Pepsico Financial Segment Analysis
Pepsico's Diversification Strategy in 2015
Data from Textbook Exhibit 7, Page 385
SEGMENT REVENUE GROWTH ANALYSIS
2011
2012
2013
2014
Net Revenue
Frito Lay North America (millions)
Frito Lay NA Actual
Frito Lay NA Growth Rate
$13.322
$13.32 billion
N/A
$13.574
$13.57 billion
1,89%
$14.126
$14.13 billion
4,07%
$14.502
$14.50 billion
2,66%
Quaker North America (millions)
Quaker NA Actual
Quaker NA Growth Rate
$2.656
$2.66 billion
N/A
$2.636
$2.64 billion
-0,75%
$2.612
$2.61 billion
-0,91%
$2.568
$2.57 billion
-1,68%
Latin American Foods (millions)
LA Foods Actual
LA Foods Growth Rate
$7.156
$7.16 billion
N/A
$7.780
$7.78 billion
8,72%
$8.350
$8.35 billion
7,33%
$8.442
$8.44 billion
1,10%
Pepsico Americas Beverage (millions)
Pepsico Americas Actual
Pepsico Americas Growth
$22.418
$22.42 billion
N/A
$21.408
$21.41 billion
-4,51%
$21.068
$21.07 billion
-1,59%
$21.154
$21.15 billion
0,41%
Europe (millions)
Europe Actual
Europe Growth Rate
$13.560
$13.56 billion
N/A
$13.441
$13.44 billion
-0,88%
$13.752
$13.75 billion
2,31%
$13.290
$13.29 billion
-3,36%
$7.392
$7.39 billion
N/A
$6.653
$6.65 billion
-10,00%
$6.507
$6.51 billion
-2,19%
$6.727
$6.73 billion
3,38%
Asia, Middle East, Africa
AMEA Actual
AMEA Growth Rate
Note: N/A means not available or missing data
Pepsico Financial Segment Analysis
Pepsico's Diversification Strategy in 2015
Data from Textbook Exhibit 7, Page 385
OPERATING MARGIN ANALYSIS
2011
2012
2013
2014
Operating Margins
Frito Lay North America (millions)
Operating Income (millions)
Operating Margin
$13.322
$3.621
27,18%
$13.574
$3.646
26,86%
$14.126
$3.877
27,45%
$14.502
$4.054
27,95%
Quaker North America (millions)
Operating Income (millions)
Operating Margin
$2.656
$797
30,01%
$2.636
$695
26,37%
$2.612
$617
23,62%
$2.568
$621
24,18%
Latin American Foods (millions)
Operating Income (millions)
Operating Margin
$7.156
$1.078
15,06%
$7.780
$1.059
13,61%
$8.350
$1.242
14,87%
$8.442
$1.211
14,34%
Pepsico Americas Beverage (millions)
Operating Income (millions)
Operating Margin
$22.418
$3.273
14,60%
$21.408
$2.937
13,72%
$21.068
$2.955
14,03%
$21.154
$2.846
13,45%
Europe (millions)
Operating Income (millions)
Operating Margin
$13.560
$1.210
8,92%
$13.441
$1.330
9,90%
$13.752
$1.293
9,40%
$13.290
$1.331
10,02%
Asia, Middle East, Africa
Operating Income (millions)
Operating Margin
$7.392
$1.210
16,37%
$6.653
$1.330
19,99%
$6.507
$1.174
18,04%
$6.727
$1.043
15,50%
Pepsico Financial Segment Analysis
Pepsico's Diversification Strategy in 2015
Data from Textbook Exhibit 7, Page 385
SEGMENT REVENUE GROWTH ANALYSIS
2011
2012
2013
2014
Net Revenue
Frito Lay North America (millions)
Frito Lay NA Actual
Frito Lay NA Growth Rate
$13.322
$13.32 billion
N/A
$13.574
$13.57 billion
1,89%
$14.126
$14.13 billion
4,07%
$14.502
$14.50 billion
2,66%
Quaker North America (millions)
Quaker NA Actual
Quaker NA Growth Rate
$2.656
$2.66 billion
N/A
$2.636
$2.64 billion
-0,75%
$2.612
$2.61 billion
-0,91%
$2.568
$2.57 billion
-1,68%
Latin American Foods (millions)
LA Foods Actual
LA Foods Growth Rate
$7.156
$7.16 billion
N/A
$7.780
$7.78 billion
