the industry such as Coca Cola, Mecca-Cola, and Virgin Cola.

According to Ferrell, Fraedrich, and Ferrell (2017), being one of the global market leaders come at a high price because most of the emerging firms often try to capture a section of the market share of such a firm. In the last four decades, PepsiCo has registered impressive financial and market performance both locally and on a global scale. It has successfully developed a strong market brand that puts its products at a vantage position against that of the rival products.

Despite the success, it is important to appreciate that this firm faces some challenges that affect the revenue flow and profitability in the market. In this paper, the researcher seeks to conduct a critical case analysis of PepsiCo to help identify core issues that affect its operations, and how the issues can be addressed effectively.

Identification of Key Issues

According to Hall (2015), PepsiCo’s success in the market has recently been affected by a number of issues that the management must take into consideration to enhance its sustainability in the current competitive market. Some of these issues are symptoms of serious underlying problems, which may be a threat to the survival of this company. One of the issues that have emerged in the firm’s recent operations is the reduced revenue.

The company’s books of account reveal that the revenue of the company in 2016 was $ 62.799 billion, which is a drop when compared to that of the previous year. The dropping revenue is an indication of problems in the market that needs to be addressed. Another problem is that the company has been subject to criticism from environmentalists, especially in India, United States, and United Kingdom. Many of these environmental groups have raised concerns about the massive amounts of water used by the company in complete disregard to the basic water needs of the locals in the areas where it operates.

It has also faced criticism regarding the massive pollution caused by the plastic bottles used in packaging its products. Health experts have also raised concerns about the possible health consequences related to regular use of most of the cola products sold by this company. These issues may have a significant impact on the ability of PepsiCo to remain sustainable in its global operations.

Discussion of Problems Faced by PepsiCo

According to Bachmeier (2013), in many cases the issues, which are evident within an organization, are symptoms of more serious problems that must be addressed to enable a firm to operate successfully in the market. The above issues are symptoms of serious problems that PepsiCo faces. The management must understand these problems to come up with effective solution. In this paper, the researcher will discuss these problems to help determine how they can be managed.

Competition in the Market

One of the symptoms that were identified was reduced revenues at the firm. One of the possible causes of such a problem is the increasing competition in the market. Hall (2015) says that although PepsiCo and Coca Cola Company remains the dominant players in the global beverage market, a number of rival companies have emerged with unique products, which reduces the sales volume made by these two leading companies.

PepsiCo is finding itself in a position where it has to compete against new entrants offering substitutes, which are becoming popular in the market. Some of these substitute products are propositioned as more healthy alternatives than the cola products. Other than these emerging companies in the global market, PepsiCo has to deal with stiff competition from Coca Cola Company both locally and internationally. Coca Cola Company has successfully created a strong brand in the market, and it forces PepsiCo to find ways of dealing with the growing popularity of this rival brand in the market.

Inability to Tackle Environmental Concerns

PepsiCo is yet to come up with innovative ways of addressing a number of environmental concerns both locally and in the global market. In India, the United States, and United Kingdom, the company has been criticized for its excessive use of water at the expense of the locals who need the same commodity for their basic needs. The company has failed to come up with innovative ways of developing their products that can enable them reduce their water usage.

As scarcity of water continues to become a serious problem in some of these regions, this company may face serious challenges in the production of the beverage products. The plastic bottles used in packaging of the beverages also pose serious threat to the environment both on land and at sea (Thompson, 2015). PepsiCo is yet to come up with alternative packaging materials, which are environmentally friendly.

Inability to Tackle Health Concerns

It is also important to look at the health concerns that have been raised by the medical experts regarding some of the products of this company. According to Lambert (2012), although cola products are largely harmless when consumed by human, their excessive consumption is associated with some health problems. One is expected to take significant amounts of water after taking these cola products to neutralize their impact on the body. However, it is important to note that cola drinks still form the most important segment of the products that this company offers in the market. Although the company has come up with healthier products such as bottled water, its heavy reliance on cola products is an indication that it is yet to deal with the emerging market trends effectively.

