CASE 21

PepsiCos Diversification Strategy in 2014

John E. Gamble
Texas A&M UniversityCorpus Christi

epsiCo was the worlds largest snack and beverage company, with 2013 net revenues of
approximately $66.4 billion. The companys
portfolio of businesses in 2014 included Frito-Lay
salty snacks, Quaker Chewy granola bars, Pepsi
soft-drink products, Tropicana orange juice, Lipton Brisk tea, Gatorade, Propel, SoBe, Quaker
Oatmeal, Capn Crunch, Aquafina, Rice-A-Roni,
Aunt Jemima pancake mix, and many other regularly consumed products. The company viewed the
lineup as highly complementary since most of its
products could be consumed together. For example,
Tropicana orange juice might be consumed during
breakfast with Quaker Oatmeal, and Doritos and a
Mountain Dew might be part of someones lunch. In
2014, PepsiCos business lineup included 22 $1 billion
global brands.
The companys top managers were focused on
sustaining the impressive performance through strategies keyed to product innovation, close relationships
with distribution allies, international expansion, and
strategic acquisitions. Newly introduced products
such as Mountain Dew KickStart, Tostitos Cantina tortilla chips, Quaker Real Medleys, Starbucks
Refreshers, and Gatorade Energy Chews accounted
for 15 to 20 percent of all new growth in recent years.
New product innovations that addressed consumer
health and wellness concerns were important contributors to the companys growth, with PepsiCos
better-for-you and good-for-you products becoming
focal points in the companys new product development initiatives.
In addition to focusing on strategies designed
to deliver revenue and earnings growth, the company maintained an aggressive dividend policy,

with more than $53 billion returned to shareholders

between 2003 and 2012. The company bolstered its
cash returns through carefully considered capital
expenditures and acquisitions and a focus on operational excellence. Its Performance with Purpose plan
utilized investments in manufacturing automation, a
rationalized global manufacturing plan, reengineered
distribution systems, and simplified organization
structures to drive efficiency. In addition, the companys Performance with Purpose plan was focused
on minimizing the companys impact on the environment by lowering energy and water consumption
and reducing its use of packaging material, providing
a safe and inclusive workplace for employees, and
supporting and investing in the local communities
in which it operated. PepsiCo had been listed on the
Dow Jones Sustainability World Index for seven consecutive years and listed on the North America Index
for eight consecutive years as of 2013.
Even though the company had recorded a number of impressive achievements over the past decade,
its growth had slowed since 2011. In fact, the spikes in
the companys revenue growth since 2000 had resulted
from major acquisitions such as the $13.6 billion acquisition of Quaker Oats in 2001, the 2010 acquisition
of the previously independent Pepsi Bottling Group
and PepsiCo Americas for $8.26 billion, and the
acquisition of Russias leading food-and-beverage
company, Wimm-Bill-Dann (WBD) Foods, for
$3.8 billion in 2011. A summary of PepsiCos financial performance for 2004 through 2013 is shown in
Exhibit 1. Exhibit 2 tracks PepsiCos market performance between 2004 and July 2014.
Copyright 2014 by John E. Gamble. All rights reserved.

CASE 21

EXHIBIT 1

PepsiCos Diversification Strategy in 2014

C-307

Financial Summary for PepsiCo, Inc., 20042013

(in millions, except per share amounts)
2013

Net revenue
Net income
Income per
common share
basic, continuing
operations
Cash dividends
declared per
common share
Total assets
Long-term debt

2012

2011

2010

2009

2008

2007

2006

2005

2004

$66,415 $65,492 $66,504 $57,838 $43,232 $43,251 $39,474 $35,137 $32,562 $29,261
6,740
6,178
6,443
6,320
5,946
5,142
5,599
5,065
4,078
4,212
$4.37
$3.96
$4.08
$3.97
$3.81
$3.26
$3.38
$3.00
$2.43
$2.45

$2.24

$2.13

$2.03

$1.89

$1.78

$1.65

$1.42

$1.16

$1.01

$0.85

$77,478
24,333

74,638
23,544

72,882
20,568

68,153
19,999

39,848
7,400

35,994
7,858

34,628
4,203

29,930
2,550

31,727
2,313

27,987
2,397

Source: PepsiCo 10-K reports, various years.