8,72%
$8.350
$8.35 billion
7,33%
$8.442
$8.44 billion
1,10%
Pepsico Americas Beverage (millions)
Pepsico Americas Actual
Pepsico Americas Growth
$22.418
$22.42 billion
N/A
$21.408
$21.41 billion
-4,51%
$21.068
$21.07 billion
-1,59%
$21.154
$21.15 billion
0,41%
Europe (millions)
Europe Actual
Europe Growth Rate
$13.560
$13.56 billion
N/A
$13.441
$13.44 billion
-0,88%
$13.752
$13.75 billion
2,31%
$13.290
$13.29 billion
-3,36%
$7.392
$7.39 billion
N/A
$6.653
$6.65 billion
-10,00%
$6.507
$6.51 billion
-2,19%
$6.727
$6.73 billion
3,38%
Asia, Middle East, Africa
AMEA Actual
AMEA Growth Rate
Note: N/A means not available or missing data
Pepsico Financial Segment Analysis
Pepsico's Diversification Strategy in 2015
Data from Textbook Exhibit 7, Page 385
OPERATING MARGIN ANALYSIS
2011
2012
2013
2014
Operating Margins
Frito Lay North America (millions)
Operating Income (millions)
Operating Margin
$13.322
$3.621
27,18%
$13.574
$3.646
26,86%
$14.126
$3.877
27,45%
$14.502
$4.054
27,95%
Quaker North America (millions)
Operating Income (millions)
Operating Margin
$2.656
$797
30,01%
$2.636
$695
26,37%
$2.612
$617
23,62%
$2.568
$621
24,18%
Latin American Foods (millions)
Operating Income (millions)
Operating Margin
$7.156
$1.078
15,06%
$7.780
$1.059
13,61%
$8.350
$1.242
14,87%
$8.442
$1.211
14,34%
Pepsico Americas Beverage (millions)
Operating Income (millions)
Operating Margin
$22.418
$3.273
14,60%
$21.408
$2.937
13,72%
$21.068
$2.955
14,03%
$21.154
$2.846
13,45%
Europe (millions)
Operating Income (millions)
Operating Margin
$13.560
$1.210
8,92%
$13.441
$1.330
9,90%
$13.752
$1.293
9,40%
$13.290
$1.331
10,02%
Asia, Middle East, Africa
Operating Income (millions)
Operating Margin
$7.392
$1.210
16,37%
$6.653
$1.330
19,99%
$6.507
$1.174
18,04%
$6.727
$1.043
15,50%
case
9 PepsiCo's Diversification Strategy
in 2015
a connect
JOHN E. GAMBLE Texas A&M University-Corpus Christi
DAVID L. TURNIPSEED University of South Alabama
PepsiCo was the world's largest snack and bever-
age company, with 2014 net revenues of approxi-
mately $66.7 billion. The company's portfolio of
businesses in 2015 included Frito-Lay salty snacks,
Quaker Chewy granola bars, Pepsi soft-drink prod-
ucts, Tropicana orange juice, Lipton Brisk tea,
Gatorade, Propel, SoBe, Quaker Oatmeal, Cap'n
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 someone's lunch. In 2015,
PepsiCo's business lineup included 22 $1 billion
global brands.
The company's top managers were focused on
sustaining the impressive performance through
strategies keyed to product innovation, close rela-
tionships with distribution allies, international
expansion, and strategic acquisitions. Newly intro-
duced products such as Mountain Dew KickStart,
Tostitos Cantina tortilla chips, Quaker Real Med-
leys, 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 con-
cerns were important contributors to the company's
growth, with PepsiCo's better-for-you and good-for-
you products becoming focal points in the compa-
ny's new product development initiatives. In 2014,
PepsiCo's nutrition business accounted for about 20
percent of the company's net revenue.
