PepsiCo Restaurants

Group 5
Arnab Chakraborty Gagan Arora Maruti G Nitin Saxena Priyam Srivastava

Agenda
Issues Structure of PepsiCo PepsiCos Philosophy PepsiCo & subsidiaries Financials Wayne Calloways Motives KFC Pizza Hut Taco Bell Opportunity Carts of Colorado Carts of Colorado Strategic Fit Carts of Colorado Sales & Firm Value Opportunity California Pizza Kitchen California Pizza Kitchen Strategic Fit COC & CPK People Issues Recommendations
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Issues
Carts of Colorado Food carts and kiosks Evaluate existing relationship To acquire or not ? Structuring of new relationship Customers to be catered ? California Pizza Kitchen Casual dining restaurant chain To acquire or not ? Managing CPKs loyal customer base Maintaining its uniqueness

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Structure of PepsiCo

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PepsiCos Philosophy
Growth company passive to aggressive Decentralised management three basics Shared sense of loyalty No focus on synergy Three Ps people, people, people Cross business, cross functional exposure

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SWOT Analysis
Strengths Diversified yet complementary activities within the food business Highly Decentralized Organization Internal movement of managers allows good experience Weaknesses Strong resistance to higher management control Independence of Businesses makes it difficult to put synergies in place No shared and established strategy within the brand

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SWOT Analysis
Opportunities Drive more synergies between brands Eliminate duplicate costs and tasks within the holding Threats Stop in growth of the market for particular products

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PEPSICO & Subsidiaries Financials

Cash Flows
Negative Acquisition Spree

Capital Structure
Large Debt Component Conducive to Acquisition

Profit Margins
5.5% in 1991

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Wayne Calloways Motives

Expand Business
 To decide which they are meeting

Double the sales every five years

 Calloways ambitious goal inspired by Kendall

Opportunities
 Carts of Colorado, a cart and kiosk manufacturer  California Pizza Kitchen, a restaurant similar to Pizza Hut

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Restaurants International Sales

Higher Gross Margins from international restaurant business COCs technology know how would help in international expansion

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Restaurants International Sales

Net Sales 1991 (Exhibit 4)

Operating Income/ Net Sales - 1991

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Restaurants International Sales

Net Operating Sales Income/ 1991 (Exhibit Net Sales 4) - 1991

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KFC
Started by Col. Harlan Sanders Sold in 1964: at $2 mn, a lifetime salary and position in charge of Quality Control Sales doubled in each of next 5 yrs to $200 mn in 1970 In 1986, PepsiCo acquired KFC for approx. $840 mn With this acquisition, PepsiCo topped its restaurant business sales at $7 bn and 14,000 units worldwide

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Pizza Hut
Founded in 1959 by two college students Went public in 1969 Became worlds largest pizza chain, both in terms of sales & units, in 1971 PepsiCo purchased it in 1977 for $300 mn In late seventies Pizza Hut witnessed sharp decline in its eat-in business In early eighties, Dominos Pizza delivery system posed a serious threat Was mulling the idea of Pizza Hut Cafe Pizza hut considered itself generalist

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Taco Bell
In 1963 Glen W. Bell Jr. opened the first Taco Bell In 1969 it went public By 1970, sales were $6 mn & earnings about $150,000 PepsiCo acquired it in 1978: It had 860 units then New product were introduced to fill the gap of 10 yrs K-Minus: reduction of kitchen size and streamlining process TACO: an MIS initiative People at all levels empowered Average sales per unit was flat: to boost it Value Menu introduced Acquired Hot N Now

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Opportunity 1 - Carts of Colorado

Possibilities Acquisition Strategic Alliance PEPSICO accounted for 20% of COCs sales Case Fact: First Cart, Cost Price = $700 Selling Price = $5,200

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Carts of Colorado
History Performance Operations Technology

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Carts of Colorado Strategic Fit

Strategic Partnership

Acquisition

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Carts of Colorado Strategic Partnership

