PepsiCo: Business Strategies

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The soft drinks industry has been among the most vibrant and profitable for a long time, but has now come under great criticism for its products’ health effects. As obesity and other health complications become a priority in many countries, the industry is facing criticism from stakeholders in the health industry. The results have been reduced sales and revenues. The foods industry is facing the same challenges, as competition increases and health concerns affect sales.

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PepsiCo is the second largest beverage and foods company by revenue. The company has managed to stay ahead of the competition by implementing and maintaining relevant strategies in different markets and seasons. The company’s strategy addresses marketing, promotions, management, public relations, employment, social responsibilities, among other factors that affect its operations.

This paper aims at studying PepsiCo’s strategies that have enabled it stay ahead of the competition in the past. The operational techniques used by PepsiCo are aimed at sustaining quality in the company. Using such techniques is intended at attaining better quality and keeping it monitored at all times. Quality assurance is a big part of its products’ success, largely because of the market share that the business commands in different global regions and the loyalty which the product enjoys. Strategies discussed in the paper include E-marketing, positioning, communication, pricing, public relations and supply chain logistics among others.

Introduction

“Soft drinks are enormously popular beverages consisting primarily of carbonated water, sugar and flavoring” (Council of American Food Technology Association, 2010). The industry has been among the most vibrant and profitable for a long time, but has now come under great criticism for its products’ health effects. As obesity and other health complications become a major concern in many countries, the industry is facing criticism from stakeholders in the health industry. The results have been reduced sales and revenues.

The soft drinks market has been the most buoyant in recent times. Energy and sports drinks now command good authority in the market even though there is a big growth in the retro drink segment after the recent economic crisis. Different economies have registered different results in the last two years, a factor contributed to the fact that different economies have faced challenges after the economic crisis.

The Russian economy registered the biggest growth in the soft drinks industry last year. The region’s GDP grew by 5% and production volume in the region grew by 10% (OzBevNet, 2010). In Saudi Arabia, population growth and hot weather throughout the year kept the soft drink’s market stable. The market is among those affected by consumers’ health concerns and therefore, health-oriented products such as vegetable and pure fresh juice products performed better. The bigger and developed markets such as Europe and North America are reported to have a stagnated growth in the last few years. This is partly attributed to the global crisis. Analysts however argue that it is largely due to the fact that these markets have reached a maturity level, making it hard for producers to experiment.

According to (Schweppes, 2011), “as soft drinks manufacturers emerge from global recession, many face continued decline in developed countries due to maturity”. It is also notable that as more economies recover, credit accessibility is bigger and more competitors will emerge. More companies are therefore looking beyond their domestic markets to stay profitable and grow revenues. More companies are also looking at expanding their products categories to increase revenue. Another emerging trend is mergers by smaller companies to create strategic partnerships that will allow them gain access to new and bigger geographies.

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Background

“PepsiCo is an American global corporation headquartered in Purchase, Harrison, New York, with interests in manufacturing, marketing and distribution of grain-based snacks, beverages and other products” (PepsiCo, 2011). The company was formed 46 years ago by merging Pepsi-Cola and Frito-Lay. Pepsi has made several other acquisitions to add more brands to its portfolio. The business sells its products in more than 200 countries and by 2009, each of its lines was generating more than $ 1 billion in sales. It is ranked the second largest food and beverage business in the world by revenue. With over 285,000 employees globally, the business definitely attracts the attention of a big number of stakeholders.

In the beverage market, Coca-Cola has been Pepsi-Co’s primary competitor since its inception. In every part of the world, there are major soft drinks’ producers. However, Coca-Cola and Pepsi have dominated the market for a long time and registered a presence in every part of the globe. Other major competitors in different markets include RC Cola in North America, Ajegroup, AmBev, Corporacion Jose R. Lindley S.A, Embotelladora Don Jorge SAC, all in South America. In Europe, Perrier boasts of a good market share in the region while Bundaberg and Kirks do the same in Australia (Heinnman, 2010).

PepsiCo’s products portfolio has grown to hundreds of brands. Foods make up for 63% of the total products and beverages take up the remaining 37%. The company’s annual retail sales have been over $100 billion since 2009. The company categorizes its brands based on how much they generate in a year. In 2009, 19 of the company’s brands surpassed the $1 billion mark. Its major brands include Pepsi-Cola, Mountain Dew, 7 Up, Lay’s, Cheetos, Gatorade, Tropicana, Walkers and Pepsi Mix, among others. To manage a large number of brands globally, the company’s structure of global operations is constantly changing to suit its current needs.