COMPANY HISTORY
PepsiCo, Inc., was established in 1965 when PepsiCola and Frito-Lay shareholders agreed to a merger
between the salty-snack icon and soft-drink giant.
The new company was founded with annual revenues of $510 million and such well-known brands
as Pepsi-Cola, Mountain Dew, Fritos, Lays, Cheetos, Ruffles, and Rold Gold. PepsiCos roots can
be traced to 1898 when New Bern, North Carolina,
pharmacist Caleb Bradham created the formula
for a carbonated beverage he named Pepsi-Cola.
The companys salty-snack business began in 1932
when Elmer Doolin, of San Antonio, Texas, began
manufacturing and marketing Fritos corn chips and
Herman Lay started a potato chip distribution business in Nashville, Tennessee. In 1961, Doolin and
Lay agreed to a merger between their businesses to
establish the Frito-Lay Company.
During PepsiCos first five years as a snack and
beverage company, it introduced new products such
as Doritos and Funyuns, entered markets in Japan
and eastern Europe, and opened, on average, one new
snack-food plant per year. By 1971, PepsiCo had more
than doubled its revenues to reach $1 billion. The
company began to pursue growth through acquisitions outside snacks and beverages as early as 1968,
but its 1977 acquisition of Pizza Hut significantly
shaped the strategic direction of PepsiCo for the next
20 years. The acquisitions of Taco Bell in 1978 and

Kentucky Fried Chicken in 1986 created a business

portfolio described by Wayne Calloway (PepsiCos
CEO between 1986 and 1996) as a balanced threelegged stool. Calloway believed the combination of
snack foods, soft drinks, and fast food offered considerable cost sharing and skill transfer opportunities, and he routinely shifted managers among the
companys three divisions as part of the companys
management development efforts.
PepsiCo strengthened its portfolio of snack
foods and beverages during the 1980s and 1990s
with the acquisitions of Mug Root Beer, 7-Up International, Smartfood ready-to-eat popcorn, Walkers
Crisps (United Kingdom), Smiths Crisps (United
Kingdom), Mexican cookie company Gamesa, and
Sunchips. Calloway added quick-service restaurants
Hot-n-Now in 1990; California Pizza Kitchens in
1992; and East Side Marios, DAngelo Sandwich
Shops, and Chevys Mexican Restaurants in 1993.
The company expanded beyond carbonated beverages through a 1992 agreement with Ocean Spray to
distribute single-serving juices, the introduction of
Lipton ready-to-drink (RTD) teas in 1993, and the
introduction of Aquafina bottled water and Frappuccino ready-to-drink coffees in 1994.
By 1996 it had become clear to PepsiCo management that the potential strategic-fit benefits
existing between restaurants and PepsiCos core
beverage and snack businesses were difficult to capture. In addition, any synergistic benefits achieved

C-308

EXHIBIT 2

PART 2

Cases in Crafting and Executing Strategy

Monthly Performance of PepsiCo, Inc.s Stock Price, 2004July 2014

(a) Trend in PepsiCo, Inc.s Common Stock Price
90
85
80

70
65
60

Stock Price ($)

75

55
50
45
05

06

07

08

09
10
Year

11

12

13

14

(b) Performance of PepsiCo, Inc.s Stock Price

versus the S&P 500 Index

190
170
160
150
140
130
120
110
10
210

S&P 500
05

06

07

08

09
10
Year

were more than offset by the fast-food industrys fierce

price competition and low profit margins. In 1997,
CEO Roger Enrico spun off the companys restaurants
as an independent, publicly traded company to focus
PepsiCo on food and beverages. Soon after the spinoff of PepsiCos fast-food restaurants was completed,
Enrico acquired Cracker Jack, Tropicana, Smiths
Snackfood Company in Australia, SoBe teas and alternative beverages, Tasali Snack Foods (the leader in the

11

12

13

Percent Change (1998 = 0)

180
PepsiCos
Stock Price

220
230
14

Saudi Arabian salty-snack market), and the Quaker

Oats Company.

The 2001 Acquisition of Quaker Oats

At $13.9 billion, Quaker Oats was PepsiCos largest acquisition and gave it the number-one brand
of oatmeal in the United States, with more than a
60 percent category share; the leading brand of rice

CASE 21

PepsiCos Diversification Strategy in 2014

cakes and granola snack bars; and other well-known

grocery brands such as Capn Crunch, Rice-A-Roni,
and Aunt Jemima. However, Quakers most valuable
asset in its arsenal of brands was Gatorade.
Gatorade was developed by University of Florida researchers in 1965, but it was not marketed
commercially until the formula was sold to StokelyVan Camp in 1967. When Quaker Oats acquired the
brand from Stokely-Van Camp in 1983, Gatorade
gradually made a transformation from a regionally
distributed product with annual sales of $90 million to a $2 billion powerhouse. Gatorade was able
to increase sales by more than 10 percent annually
during the 1990s, with no new entrant to the sports
beverage category posing a serious threat to the
brands dominance. PepsiCo, Coca-Cola, Frances
Danone Group, and Swiss food giant Nestl all were
attracted to Gatorade because of its commanding
market share and because of the expected growth
in the isotonic sports beverage category. PepsiCo
became the successful bidder for Quaker Oats and
Gatorade with an agreement struck in December
2000, but the merger would not receive U.S. Federal Trade Commission (FTC) approval until August
2001. The FTCs primary concern over the merger
was that Gatorades inclusion in PepsiCos portfolio of snacks and beverages might give the company
too much leverage in negotiations with convenience
stores and ultimately force smaller snack-food and
beverage companies out of convenience store channels. In its approval of the merger, the FTC stipulated that Gatorade and PepsiCos soft drinks could
not be jointly distributed for 10 years.

