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PepsiCo Case Study

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In modern day society consumers are becoming more health orientated, fuelled by increased media channels constantly reminding about the dangers of unhealthy eating. As a result many food and drink manufacturers are reinventing both their product portfolios and their marketing activities. However companies are also realizing that customers view ethical conduct as important in all business operations. This case study focuses on PepsiCo’s operational and marketing activities both domestically and internationally, exploring how the company is at the forefront of initiating change whilst maintaining core competencies.

• PepsiCo’s previous history of environmental adaptation and restructure will be beneficial for it to both respond and initiate change in an increasingly health orientated market, capitalizing on the negative conceptions associated with competitors. PepsiCo should also exploit tacit knowledge and competencies, where possible, of companies acquired, both in domestic and global markets. • PepsiCo aims to overcome gatekeepers associated with certain target audiences by working with recognized associations, both in domestic and global markets, to portray the brand image in a positive manner. PepsiCo is also responding to the challenges associated with a teenage audience through social affiliation and brand loyalty. • The challenge associated with PepsiCo is maintaining a positive image in a market where numerous influential groups may view the company negatively. The company needs to keep track of a new joint venture, to make sure any associated controversy doesn’t damage the previous good practice it has carried out.

ANALYSIS PepsiCo formulates a structure that will embrace change PepsiCo’s inconsistent start is a different memory as company now finds itself in strong position In 2006 PepsiCo estimated that its annual retail sales had reached $92 billion, offering over 100 brands around the globe. The main cash cow of PepsiCo of course being the Pepsi carbonated drink that owned 10% of the US beverage market in 2006, but this hasn’t always been the case. Pepsi and its main competitor, Coca-Cola, were only released four years apartin 1890 and 1886 respectively. But whilst the success of Coca-Cola occurred almost automatically, Pepsi remained an unsteady brand for half a century, with sales suffering dramatically as a result of two world wars and a massive overestimation on sugar inflation. It wasn’t until the 1960s that the brand began to grow, after constantly having to adapt itself to changing environmental conditions. However, when Indra Nooyi replaced current CEO Steve Reinemund, PepsiCo became fronted by a woman whose focus on constant innovation has seen its strategy branch out to a more health conscious audience and grow its portfolio of products.

Indra Nooyi is already influential in diversifying away from core competency Nooyi, who has been at PepsiCo since 1994 and was credited as one of the key players in the transactions of Tropicana and Quaker, didn’t come to power on the back of a political conflict that sometimes occurs with multinationals. In fact Nooyi has stated that any strategies she implements will not be radically different from the man who was responsible for PepsiCo passing its arch rivals for the first time in history (in terms of market capitalization) in 2005. What this means is that PepsiCo will prolong a strategy of diversifying into new markets without moving away from its core competencies, maintaining brand loyalty in its home market whilst developing into emerging markets. This will continue to be done in a manner that takes into account corporate and social responsibility.

PepsiCo domestic strategy influenced by target audiences and acquisitions Implements changing strategies to influence gatekeepers
PepsiCo’s recent comments on targeting growth in the mid-teen section, in particular on an international basis, will be crucial to maintaining brand loyalty from a target audience where perceptions of products (in particular carbonated soft drinks) and brand loyalty will have been influenced by a number of gatekeepers. There are 17 countries in Europe that have already implemented bans on advertising aimed at children, whilst many lobbyists in Australia are also pushing for a ban. In the first instance this will lead to a restriction in product marketing exposure to kids. Children will still be exposed to PepsiCo products, but parents, who are likely to be in charge of purchasing decisions, will also have been influenced by lobby health organizations etc and this will decrease the chance of them purchasing their child a PepsiCo product. This is why it is crucial for the company to not only continue to release health orientated products which might sway parents perception of the brand, but also focus on a mid-teenage audience who have more autonomy on their purchasing behavior.

PepsiCo tries to implement standardized rating system
PepsiCo’s recent deal with the American Heart Association to stop selling non-diet soft drinks in schools in the US is just one example of the company’s commitment to increasing its focus on healthier products. Coca-Cola, despite also signing the agreement and releasing the Minute Maid Juice brand, is still criticized for its unhealthy products. The difference between the companies’ reception towards the move could be attributed to the fact that Coca-Cola has never released its “secret recipe” in its coca-cola drink, meaning there is still uncertainty to what is actually in the content. It could also be that PepsiCo is pushing for a standardized industry-rating program in the US for all packaged food and drink items. The company’s proactive stance in pushing for a recognized rating system means that the criticism leveled by some parties (in relation to what actually defines a health product) over its “Smart spot” healthy labeling system will not affect the company on a significant level.

Developing brand loyalty with the mid-teen audience
PepsiCo has already started to target the mid-teen audience, formulating a strategy both in the US and on a global basis where the design of Pepsi cans and bottles are changed on a frequent basis. This is to determine what brands are popular in a mass market where customization and social identity will be important features to the target audience. PepsiCo press has discussed acquisitions and expansion in line with global policy, but in the short term a key opportunity could present itself closer to home.