Porter’s Five Forces

“A porter’s Five analysis of the industry revels that market forces are favorable for profitability” (Schweppes, 2011). The soft drinks industry has shown tremendous growth in profitability for both the bottlers and concentrate producers. These two parts of the industry have always been dependent of each other since the birth of the industry.

Rivalry

The soft drinks industry is characterized by concentrated revenues. By 1994, Coca Cola and Pepsi commanded a combined 73% market share, a number that stands at 74% now. The market is many times considered a duopoly between the two giant companies, a factor that has brought about tremendous economic benefits for the companies. “However, the fierce competition existing among few players such as the intensive rivalry between Coke and Pepsi has sometimes hampered profitability” (Schweppes, 2011). For example, in past years, price wars have time and again caused reduced profitability. In the 1980s, price wars caused poor margins and both companies registered losses in some of the years.

Threat of substitute

For along time in the early years of the industry, a soft drink meant a cola to many people. In the 1970s and 80s, the industry started experiencing an expanded portfolio and other beverages such as tea and bottled water became common. When these products came up, the two companies responded by expanding their varieties, mostly through alliances and more internal innovations. Businesses in the industry now work towards increasing substitutes internally and growing their brand names. “The threat of substitutes has therefore been reduced by the expansion of products portfolio through availability of alternative beverages such as juice, tea and many others” (Schweppes, 2011).Proliferation of brands and products has in the past threatened profitability as the markets get more and segmented, but the industry has put in place measures to ensure these threats don’t hold.

Supplier power

The inputs for most soft drinks are sugar and packaging. “Suppliers have less bargaining power because there are many substitutes for sugar or corn syrups and packaging” (Schweppes, 2011). Most of the times, sugar is easily available in many markets and when it is not, corn syrup is been a viable substitute. The packaging industry such as the bottlers also have a low bargaining power. Starting1990s, availability of inexpensive aluminum further reduced bottlers’ bargaining powers. Several companies went into competition to get contracts with concentrate producers, putting them at a disadvantaged situation.

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Buyers bargaining powers

There are different levels of bargaining powers for buyers. According to Schweppes, (2011), “the soft drink industry has in the past sold to consumers through five principal channels: food stores, convenience and gas, fountain, vending and mass merchandise”. Consumers pay less through these channels than in other outlets. The supermarkets, which have been for a long time been the principal customer for producers, have become too much fragmented, a factor that affects their bargaining power negatively.

Strong barriers to new entrants

Entry to the industry involves having a clear strategy for concentrate production and bottling. An investor will need well developed operations in both disciplines. A new entrant in the concentrate production discipline will threaten both producers and bottler but a new bottler entering the market may only present a threat to the bottlers. The distribution channel is also a major challenge since most of the big companies have established exclusive territories. This makes it even harder for new entrants to access retailers and the retail channels.

Market Analysis

“A market analysis is aimed at determining the attractiveness of a market and understanding its evolving threats and opportunities as they relate to those of a business” (Dutka, 2004). PepsiCo needs it to determine who the customers are in the market and what they want from the product. “When doing a market research, areas of interest for the new product will include existing marketing strategies and sales forecasts” (Kahaner, 2009). As Prechter (2002) points out, “The dimensions of a market analysis include the market size, its growth rate, trends, profitability, its cost structure, success factors and distribution channels”.

In markets where soft drinks have done well such as America and Europe, the markets seem to be dominated by one or two products. The big companies’ market share in the soft drinks industry seems to be so high, leaving no opportunity for the small businesses since it means they have a small market to target and cover. “The best and most commonly used method of forecasting markets is extrapolation of historical data into the future” (Wood, Cogin and Beckmann, 2009). By studying the adoption rate of a similar product such as Coca-Cola, it is easy to estimate or predict the shape of the product’s diffusion curve. The same strategy is applicable in other markets such as the USA where PepsiCo brand Gatorade dominates the market with a 75% market share.

The industry’s cost structures is an important factor when evaluating a market and its viability. According to White (2005), “it is equally important when formulating strategies for the product to develop a competitive advantage”. Cost structures play a big role in a product’s indirect costs and consequently, profitability. A company may not be able to sell a certain product in a market whose cost structure is too high even though the product may have a very low production cost. The cost is dependent on the market share a business holds and the amount of sells.