Acquisitions after 2001

After the completion of the Quaker Oats acquisition in 2001, the company focused on integration of
Quaker Oats food, snack, and beverage brands into
the PepsiCo portfolio. The company made a number
of tuck-in acquisitions of small, fast-growing food
and beverage companies in the United States and
internationally to broaden its portfolio of brands.
Tuck-in acquisitions in 2006 included Stacys bagel
and pita chips, Izze carbonated beverages, Netherlands-based Duyvis nuts, and Star Foods (Poland).
Acquisitions made during 2007 included Naked
Juice fruit beverages, Sandora juices in the Ukraine,
New Zealands Bluebird snacks, Penelopa nuts and
seeds in Bulgaria, and Brazilian snack producer

C-309

Lucky. The company also entered into a joint venture with the Strauss Group in 2007 to market
Sabrathe top-selling and fastest-growing brand
of hummus in the United States and Canada. The
company acquired the Russian beverage producer
Lebedyansky in 2008 for $1.8 billion, and in 2010 it
acquired Marbo, a potato chip production operation
in Serbia.
In 2010 and 2011, the company executed its
largest acquisitions since the 2001 acquisition of
Quaker Oats. In 2010, PepsiCo acquired the previously independent Pepsi Bottling Group and PepsiCo Americas for $8.26 billion in cash and PepsiCo
common shares. The acquisition was designed to
better integrate its global distribution system for its
beverage business. In 2011, it acquired Russias leading food and beverage company, Wimm-Bill-Dann
Foods, for $3.8 billion. The combination of acquisitions and the strength of PepsiCos core snacks and
beverages business allowed the companys revenues
to increase from approximately $29 billion in 2004
to more than $66 billion in 2013. Exhibit 3 presents
PepsiCos consolidated statements of income for
20112013, while the companys consolidated balance sheets for 20122013 are presented in Exhibit
4. The companys calculation of free cash flow for
20112013 is shown in Exhibit 5.

BUILDING SHAREHOLDER
VALUE IN 2014
Three people had held the position of CEO since the
company began its portfolio restructuring in 1997.
Even though Roger Enrico was the chief architect of
the business lineup as it stood in 2007, his successor,
Steve Reinemund, and Indra Nooyi, the companys
CEO in 2007, were both critically involved in the
restructuring. Nooyi joined PepsiCo in 1994 and
developed a reputation as a tough negotiator who
engineered the 1997 spin-off of Pepsis restaurants,
spearheaded the 1998 acquisition of Tropicana, and
played a critical role in the 1999 IPO of Pepsis
bottling operations. After being promoted to chief
financial officer, Nooyi was also highly involved
in the 2001 acquisition of Quaker Oats. Nooyi was
selected as the companys CEO upon Reinemunds
retirement in October 2006. Nooyi had emigrated
to the United States in 1978 to attend Yales Graduate School of Business, and she worked with the

C-310

EXHIBIT 3

PART 2

Cases in Crafting and Executing Strategy

PepsiCo, Inc.s Consolidated Statements of Income, 20112013

(in millions, except per share data)
2013

Net revenue
Cost of sales
Selling, general, and administrative expenses
Amortization of intangible assets
Operating profit
Interest expense
Interest income and other
Income before income taxes
Provision for income taxes
Net income
Less: Net income attributable to noncontrolling interests
Net income attributable to PepsiCo
Net income attributable to PepsiCo per common share:
Basic
Diluted
Weighted-average common shares outstanding:
Basic
Diluted
Cash dividends declared per common share

$66,415
31,243
25,357
110
9,705
(911)
97
8,891
2,104
6,787
47
$ 6,740

2012
$65,492
31,291
24,970
119
9,112
(899)
91
8,304
2,090
6,214
36
$ 6,178

2011
$66,504
31,593
25,145
133
9,633
(856)
57
8,834
2,372
6,462
19
$ 6,443

$4.37
$4.32

$3.96
$3.92

$4.08
$4.03

1,541
1,560
$2.24

1,557
1,575
$2.1275

1,576
1,597
$2.025

Source: PepsiCo, Inc., 10-K report, 2013.