Analysis Using Various Tools and Methods

The management of PepsiCo must understand that the ability of the firm to achieve success in the market depends on how well it can address issues raised above. It is important to conduct a critical analysis of the problems using various tools and methods, and to understand how they can be tackled from various perspectives. In this section, the focus is to conduct a multi-disciplinary analysis using various tools to understand the problem and to identify proper ways of solving it. The management needs to understand the problem from the following perspectives.

Accounting

According to Weygandt, Kimmel, and Kieso (2015), for a company to achieve success in the market, it must ensure that its current books of account are showing signs of improvement when compared with that of the previous seasons. Some of the tools that can be used include gross profit ratio, net profit ratio, return on equity, and return on net asset among others. In this section, it is important to use one of these instruments to determine the performance of this firm in the market. Net profit ratio is critical because it indicates the ability of the firm to sustain its operations. Using the financial statement of this firm shown in the section of financial analysis, net profit ratio for this firm in the last 3 years will be as follows:

Net profit ratio = {Profit after interest ÷ Revenue} × 100

  • 2014 NPR= {8,757,000 ÷ 66,683,000} × 100 = 13.1%
  • 2015 NPR= {7,442,000 ÷ 63,056,000} × 100 = 11.8%
  • 2016 NPR= {8,553,000 ÷ 62,799,000} × 100 = 13.61%

The net profit ratio of PepsiCo, based on its financial statement over the last three years, shows some instability in the earnings at the firm. The profit ratio dropped significantly in the year 2015 when compared against that of 2014. The company then registered an improvement in the year ending December 31, 2016. The instability and unpredictability of the profit ratio may be a sign of other serious problems in the revenue flow at the firm.

Administrative Studies

In administrative studies, a number of tools exist that can be used to evaluate the performance of PepsiCo and to determine its ability to overcome various challenges discussed in this paper. Tools such as SWOT analysis, Balanced Scorecard, and Benchmarking are popular tools that can be used in the analysis. In this study, benchmarking is considered the most appropriate tool that the management of this firm can use to compare the firm’s performance metrics with that of the best players in the industry.

It can help in defining how the best practices of the industry leaders can be emulated within the firm. PepsiCo may need to use marketing strategies of Coca Cola Company as a benchmark. Bachmeier (2013) says that Coca Cola is one of the global companies that have registered impressive success in the use of social media marketing. PepsiCo can emulate the social media marketing strategies used by Coca Cola Company to ensure that it promotes its brand in the market.

Economics

In economics, Lambert (2012) says that a number of tools exist that can be used to analyze a firm critically and to determine its ability to achieve success. The common economic tools used in analysis of a company include economic variables, slope, optimization techniques, and linier programming. In this section, the researcher will look at the economic variables to analyze the operations of PepsiCo.

The variables can broadly be categorized as dependent, independent, endogenous, and exogenous variables. The management should be specifically concerned about the independent variables that may affect its operations in the market. These include emerging technologies, economic forces in the country, population, infrastructural development among others. For instance, technology as an independent variable has significant on the operational strategies of a firm and if it is ignored, then this firm may be unable to achieve the desired success in the market.

Finance

It is also important to conduct a financial analysis to determine how a company is progressing in terms of its revenue flow. As Weygandt et al. (2015) note, the revenue flow of a company defines its ability to meet its financial obligation both in short and long terms. Some of the common tools used in such financial analysis include comparative financial statements, ration analysis, trend analysis, and common size income statements and balance sheet (Kumar, 2012). In this analysis of PepsiCo, the researcher will use comparative analysis of the financial statement of the firm. The table below shows the firm’s financial statement over the last three years.