Market entry plan

In order for a new product to successfully enter into the beverages and foods market, it must be able to chose a mode that is already working in the market. In this case, PepsiCo’s strategy for any new products has been partnering with a distributor that is already well established. The company uses Pepsi Bottling group Inc. to market and distribute its products together with tens of thousands of registered distributors. The business has a strong and well developed distribution channel, one that offers it the much needed avenue to reach the consumers. A well established distribution channel not only helps a manufacturer reach the markets, but also receive timely feedback from the market.

Supply chain and logistics

The operational techniques used by PepsiCo in managing logistics are aimed at sustaining quality in the company. Using such techniques is intended at attaining better quality and keeping it monitored at all times. Quality assurance is a big part of its products’ success, largely because of the market share that the business commands in different global regions and the loyalty which the product enjoys.

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Logistical management in the business is made possible through the companies’ commitment to quality. It is through quality that it is able to have a competitive edge, especially in such a changing, competitive and wide market. For a company with such a large market, handling information can be hectic and inaccurate without proper quality and organization. Knowing when products have been released and when they are due for delivery may be challenging without real time information, which can only be made through a logistics management that assures quality.

Continual improvement has been a big part of the product’s culture. It is one of the focuses in the industry’s modern research projects. The company seeks to continually improve its products’ quality while reducing the cost of doing so. Being in such a competitive industry, customer satisfaction has to be on top of the business’ priorities. It is made possible by ensuring quality assurance through continuous improvement. Logistics play a major role in quality assurance by ensuring supplies are available and are handled with proper care during transportation and storage.

Marketing strategy

In order to achieve the marketing objectives, PepsiCo’s products are packaged in a combination of local and international brands but ensure that it remains a flagship brand in all the markets. The business has implemented measures that ensure it gains a broader position in the soft drinks market. A top or secondary position in the market helps the products deliver a high target in both marketing, distribution and even production. Moreover, such a position creates the much desired platform from which the business can further increase its range of products. Brands doing well in North American and European markets are good examples of how much an asset position can be. With a continued focus on other market factors such as price and quality, its products have undoubtedly been able to reach their marketing objectives.

Promotion

“The key success factors in a market include those elements which are important for a firm to achieve its marketing objectives” (Blyth and Gerald, 2006).The company with the best economies of scale is able to do much better than its competitors in any market and so will a company with technological resources which best suit the market. “They include access to essential unique resources such as communication services, a company’s ability to achieve economies of scale, accessibility of distribution channels and technological processes” (Chen, 2002).

A proper marketing strategy in PepsiCo have ensured that its products are felt in the market, not just when they are new but in the many years that follow after their introduction. “Ultimately, each product will reach its maturity stage and a decline period but how long that takes is dependent on several factors” (Boyce and Dan, 2002). These factors include ability to fight price pressure from a competing product, ability to maintain brand loyalty, how well it can hold with emergence of new products, how soon the market gets saturated, amongst many other factors. Lack of growth drivers has negative effects on a product’s performance in a market regardless of its quality or how well it can cope with pressure and competition in the market, factors that PepsiCo has been able to deal with.

After a successful launch of a product into the market, there is always need to encourage consumption. PepsiCo’s promotion strategies always aim at meeting consumers from different places, especially the urban market which is largely targeted. Promotion strategies include use of video and print advertisements, audio channels and e-marketing. The high level of quality exhibited in the company’s products is used to prove the company’s commitment to customer satisfaction.

Pricing and profitability strategy

While profitability of different companies will vary in the same market, its average profit potential is used to give guidelines on how easy or difficult it is to do well in it” (Chen, 2002). According to Competitive Intelligence Foundation (2006), “a market’s profitability is influenced by several factors among them being supplier power, buyer power, threat of substitute products, entry barriers and rivalry among different firms”. It helps to identify a market’s potential and the benefits a business will enjoy by entering the market. This then allows a company decide on which products to sell in the market, selling and pricing strategies.

“Any business with intentions of launching a product to a market must base their pricing on several key trends that continually shape the global marketplace of soft drinks in that market” (Computer Associates, 2007). Factors that affect pricing in PepsiCo include the cost of production, target market, competitors’ pricing, consumers’ wealth, spending habits, among many others. The company’s product’s pricing strategy takes into consideration how much its other products have performed in the target markets. “In terms of market segment, PepsiCo has a share of volume growth estimated at 5% per year, against the 2-3% overall growth rate” (Intellectual Property Organization, 2010). Such a growth level offers an advantage to its products and its efforts to convenience the people to try one more product from them. The business ensures profitability through high sales volumes.