Boston Consulting Group, Motorola, and Asea

Brown Boveri before arriving at PepsiCo in 1994. In
the eight years under Nooyis leadership, PepsiCos
revenues had increased by nearly 90 percent, and its
share price had grown by 50 percent.
In 2014, PepsiCos corporate strategy had diversified the company into salty and sweet snacks, soft
drinks, orange juice, bottled water, ready-to-drink
teas and coffees, purified and functional waters,
isotonic beverages, hot and ready-to-eat breakfast
cereals, grain-based products, and breakfast condiments. Most PepsiCo brands had achieved numberone or number-two positions in their respective food
and beverage categories through strategies keyed to
product innovation, close relationships with distribution allies, international expansion, and strategic
acquisitions. The company was committed to producing the highest-quality products in each category
and was working diligently on product reformulations to make snack foods and beverages less
unhealthy. The company believed that its efforts to

develop good-for-you and better-for-you products

would create growth opportunities from the intersection of business and public interests.
PepsiCo was organized into six business divisions, which all followed the corporations general
strategic approach. Frito-Lay North America manufactured, marketed, and distributed such snack foods
as Lays potato chips, Doritos tortilla chips, Cheetos
cheese snacks, Fritos corn chips, Grandmas cookies, and Smartfood popcorn. Quaker Foods North
America manufactured and marketed cereals, rice and
pasta dishes, granola bars, and other food items that
were sold in supermarkets. Latin American Foods
manufactured, marketed, and distributed snack
foods and many Quaker-branded cereals and snacks
in Latin America. PepsiCo Americas Beverages
manufactured, marketed, and sold beverage concentrates, fountain syrups, and finished goods under
such brands as Pepsi, Gatorade, Aquafina, Tropicana, Lipton, Dole, and SoBe throughout North
and South America. PepsiCo Europe manufactured,

CASE 21

EXHIBIT 4

PepsiCos Diversification Strategy in 2014

C-311

PepsiCo, Inc.s Consolidated Balance Sheets, 20122013

(in millions, except per share data)
2013

2012

Assets
Current assets
Cash and cash equivalents
Short-term investments
Accounts and notes receivable, net
Inventories
Prepaid expenses and other current assets
Total current assets
Property, plant, and equipment, net
Amortizable intangible assets, net
Goodwill
Other nonamortizable intangible assets
Nonamortizable intangible assets
Investments in noncontrolled affiliates
Other assets
Total assets

$ 9,375
303
6,954
3,409
2,162
22,203
18,575
1,638
16,613
14,401
31,014
1,841
2,207
$ 77,478

$ 6,297
322
7,041
3,581
1,479
18,720
19,136
1,781
16,971
14,744
31,715
1,633
1,653
$74,638

$ 5,306
12,533

17,839
24,333
4,931
5,986
53,089

$ 4,815
11,903
371
17,089
23,544
6,543
5,063
52,239

Liabilities and Equity

Current liabilities
Short-term obligations
Accounts payable and other current liabilities
Income taxes payable
Total current liabilities
Long-term debt obligations
Other liabilities
Deferred income taxes
Total liabilities
Commitments and contingencies
Preferred stock, no par value
Repurchased preferred stock
PepsiCo common shareholders equity
Common stock, par value 12/3 per share (authorized 3,600 shares, issued,
net of repurchased common stock at par value: 1,529 and 1,544 shares,
respectively)
Capital in excess of par value
Retained earnings
Accumulated other comprehensive loss
Repurchased common stock, in excess of par value (337 and 322 shares,
respectively)
Total PepsiCo common shareholders equity
Noncontrolling interests
Total equity
Total liabilities and equity
Source: PepsiCo, Inc., 10-K report, 2013.

41
(171)

41
(164)

25
4,095
46,420
(5,127)

26
4,178
43,158
(5,487)

(21,004)
24,409
110
24,389
$ 77,478

(19,458)
22,417
105
22,399
$ 74,638

C-312

EXHIBIT 5

PART 2

Cases in Crafting and Executing Strategy

Net Cash Provided By PepsiCos Operating Activities, 20112013

Net cash provided by operating activities

Capital spending
Sales of property, plant, and equipment
Free cash flow

2013

2012

2011

$9,688
(2,795)
109
$ 7,002

$8,479
(2,714)
95
$5,860

$8,944
(3,339)
84
$5,689

Source: PepsiCo, Inc., 10-K report, 2013.

marketed, and sold snacks and beverages throughout Europe, while the companys Asia, Middle East,
and Africa division produced, marketed, and distributed snack brands and beverages in more than 150
countries in those regions. A full listing of Frito-Lay
snacks, PepsiCo beverages, and Quaker Oats products is presented in Exhibit 6. Select financial information for PepsiCos six reporting units is presented
in Exhibit 7.