Vertical integration might be difficult Provides assurance of continuous supply Supply chain component
Equipment to increase POS Not an integral part of supple chain

Unrelated to other PepsiCo businesses Avoids depletion in prospective customers COC acquired major competitor in 1990
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Carts of Colorado - Acquisition

Brand Icon State of the Art technology
Source of competitive advantage for operations

PepsiCo already a major customer of COC Autonomous culture of PepsiCo

Top management can be retained New customer acquisition rate much higher than possible cannibalization

Ability to target new market segment Not the cheapest cart maker

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Carts of Colorado - Sales

Case Fact: Since 1984,
20,000 units sold -> Annual sales $2 Billion Average Sales per Unit = $ 2 Bn/20,000 = $0.1 Mn Annual sales of some units as high as $1.2 Mn

Case Fact: Outliers

PEPSICO restaurants unit sales (Exhibit 5)

Lowest = $0.613 Mn Highest = $0.814 Mn

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Carts of Colorado Firm Value

Case Fact: In 1987,
When sales = $5Mn, COC sold 30% business @ $1.3 Mn 100% Business = $4.3 Mn

Using sales multiple logic,

In 1991, @ Sales = $7.65 Mn Value of the firm ~ $ 5 Mn

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Cultural issues - COC

Family business No managerial experience in the cart business Retaining top management could be acceptable due to autonomous functioning Innovation at COC PepsiCo encourages taking risks Work environment not to tinkered

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Opportunity 2 - California Pizza Kitchen

Sales  Pizza (40%) + Pasta (20%) + Salads (20%) + Beverages & Deserts (20%) Case Fact:  Sales @ Mirage, a restaurant inside a luxury hotel = $5.5 Mn as against a typical $3 Mn  No. of CPK restaurants = 25 (In 1991)  Total Sales = $33.638 Mn (In 1991) Average per unit = $ 1.345 Mn
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California Pizza Kitchen

History Philosophy of Management Operations Model Value Proposition Intangibles

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California Pizza Kitchen Strategic Fit

Acquisition

No Acquisition

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California Pizza Kitchen Acquisition

Autonomous culture of PepsiCo
Top management can be retained Allows CPK to maintain its personal touch

PepsiCo can provide Global exposure to CPK Allows PepsiCo to target new customer segment
Young upscale Singles, Families & elderly seeking moderately priced items

Synergy in downstream supply chain

PepsiCo companies can provide cost savings at back end

CPK in need of funds for expansion

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California Pizza Kitchen No Acquisition

Possible cannibalization of sales for Pizza Hut CPK culture is different from other PepsiCo companies
First waitress promoted as President of Training

Top Management has a strong sense of ownership

Flax and Roseland: We cant sit on sidelines and see someone else destroy it or do great with it

Top Management is highly Autocratic

Fired chief Chef for not implementing their suggestion Hired cooks instead of Chefs

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Cultural issues - CPK

Top management to be retained Flax & Rosenfield Final say in recipes and menu Contrasting working style at front end Higher Job security & Job upgradations

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California Pizza Kitchen Firm Value

Case Hint: Value = $ 100 Mn
It would kill me to sell now for $100 Mn and sit on the sides and watch somebody else either destroy it or do great with it. - Flax, Co-founder, CPK

Case Fact: Typical CPK restaurant features

Area: 1800 4000 sq.ft Seats: 70 200 Capital expenditures: $1 Mn $ 2 Mn Time to start operations: 8 months from signing lease
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Recommendations
Strategic Partnership with COC
Unsuccessful history of PepsiCo with vertical Integration Technology not core business of PepsiCo COC might loose external customers Strategic Partnership will give assurance of continuous supple Provides greater bargaining power

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Recommendations
Buy CPK but with caution
High synergy with Pizza Hut PepsiCos culture fits well with CPK Top management of CPK needs to be handled with care Special heed to avoid competition between CPK and Pizza Hut
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THANK YOU

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