E-marketing

A big percentage of the company’s target market is aged between 18 -45 years, an age group that is more excited about new products and conversant with technology. This makes it easy for them to be reached through e-marketing. Strategies used by Pepsi-Co in e-marketing include use of social groups such as facebook and twitter, email advertising, videos posted on the internet and use of a well informing and attractive website.

The latest E-marketing strategy by Pepsi-Co has been use of viral marketing. The strategy was first used in the American market and is now used in many other regions. Case in point for PepsiCo is the latest video teasing the company’s attempt to bring name recognition to their recent products. Through their website, customers are able to upload a photo of anyone they want, together with other personalized information, and have it incorporated into the Pepsi video. The company has been using this video to market Pepsi-Max and has so far caught the attention of more than 10 million people.

Creative advertisement case studies

Advertisement is a crucial part of PepsiCo’s business strategy. The company’s outstanding advertisements have been credited for changing the game of advertisement. In 1987, the Pepsi advertisement by Michael J. Fox won the peoples’ choice of the year for two years. The business has also stood out in sports marketing and transformed the face of those sports. Last year, the company once again stood out to beat all the communication companies sponsoring the ICC cricket world cup and made the most returns than any other sponsor in the event. Some of the most outstanding PepsiCo advertisements are included in the appendices.

Brands and consumer psychology

Consumer psychology is a key aspect in PepsiCo’s advertisement and sales strategy. The company invest heavily in packaging to ensure its products are appealing to even new consumers. Offers and discounts based on the quantity of purchase have been a common strategy in the business. The business also uses every available platform to notify its customers of new developments and changes in their products. In recent years, the business has made several announcement to change ingredients in some of its products in a bid to retain customers who are threatened by health concerns raised against its products.

In recent times, the foods and beverage industries have suffered a lot of criticism from nutritionists. PepsiCo has used this opportunity to its advantage to introduce healthy options for its consumers. Among the healthy products offered by the company include Diet Pepsi, Pepsi Max, Frito-Lay, Ruffles and Lay’s. The company has been keen to convince its customers that it cares by announcing plans to cut half a trillion calories from their products sold by the end of 2015. The business also offers children with low calorie alternatives. Such measures have been used to convince the customer that they are getting enough value for their money and there are safe with the company’s products.

Positioning

The company has focused on the differentiation strategy by developing unique products with attributes that keep its customers loyal. The products’ uniqueness adds value to them, making the favourable regardless of their price. As a result, PepsiCo is able to charge a premium price for some of them. This way, the business can easily afford the costs that go into making its products unique. When the company’s cost of production goes up, it is able to easily pass it down to the consumers, who may not be able to enjoy the experience anywhere else other than in PepsiCo’s products.

The business has been able to succeed using a differentiation strategy by implementing several internal strengths. It has established a good reputation of quality for itself and has ensured it stays as the best firm in terms of innovations. The company’s stable financial position allows it access to the best research technologies. The position also allows PepsiCo the privilege of being able to hire and retain the best designers and software developers. The company invests enough on advertisements and its financial status allows it to hire the best talent in the marketing industry, perfectly capable of making the products’ strengths well known in the market.

Communication and execution

PepsiCo’s leadership is full of talented, strong and dedicated leadership. The company is headed by Indra Nooyi who serves as the chairman and CEO. Each of the major divisions in the company are headed by a CEO, who is assisted by one or more vice presidents. Each department in the company is headed by a senior vice-president who reports to the CEO in that region. The management structure in PepsiCo allows the leaders to come up and implement creative ideas without too much bureaucracy. The strategy has allowed the business to save time on strategies implementation and have the best ideas from their own staff. The executive management team in the company is made up of 29 people. Amin Salman is the executive vice president sales and marketing, and is responsible for driving sales and marketing strategies in the company.

Strategies are implemented and executed after a comprehensive analysis and consideration of risks and benefits. Its global presence demands that its strategies fit well in different global regions and be capable of producing results in them. The company’s strategy right now is focused on being part of a solution to curbing obesity and other health challenges arising from its products. The initial step for the company involved hiring experts who helped the business reduce the amount of sugar and slat in their foods. The company has now categorized its products into; “fun-for-you foods”, “better-for-you” and “good-for-you”. Last year, the company announced an ambitious plan which is aimed at seeing the revenues received from the “good-for-you” products from $10 billion to $30 billion by the year 2020.