Frito-Lay North America

As of 2014, three key trends that were shaping the
industry were convenience, a growing awareness
of the nutritional content of snack foods, and indulgent snacking. A product manager for a regional
snack producer explained, Many consumers want
to reward themselves with great-tasting, gourmet
flavors and styles. . . . The indulgent theme carries
into seasonings as well. Overall, upscale, restaurantinfluenced flavor trends are emerging to fill consumers desires to escape from the norm and taste
snacks from a wider, often global, palate.1 Most
manufacturers had developed new flavors of salty
snacks such as jalapeno and cheddar tortilla chips
and pepper jack potato chips to attract the interest of
indulgent snackers. Manufacturers had also begun
using healthier oils when processing chips and had
expanded lines of baked and natural salty snacks to
satisfy the demands of health-conscious consumers.
Snacks packaged in smaller bags not only addressed
overeating concerns but also were convenient to
take along on an outing. In 2013 Frito-Lay owned
the top-selling chip brand in each U.S. salty-snack
category and held more than a 2-to-1 lead over the
next-largest snack-food maker in the United States.
Frito-Lays 36.6 percent market share of convenience foods sold in the United States was more than

five times greater than runner-up Kelloggs market

share of 6.9 percent. Convenience foods included
both salty and sweet snacks, such as chips, pretzels,
ready-to-eat popcorn, crackers, dips, snack nuts and
seeds, candy bars, and cookies.
PepsiCos Performance with Purpose goals applied
to all of its business units. Frito-Lay North Americas (FLNAs) revenues increased by 3 percent during 2013, but its net revenue increased by 4 percent
and its operating profit increased by 6 percent. The
divisions management believed that growth in
snack foods remained possible since typical individuals, on average, consumed snacks 67 times per
month. On average, consumers chose Frito-Lay
snacks only eight times per month. To increase its
share of snack consumption, FLNA was focused on
developing additional better-for-you (BFY) snacks
like Baked Cheetos and Doritos packaged in smaller
portion sizes. Between 2008 and 2013, improving
the performance of the divisions core salty brands
and further developing health and wellness products were key strategic initiatives. The company had
eliminated trans fats from all Lays, Fritos, Ruffles,
Cheetos, Tostitos, and Doritos varieties, marketed a
wide variety of gluten-free products, and was looking for further innovations to make its salty snacks
more healthy. The company had introduced Lays
Classic Potato Chips cooked in sunflower oil that
retained Lays traditional flavor but contained 50%
less saturated fat.
Good-for-you (GFY) snacks, such as Flat Earth
fruit and vegetable snacks, offered an opportunity
for the company to exploit consumers desires for
healthier snacks and address a deficiency in most
diets. Americans, on average, consumed only about
50 percent of the U.S. Department of Agricultures
recommended daily diet of fruits and vegetables.
Other GFY snacks included Stacys Pita Chips,

CASE 21

EXHIBIT 6

PepsiCos Diversification Strategy in 2014

C-313

PepsiCo, Inc.s Snack, Beverage, and Quaker Oats Brands, 2014

Snack Brands

Beverage Brands

Quaker Oats Brands

Lays potato chips

Pepsi-Cola

Quaker Oatmeal

Maui Style potato chips

Mountain Dew

Capn Crunch cereal

Ruffles potato chips

Mountain Dew AMP energy drink

Life cereal

Doritos tortilla chips

Mug

Quaker 100% Natural cereal

Tostitos tortilla chips

Sierra Mist

Quaker Squares cereal

Santitas tortilla chips

Slice

Quisp cereal

Fritos corn chips

Lipton Brisk (partnership)

King Vitaman cereal

Cheetos cheese-flavored snacks

Lipton Iced Tea (partnership)

Quaker Ohs! cereal

Rold Gold pretzels and snack mix

Mothers cereal

Funyuns onion-flavored rings

Dole juices and juice drinks

(license)

Go Snacks

FruitWorks juice drinks

Quaker Oatmeal-to-Go

Sunchips multigrain snacks

Aquafina purified drinking water

Aunt Jemima mixes & syrups

Sabritones puffed-wheat snacks

Frappuccino ready-to-drink coffee

(partnership)

Quaker rice cakes

Starbucks DoubleShot
(partnership)

Quaker Chewy granola bars

Cracker Jack candy-coated

popcorn
Chesters popcorn

Quaker grits

Quaker rice snacks (Quakes)

SoBe juice drinks, dairy, and teas

Quaker Dipps granola bars

SoBe energy drinks (No Fear and

Adrenaline Rush)

Rice-A-Roni side dishes

Munchos potato crisps

Smartfood popcorn

H2OH!