Income Statement

All numbers in thousands
Revenue 12/31/2016 12/26/2015 12/27/2014
Total Revenue 62,799,000 63,056,000 66,683,000
Cost of Revenue 28,209,000 28,731,000 31,238,000
Gross Profit 34,590,000 34,325,000 35,445,000
Operating Expenses
Research Development
Selling General and Administrative 24,735,000 24,538,000 25,772,000
Non Recurring 1,359,000 1,359,000
Others 70,000 75,000 92,000
Total Operating Expenses
Operating Income or Loss 9,785,000 8,353,000 9,581,000
Income from Continuing Operations
Total Other Income/Expenses Net 110,000 59,000 85,000
Earnings Before Interest and Taxes 9,895,000 8,412,000 9,666,000
Interest Expense 1,342,000 970,000 909,000
Income Before Tax 8,553,000 7,442,000 8,757,000
Income Tax Expense 2,174,000 1,941,000 2,199,000
Minority Interest 104,000 107,000 110,000
Net Income From Continuing Ops 6,329,000 5,452,000 6,513,000
Non-recurring Events
Discontinued Operations
Extraordinary Items
Effect Of Accounting Changes
Other Items
Net Income
Net Income 6,329,000 5,452,000 6,513,000
Preferred Stock And Other Adjustments
Net Income Applicable To Common Shares 6,329,000 5,452,000 6,513,000

Table 1: PepsiCo’s three-year income statement (Yahoo Finance, 2017).

When looking at the comparative net income of the company, it is clear that PepsiCo has issues that need to be addressed. The net income dropped significantly in 2015 when compared to that of 2014. Although 2016 registered a slight improvement in net revenue, it is still below that of 2014.

Legal

The legal environment is important for the success of a firm in the market. It is important, as Thompson (2015) observes, for a firm to ensure that it operates within the dictates of the law. The company can use various legal tools to ensure that its operations, assets, and other valuables are protected. It should also understand that the same tools could be used against it by other firms or by state in case it fails to follow the law in one way or the other in its operations. One of the important legal areas that it must observe is infringement on intellectual property. Some of the ingredients and the entire process that this firm uses to prepare its products are protected under intellectual property laws. The firm can sue firms that may try to steal its recipes both locally and internationally.

Management

According to Hall (2015), PepsiCo has registered impressive performance in the market over the past few decades because of effective management strategies it has employed. In this analysis, it is important to employ management tools to determine how the company is performing and areas of weakness that need to be addressed. Common management tools that can be used in the analysis include balanced scorecard, Six Sigma, and five forces framework. In this section, five forces framework will be used for analysis. The figure below shows the framework.

Porter’s five forces model.
Figure 1: Porter’s five forces model (Deane & Ferdman, 2013).

The competitive rivalry in the market is currently very stiff. Other than Coca Cola Company, numerous other firms, which offer same products as PepsiCo, exist in the market. The threat for new entrants both in the local and global markets is high. The company is faced with a strong bargaining power of the buyers because of the many choices they can make in the market. However, the bargaining power of the suppliers is relatively low. The management will need to deal with the threat of substitutes in the market.

Marketing

According to Bachmeier (2013), a number of marketing analysis tools exist that one can use to evaluate forces that affects a firm’s operation. Some of the commonly used tools include PESTEL, SWOT, and fishbone diagram among other. In this section, the researcher will use SWOT analysis to evaluate the internal and external forces that affect this company. The strength of this company lies in its strong brand both locally and in the international market.

The company’s strong financial base is another strength that has enabled it to undertake various developmental and research projects in the market. However, its inability to address some of the environmental concerns such as excessive use of water needed by the local community and continued use of plastic packaging materials is a major weakness. The market presents a number of opportunities that can enable PepsiCo to achieve greater success.

The growing global population, the increasing purchasing power of people around the world, improved means of transport, and communication all offer this firm opportunity to increase its market share. However, it must be ready to deal with various threats in the market such as increasing competition, emerging trends where people avoid cola products for health reasons, and emergence of alternative products.

Management Information System

Management information system is a critical area of management of a firm in the current information age. According to Kumar (2012), firms are currently focused on maintaining effective systems that can enable them access information and make it available for its stakeholders in real time. Some of the tools such as Decision Support System (DSS) and Transaction Processing System have gained popularity as means through which accuracy can be achieved when making decisions and efficiency can be improved during operations. PepsiCo has been using DSS when making critical decisions both in the local and international markets.