Public Relations strategy

Generally, public relations play a critical role in building and developing a business’ image. As argued by Kahaner, (2009), “ it provides the opportunity for the organization to successfully monitor, interact, and react with other key groups within the organizational environment”. Communication with customers and stakeholders is a crucial aspect of any business. Pepsi is affected by many external factors, most of which are related to people. It is required to abide by food and beverages laws and policies in every market it is in. It has a big target clientele and has to learn to keep all the groups satisfied.

The nature of Pepsi’s business is such that the number of stakeholders are many. The business therefore has to ensure a proper PR strategy to ensure suppliers, customers, the communities it works with, and government authorities are satisfied. The business has so far managed to maintain a good reputation among its stakeholders by ensuring they are constantly updated.

From the realization that stakeholders play an important role in a business’ implementation of selected strategies, Pepsi has ensured good corporate governance, which takes into consideration the interests of a business’ employees, customers and other stakeholders. Its strategy works for the benefit of all the people linked to it, including the community in which the business is operating in. It also aims at ensuring stakeholders’ expectations over how the organization should be run, and there economic and value needs are met.

Conclusion

PepsiCo is a global company with a presence in more than 200 countries. By 2009, each of its lines was generating more than $ 1 billion in sales. It is ranked the second largest food and beverage business in the world by revenue. With over 285,000 employees globally, the business definitely attracts the attention of a big number of stakeholders. In the beverage market, Coca-Cola has been PepsiCo’s primary competitor since its inception.

“A porter’s Five analysis of the industry revels that market forces are favorable for profitability” (Schweppes, 2011). The soft drinks industry has shown tremendous growth in profitability for both the bottlers and concentrate producers. For PepsiCo to benefit from the profitable industry, it has put in place measures to help it stay ahead of the competition. Key strategies in the business address marketing, logistics management, employment, stakeholders and new innovations. The business is constantly working to ensure consumers have an exciting experience with its products, and have no need to change to other brands.

The operational techniques used by PepsiCo are aimed at sustaining quality in the company. Using such techniques is intended at attaining better quality and keeping it monitored at all times. Quality assurance is a big part of its products’ success, largely because of the market share that the business commands in different global regions and the loyalty which the product enjoys.

The nature of Pepsi’s business is such that the number of stakeholders are many. It therefore, has to ensure a proper PR strategy to ensure suppliers, customers, the communities it works with, and government authorities are satisfied. The business has so far managed to maintain a good reputation among its stakeholders by ensuring they are constantly updated.

References

Blyth, A. and Gerald, K., 2006. Information assurance: Security in the Information Environment. London: Springer.

Boyce, J. and Dan, W., 2002. Information assurance: Managing organizational IT security risks. Amsterdam: Butterworth-Heinemann.

Chen, M., 2002. CI spider: A tool for competitive intelligence in different industries. Decision Support Systems, 34(1): 1-17.

Competitive Intelligence Foundation, 2006. Competitive intelligence ethics: Navigating the gray zone. Alexandria, VA: Competitive Intelligence Foundation.

Computer Associates, 2007. Cost of losing information: A framework for information management planning. Web.

Council of American Food Technology Association, 2010. Food America: Official journal of CFTA. New York: Council of America Food Technology Association.

Dutka, F., 2004. Marketing a new product: Competitive intelligence for competitive edge. Lincoln-wood: NTC Business Books, 2004.

Heinnman, B., 2010. Brand loyalty 2010: Case study Pepsi. New York Routledge Publishers.

Intellectual Property Organization, 2010. Information Security Enhancement Act. Web.

Kahaner, M., 2009. Business intelligence: How to gather, analyze and use information to move your business to the top. New-York: Spring-Verlag Berlin Heidelberge.

OzBevNet, 2010, Australian non-alcoholic drinks market: Australian Convenience Store News, 2007. Web.

PepsiCo, 2011. About PepsiCo. Web.

Prechter, R.R., 2002. Market analysis for the new millennium. Gainesville, Ga.: New Classics Library.

Schweppes, 2011. Trade Customers. Web.

White, P., 2005. Market analysis: Its principles and methods. New York: McGraw-Hill.

Wood, R, Cogin J, Beckmann, J, 2009, Managerial Problem Solving Framework, Tools, Techniques, McGraw-Hill, Australia.

Appendices

Some of PepsiCo’s advertisements in the past

PepsiCo's advertisement

PepsiCo's advertisement

PepsiCo's advertisement

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