Near East side dishes

Baken-ets fried pork skins

Gatorade

Puffed Wheat

Oberto meat snacks

Propel

Harvest Crunch cereal

Rustlers meat snacks

Tropicana

Quaker baking mixes

Churrumais fried corn strips

Tropicana Twister

Spudz snacks

Frito-Lay nuts

Tropicana Smoothie

Crispums baked crisps

Frito-Lay, Ruffles, Fritos, and

Tostitos dips and salsas

Izze

Quaker Fruit & Oatmeal bars

Frito-Lay, Doritos, and Cheetos

snack crackers

Naked Juice

Quaker Fruit & Oatmeal Bites

Outside North America

Fritos, Tostitos, Ruffles, and

Doritos snack kits

Mirinda

Quaker Fruit and Oatmeal

Toastables

7UP

Quaker Soy Crisps

Grain Waves

Pepsi

Quaker Bakeries

Lays Stax potato crisps

Kas

Outside North America

Miss Vickies potato chips

Teem

FrescAvena beverage powder

Munchies snack mix

Manzanita Sol

Toddy chocolate powder

Stacys Pita Chips

Paso de los Toros

Toddynho chocolate drink

Flat Earth fruit and vegetable

chips

Fruko

Coqueiro canned fish

Evervess

Sugar Puffs cereal

Red Rock Deli Chips

Yedigun

Puffed Wheat

Grandmas cookies

Pasta Roni side dishes

Sabra hummus

Shani

Cruesli cereal

Outside North America

Fiesta

Hot Oat Crunch cereal

Bocabits wheat snacks

D&G (license)

Quaker Oatso Simple hot cereal

Crujitos corn snacks

Mandarin (license)

Scotts Porage Oats

(Continued)

PART 2

C-314

EXHIBIT 6

Cases in Crafting and Executing Strategy

(Continued)

Snack Brands

Beverage Brands

Quaker Oats Brands

Fandangos corn snacks

Radical Fruit

Scotts So Easy Oats

Hamkas snacks

Tropicana Touche de Lait

Quaker bagged cereals

Niknaks cheese snacks

Alvalle gazpacho fruit juices and

vegetable juices

Quaker Mais Sabor

Tropicana Seasons Best juices and

juice drinks

Quaker oat flour

Quavers potato snacks

Sabritas potato chips
Smiths potato chips
Walkers potato crisps
Gamesa cookies
Doritos Dippas
Sonrics sweet snacks

Loza juices and nectars

Copella juices
FruiVita juices
Sandora juices

Quaker Oats
Quaker Meu Mingau
Quaker cereal bars
Quaker Oatbran
Corn goods
Magico chocolate powder

Wotsits corn snacks

Quaker Vitaly Cookies

Red Rock Deli

3 Minutos Mixed Cereal

Kurkure

Quaker Mgica

Smiths Sensations

Quaker Mgica con Soja

Cheetos Shots

Quaker pastas

Quavers Snacks

Quaker Frut

Bluebird Snacks
Duyvis Nuts
Mller yogurts
Lucky snacks
Penelopa nuts and seeds
Marbo
Wimm-Bill-Dann
Source: Pepsico.com.

Sabra hummus, salsas and dips, and Quaker Chewy

granola bars. In 2013, FLNA manufactured and marketed baked versions of its most popular products,
such as Cheetos, Lays potato chips, Ruffles potato
chips, and Tostitos Scoops! tortilla chips.

Quaker Foods North America

Quaker Foods produced, marketed, and distributed
hot and ready-to-eat cereals, pancake mixes and
syrups, and rice and pasta side dishes in the United
States and Canada. The division recorded sales of
approximately $2.6 billion in 2013. The sales volume of Quaker Foods products decreased by nearly
1 percent annually between 2011 and 2013 with
Quaker Oatmeal, Life cereal, and Capn Crunch
cereal volumes competing in mature industries with
weak competitive positions relative to Kelloggs and
General Mills. Sales of Aunt Jemima syrup and pancake mix and Rice-A-Roni rice and pasta kits also

declined between 2011 and 2013. Quaker Oats was

the star product of the division, with a commanding share of the North American market for oatmeal
in 2013. Rice-A-Roni also held a number-one market share in the rice and pasta side-dish segment
of the consumer food industry. More than one-half
of Quaker Foods 2013 revenues was generated by
BFY and GFY products.

Latin American Foods

PepsiCo management believed international markets
offered the companys greatest opportunity for growth
since per capita consumption of snacks in the United
States averaged 6.6 servings per month while per
capita consumption in other developed countries averaged 4 servings per month and in developing countries
averaged 0.4 serving per month. PepsiCo executives
expected China and Brazil to become the two largest
international markets for snacks. The United Kingdom

CASE 21

EXHIBIT 7

PepsiCos Diversification Strategy in 2014

C-315

Select Financial Data for PepsiCo, Inc.s Business Segments, 20112013

(in millions)
2013

2012

2011

Net revenues
Frito-Lay North America
Quaker Foods North America
Latin American Foods
PepsiCo Americas Beverages
Europe
Asia, Middle East, Africa
Total division

$14,126
2,612
8,350
21,068
13,752
6,507
66,415

$13,574
2,636
7,780
21,408
13,441
6,653
65,492

$13,322
2,656
7,156
22,418
13,560
7,392
66,504

Operating profit
Frito-Lay North America
Quaker Foods North America
Latin American Foods
PepsiCo Americas Beverages
Europe
Asia, Middle East, Africa
Total division