Set of Alternatives for the Company

In the case analysis PepsiCo conducted above, the main issues raised include reduced revenue, criticism from environmentalists, and health effect of the cola products as claimed by some of the health experts. These issues must be addressed for the company to achieve success in the market. However, the company may need to have a priority when addressing these concerns. The most pressing issues whose solution would have significant impact on the firm must be addressed first before other minor issues can be addressed. The first alternative would be to address health concerns of its products. The second alternative would be to address environmental concerns. The third alternative would be to improve its marketing strategies to protect its market share.

Evaluating the Alternatives

The proposed alternatives should be evaluated to help in understanding how their implementation will affect this company. It is important to note that each of these alternatives will require time, money, and human resource to be effectively implemented in this organization. That is why each must be evaluated to determine the relevance.

Addressing Health Concerns of the Products

The first alternative is to address the health concerns related to its cola products. Linn (2012) says that some health experts have warned against the dangers of cola products. Some of the health problems associated with cola products includes obesity and diabetes. The company must show that its commitment to the health of its customers. It must demonstrate that it is not just interested in making profits. It may be costly to address this problem, but it should be the first area of focus because it will improve the image of the firm. It will attract more customers to the firm, including those who might have opted to use alternative products because of health concerns.

Addressing Environmental Concerns

The second alternative would be to address environmental concerns. The environment is one of the most important pillars of sustainability. It is the responsibility of this company to ensure that its operations do not pose threat to the environment. Addressing environmental concerns will enhance sustainability of the firm’s operation and it will boost its image in the market, given the fact that many people are currently concerned about the well-being of the environment.

Improving its Marketing Strategies

The third option that this company should consider is promotion of its brand and products in the market through various marketing strategies. The marketing department of PepsiCo should consider segmenting the market and targeting specific groups with its products.

Recommendations Based on the Analysis

The case analysis of PepsiCo clearly shows that although the firm has been registering impressive growth in the market over the past few years, there are issues that the management must address to assure it of market success. The following recommendations should be taken into consideration by the management of PepsiCo:

  • The production department, working closely with the research unit, should come up with innovative ways of developing products, which are healthier than the current cola products. Of interest should be to address the main concerns such as excessive sugar contents and the preservatives.
  • The production department should replace all or most of the plastic packaging materials with environmentally friendly ones. It should promote the use of reusable bottles.
  • To popularize Pepsi brand and its products, this firm should segment the market and then target each segment for specific products and messages based on the needs and emerging trends.

Action Plan

The first alternative is to address the health concerns, and this is the most important issue that this firm should not ignore. The production department should engage the research department so that the issue of excess sugar content in the cola drinks can be addressed. The new product should be tested to ensure that it is free from ingredients, which are associated with diabetes and obesity such as excess sugar. This alternative will solve the problem where some customers are opting for alternative products in the market. It will increase sales of the firm’s products in the market.

References

Bachmeier, K. (2013). Analysis of marketing strategies used by PepsiCo based on Ansoff’s theory. New York, NY: Grin Verlag.

Deane, B., & Ferdman, B. (2013). Diversity at work: The practice of inclusion. Somerset, UK: Wiley.

Ferrell, C., Fraedrich, J., & Ferrell, L. (2017). Business ethics: Ethical decision making and cases. Boston, MA: Cengage Learning.

Hall, A. (2015). Pepsi’s dark secret. Hoboken, NJ: John Wiley & Sons Publishers.

Kumar, B. (2012). Mega mergers and acquisitions: Case studies from key industries. Basingstoke, UK: Palgrave Macmillan.

Lambert, R. A. (2012). Financial literacy for managers: Finance and accounting for better decision-making. New York, NY: Wharton Digital Press.

Linn, J. F. (2012). Scaling up in agriculture, rural development, and nutrition. Washington, DC: International Food Policy Research Institute.

Thompson, J. (2015). Star performance: Uniting planning and doing for a high performance leadership model. New York, NY: Springer.

Weygandt, J., Kimmel, D., & Kieso, E. (2015). Financial & managerial accounting. Hoboken, NJ: Wiley.

Yahoo Finance. (2017). Pepsico, Inc.: NYSE delayed price. Web.