Competitor acquisition may be an option in the short term future Cadbury’s, which is following a similar strategy to PepsiCo on a global scale, may offer PepsiCo a significant asset boost in the near term. Cadbury has recognized the importance of developing markets (i.e. Nigeria) and has entered established markets in the region. However in other markets, Cadbury seems to be focusing on its own core competencies (the confectionary market), having already sold its European beverage business for $1.26b. Furthermore, it has been proposed that Cadbury is weighing up the possibility of separating its US Beverage division, selling off the divisions in parts and offering PepsiCo the opportunity to buy part of a brand that made an estimated $4.5billion in the US beverage market last year. Associated Press recommended that PepsiCo would benefit from purchasing Cadbury’s Mexican assets because Pepsi Bottling Group Inc recently renewed its franchise agreement with Cadbury’s in Mexico. Whilst the global market is crucial for PepsiCo, international strategies should not be pursued to an extent that domestic opportunities are not capitalized on.

PepsiCo global strategy achieved through individualism
Generic strategies not on the agenda at PepsiCo
Coca-Colas Dasani UK launch is a prime example of the dangers associated with applying a worldwide generic strategy with products – despite selling 200m bottles worldwide, the product had a disastrous lifecycle in the UK and became something of a national joke. This is a strategy that PepsiCo has avoided; instead PepsiCo International chairperson, Mike White stated recently that globally, the company adjusts its flavors to coincide with local taste. The company have also released a branding strategy in countries like China, Brazil and Mexico, where a new can/bottle design will be introduced on a regular occasion. This strategy, similar to the strategy in America, will undoubtedly provide useful research and development into countries social affiliations with themes and characters.

The importance of tacit knowledge
After PepsiCo recently announced it would embark on an aggressive expansion strategy, John Faucher, a J.P Morgan analyst, commented: “You will see focus on more acquisition”. (Netscape, October 2006) If this strategy is implemented, PepsiCo will need to remember the importance of using tacit knowledge from both distributors and new acquisitions to see what works and what doesn’t work, and this isn’t exclusive just to the product itself but also its attributes – for example packaging. PepsiCo only need to look at Kellogg’s early problems with their pan European supply chain to realize this. When Kellogg’s first hit some European markets, demand for products were low; this had nothing to do with price, quality or flavor, but a standardized package that was too big to get in the cupboards of many European homes.

Good Practice throughout the operational process
Maintaining a positive image at the expense of profit maximization What distinguishes PepsiCo from certain manufacturers of food and beverages is that it seems to incorporate corporate and social responsibility into the whole of the supply chain. Coca-Cola, for example has been the subject of criticism both in the UK and US over alleged human rights and environment neglect. There is also evidence in PepsiCo’s history that ethical practice has been prioritized over profit. In the 1980s the company moved its product range out of South Africa in protest of a regime that condoned racial segregation. When the company tried to re-enter the market in the 1990s after the regime had ended, the company failed to recapture a significant amount of the market, partly due to Coca-Cola having stayed in the market throughout the period. PepsiCo has a number of ethical procedures, such as donating to relief funds like Hurricane Katrina, Tsunami appeal and research into safe drinking water in China and also has established educational programs in places like Mexico where exercise and nutrition is promoted.

Monitor joint venture to avoid damaging years of good work
One of the underlying themes in this case study is that PepsiCo has not received the same level of criticism as some other manufacturers in the food and beverages industry, and this can be attributed to PepsiCo’s practices, especially in the US, that have tried to implement change as opposed to react to them. However with the amount of influential parties and organizations that do not view particular multinational food and beverage companies favorably (health organizations, Fair Trade organizations etc.), one of PepsiCo’s latest innovations could lead to the unraveling of years of good work. Datamonitor’s Productscan database highlights one of PepsiCo’s recent innovations as recyclable steel cans, containing coffee, under the Starbucks name.

An association with Starbucks could be controversial however, as the company has recently faced controversy from the Organic Consumer Association (OCA) over its level of fair trade activity and been criticized for influencing the US National Coffee Association into preventing Addis Ababa’s trade marking. However, it is the soon to be released film “Black Gold” which depicts the exploitation of third world coffee growers that could really damage the reputation of Starbucks. Starbuck’s initial reaction to the film, which highlights that for every $60 dollars made from a pound of coffee, third world farmers see just over a $1 of, has been poor. PepsiCo needs to monitor the current situation and formulate a strategy to distance itself from Starbucks if there is further controversy. Otherwise the PepsiCo brand may finds itself placed in a category of unethical food and drink manufacturers that it has so desperately tried to separate itself from.

This report forms part of Datamonitor’s case studies series, which explores business practices across a variety of disciplines and business sectors. The series covers a range of markets including food and drink, retail, banking and insurance, pharmaceuticals and software. Each case study provides a concise evaluation of a company that stands out in some area of its strategic operations, highlighting the ways in which the company has become one of the best in its field or how it deals with different problems encountered within that sector.

A variety of secondary research was carried out for this case study. This included researching the food and beverage market on Datamonitor’s Interactive Consumer Database and on the Productscan Online Database of new products, alongside an extensive review of secondary literature and other in-house sources of information.

Secondary sources
Analyst says Cadbury separation could benefit soft drink companies; Factiva.com (March 2007) Energy drinks boost US markets; Food&drinkeurope.com (March 2007) PepsiCo looks to new products,
acquisitions; Netscape.com (Oct 2006)

Further reading
Authenticity in Food and Drinks (Datamonitor, DMCM4582, December 2006) Marketing to Kids: How to be Effective and Responsible (Datamonitor, DMCM, November 2006) Profiting from Changing Snacking and Beverage Occasions (Datamonitor, DMCM2979, August 2006)

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