$ 3,877
617
1,242
2,955
1,293
1,174
11,158

$ 3,646
695
1,059
2,937
1,330
1,330
10,414

$ 3,621
797
1,078
3,273
1,210
1,210
10,866

Capital expenditures
Frito-Lay North America
Quaker Foods North America
Latin American Foods
PepsiCo Americas Beverages
Europe
Asia, Middle East, Africa
Total division
Total assets
Frito-Lay North America
Quaker Foods North America
Latin American Foods
PepsiCo Americas Beverages
Europe
Asia, Middle East, Africa
Total division
Depreciation and other amortization
Frito-Lay North America
Quaker Foods North America
Latin American Foods
PepsiCo Americas Beverages
Europe
Asia, Middle East, Africa
Total division

423
38
384
716
550
531
2,642

$ 5,308
983
4,829
30,350
18,702
5,754
65,926

430
51
253
863
525
283
2,553

365
37
436
702
575
510
2,625

$ 5,332
966
4,993
30,889
19,218
5,738
67,146

$ 445
53
248
855
522
305
2,570

439
43
413
1,006
588
693
3,182

$ 5,384
1,024
4,721
31,142
18,461
6,038
66,770

458
54
238
865
522
350
2,604

(Continued)

C-316

EXHIBIT 7

PART 2

Cases in Crafting and Executing Strategy

(Continued)
2013

Amortization of other intangible assets

Frito-Lay North America
Quaker Foods North America
Latin American Foods
PepsiCo Americas Beverages
Europe
Asia, Middle East, Africa
Total division

8
58
32
5
110

2012

10
59
36
7
119

2011

10
65
39
12
133

Source: PepsiCo, Inc., 10-K report, 2013.

was estimated to be the third-largest international market for snacks, while developing markets Mexico and
Russia were expected to be the fourth- and fifth-largest
international markets, respectively.
Developing an understanding of consumer taste
preferences was a key to expanding into international markets. Taste preferences for salty snacks
were more similar from country to country than
were preferences for many other food items, and this
allowed PepsiCo to make only modest modifications
to its snacks in most countries. For example, classic varieties of Lays, Doritos, and Cheetos snacks
were sold in Latin America. In addition, consumer
characteristics in the United States that had forced
snack-food makers to adopt better-for-you or goodfor-you snacks applied in most other developed
countries as well.
PepsiCo operated 50 snack-food manufacturing and processing plants and 640 warehouses in
Latin America, with its largest facilities located in
Guarulhos, Brazil; Monterrey, Mexico; Mexico
City, Mexico; and Celaya, Mexico. PepsiCo was
the second-largest seller of snacks and beverages in
Mexico, and its Doritos, Marias Gamesa, Cheetos,
Ruffles, Emperador, Saladitas, Sabritas, and Tostitos brands were popular throughout most of Latin
America. The divisions revenues had grown from
$7.2 billion in 2011 to $8.3 billion in 2013 and
accounted for 12 percent of 2013 total net revenues.

PepsiCo Americas Beverages

PepsiCo was the largest seller of liquid refreshments
in the United States, with a 24 percent share of the
market in 2013. Coca-Cola was the second-largest
nonalcoholic beverage producer, with a 21 percent

market share. Dr. Pepper Snapple Group was the

third-largest beverage seller in 2013, with a market
share of 8.9 percent. Private-label sellers of beverages collectively held an 8 percent market share in
2013. As with Frito-Lay, PepsiCos beverage business contributed greatly to the corporations overall
profitability and free cash flows.
In 2013, PepsiCo Americas Beverages (PAB)
accounted for 32 percent of the corporations total
revenues and 26 percent of its operating profits. The
PAB divisions $1 billion brands included Gatorade,
Tropicana fruit juices, Lipton ready-to-drink tea,
Pepsi, Diet Pepsi, Mountain Dew, Diet Mountain
Dew, Aquafina, Miranda, Sierra Mist, Dole fruit
drinks, Starbucks cold-coffee drinks, and SoBe.
Gatorade was the number-one brand of sports drink
sold worldwide; Tropicana was the number-two
seller of juice and juice drinks globally; and PAB
was the second-largest seller of carbonated soft drinks
worldwide, with a 29 percent market share in 2014.
Market leader Coca-Cola held a 40.5 percent share of
the carbonated soft-drink (CSD) industry in 2014.
Carbonated soft drinks were the most consumed
type of beverage in the United States, with industry
sales of $20.4 billion, but the industry had declined
by 1 to 2 percent annually for nearly a decade. The
overall decline in CSD consumption was a result of
consumers interest in healthier food and beverage
choices. In contrast, flavored and enhanced water,
energy drinks, ready-to-drink teas, and bottled water
were growing beverage categories that were capturing a larger share of the stomachs in the United
States and internationally.
PepsiCos Carbonated Soft-Drink Business
Among Pepsis most successful strategies to sustain

CASE 21

PepsiCos Diversification Strategy in 2014

volume and share in soft drinks was its Power of One

strategy, which attempted to achieve the synergistic
benefits of a combined Pepsi-Cola and Frito-Lay
envisioned by shareholders of the two companies in
1965. The Power of One strategy called for supermarkets to place Pepsi and Frito-Lay products side
by side on shelves. The company was also focused
on soft-drink innovation to sustain sales and market
share, including new formulations to lower the calorie content of nondiet drinks.
PepsiCos Noncarbonated Beverage Brands
Although carbonated beverages made up the largest
percentage of PABs total beverage volume, much
of the divisions growth was attributable to the success of its noncarbonated beverages. Aquafina was
the number-one brand of bottled water in the United
States. Gatorade, Tropicana, Aquafina, SoBe, Starbucks Frappuccino, Lipton RTD teas, and Propel
were all leading BFY and GFY beverages in the
markets where they were sold.

PepsiCo Europe
All of PepsiCos global brands were sold in Europe,
as well as its country- or region-specific brands such
as Domik v Derevne, Chjudo, and Agusha. PespiCo
Europe operated 125 plants and approximately
525 warehouses, distribution centers, and offices in
eastern and western Europe. The companys acquisition of Wimm-Bill-Dann Foods, along with sales of
its long-time brands, made it the number-one food and
beverage company in Russia, with a 2-to-1 advantage
over its nearest competitor. It was also the leading
seller of snacks and beverages in the United Kingdom. PepsiCo Europe management believed further
opportunities in other international markets existed,
with opportunities to distribute many of its newest
brands and product formulations throughout Europe.

Asia, Middle East, and Africa

PepsiCos business unit operating in Asia, the Middle East, and Africa manufactured and marketed all
of the companys global brands and many regional
brands such as Kurkure and Chipsy. PepsiCo operated 45 plants, 490 distribution centers, warehouses,
and offices located in Egypt, Jordan, and China and
was the number-one brand of beverages and snacks
in India, Egypt, Saudi Arabia, United Arab Emirates,
and China. The divisions revenues had declined
from $7.4 billion in 2011 to $6.5 billion in 2013,

C-317

while its operating profit declined from $1,210 to

$1,174 over the same period of time.

Value Chain Alignment between

PepsiCo Brands and Products
PepsiCos management team was dedicated to
capturing strategic-fit benefits within the business
lineup throughout the value chain. The companys
procurement activities were coordinated globally
to achieve the greatest possible economies of scale,
and best practices were routinely transferred among
its more than 200 plants, over 3,500 distribution systems, and 120,000 service routes around the world.
PepsiCo also shared market research information
with its divisions to better enable each division to
develop new products likely to be hits with consumers, and the company coordinated its Power of One
activities across product lines.
PepsiCo management had a proven ability to
capture strategic fits between the operations of new
acquisitions and its other businesses. The Quaker
Oats integration produced a number of noteworthy
successes, including $160 million in cost savings
resulting from corporatewide procurement of product ingredients and packaging materials and an estimated $40 million in cost savings attributed to the
joint distribution of Quaker snacks and Frito-Lay
products. In total, the company estimated that the
synergies among its business units generated approximately $1 billion annually in productivity savings.

PEPSICOS STRATEGIC
SITUATION IN 2014
For the most part, PepsiCos strategies seemed to be
firing on all cylinders in 2014. PepsiCos chief managers expected the companys lineup of snack, beverage, and grocery items to generate operating cash
flows sufficient to reinvest in its core businesses,
provide cash dividends to shareholders, fund a $15
billion share-buyback plan, and pursue acquisitions
that would provide attractive returns. Nevertheless,
the low relative profit margins of PepsiCos international businesses created the need for a continued
examination of its strategy and operations to better
exploit strategic fits between the companys international business units.
The company had developed a new divisional
structure in 2008 to combine its food and beverage

C-318

PART 2

Cases in Crafting and Executing Strategy

businesses in Latin America into a common division. Also, the companys international businesses
were reorganized to boost profit margins in Europe
and Asia, the Middle East, and Africa. However,
more than five years after the reorganization, the
performance of the companys international businesses continued to lag that of its North American
businesses by a meaningful margin. Some food
and beverage industry analysts had speculated that
additional corporate strategy changes might also

ENDNOTES
1

As quoted in Snack attack, Private Label Buyer, August 2006, p. 26.

be required to improve the profitability of PepsiCos international operations and to help restore
previous revenue and earnings growth rates. Possible actions might include a reprioritization of
internal uses of cash, new acquisitions, further
efforts to capture strategic fits existing between the
companys various businesses, or the divestiture of
businesses with poor prospects of future growth
and minimal strategic fit with PepsiCos other
businesses.