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. PepsiCo increased its dividend for
the 42nd consecutive year in 2014 and paid $8.7
billion to its shareholders through dividends and
stock repurchases, which was a 36 percent increase
over 2013. The company bolstered its cash returns
through carefully considered capital expenditures
and acquisitions and a focus on operational excel-
lence. Its Performance with Purpose plan utilized
investments in manufacturing automation, a ratio-
nalized global manufacturing plan, reengineered
distribution systems, and simplified organization
structures to drive efficiency. In addition, the com-
pany's Performance with Purpose plan was focused
on minimizing the company's impact on the envi-
ronment by lowering energy and water consumption,
and reducing its use of packaging material, provid-
ing a safe and inclusive workplace for employees,
and supporting and investing in the local communi-
ties in which it operated. PepsiCo had been listed on
the Dow Jones Sustainability World Index for eight
consecutive years and listed on the North America
Index for nine consecutive years as of 2014.
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 company's revenue growth since 2000 had
resulted from major acquisitions, such as the $13.6
billion acquisition of Quaker Oats in 2001, the 2010
Copyright © 2015 by John E. Gamble. All rights reserved.
Part 2 Cases in Crafting and Executing
378
acquisition of the previously independent Pepsi
Bottling Group and PepsiCo Americas for $8.26
billion, and the acquisition of Russia's leading food-
and-beverage company, Wimm-Bill-Dann (WBD)
Foods, for $3.8 billion in 2011. A summary of Pep-
siCo's financial performance for 2005 through 2014
is shown in Exhibit 1. Exhibit 2 tracks PepsiCo's
market performance between 2004 and July 2014.
Company History
PepsiCo, Inc., was established in 1965 when Pepsi-
Cola and Frito Lay shareholders agreed to a merger
between the salty-snack icon and the 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, Lay's,
Cheetos, Ruffles, and Rold Gold. PepsiCo's roots
can be traced to 1898, when New Bern, North Caro-
lina, pharmacist Caleb Bradham created the formula
for a carbonated beverage he named Pepsi-Cola.
The company's 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 busi-
ness in Nashville, Tennessee. In 1961, Doolin and
Lay agreed to a merger between their businesses to
establish the Frito-Lay Company.
During PepsiCo's 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 bil-
lion. The company began to pursue growth through
acquisitions outside snacks and beverages as early
as 1968, but its 1977 acquisition of Pizza Hut sig-
nificantly shaped the strategic direction of PepsiCo
for the next 20 years. The acquisitions of Taco Bell
in 1978 and Kentucky Fried Chicken in 1986 cte-
ated a business portfolio described by Wayne Cal-
loway (PepsiCo's CEO between 1986 and 1996) as
a balanced three-legged 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 man-
agers among the company's three divisions as part
of the company's 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 Interna-
tional, Smartfood ready-to-eat popcorn, Walker's
Crisps (United Kingdom), Smith's 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 Mario's, D'Angelo Sandwich
Shops, and Chevy's Mexican Restaurants in 1993.
The company expanded beyond carbonated bever-
ages through a 1992 agreement with Ocean Spray to
EXHIBIT 1
Financial Summary for PepsiCo, Inc., 2005-2014 (in millions, except per share amounts)
Net revenue
Net income
2014 2013 2012 2011 2010 2009 2008 2007 2006 2005
$66,683 $66,415 $65,492 $66,504 $57,838 $43,232 $43,251 $39,474 $35,137 $32,562
6,558 6,787 6,214 6,443 6,320 5,946 5,142 5,599 5,065 4,078
$4.31 $4.37 $3.96 $4.08 $3.97 $3.81 $3.26 $3.38
$3.00 $2.43
Income per common
share-basic,
continuing operations
Cash dividends
declared per
common share
Total assets
$2.53 $2.24
$2.13
$2.03
$1.89 $1.78
$1.78 $1.65 $1.42 $1.16 $1.01
Long-term debt
$70,509 77,478 74,638 72,882 68,153 39,848 35,994 34,628 29,930 37,727
23,821 24,333 23,544 20,568 19,999 7,400 7,858 4,203 2,550
2,313
Source: PepsiCo 10-K reports, various years.
Case 9 PepsiCo's Diversification Strategy in 2015
379
EXHIBIT 2
Monthly Performance of PepsiCo, Inc.'s Stock Price, 2005-July 2015
(a) Trend in PepsiCo, Inc.'s Common Stock Price
110
100
Hut
90
HH
80
NUESTRA
Stock Price ($)
70
HITH
60
50
40
06
1
07
08
09
T
11
T
13
10
T T
15
12
14
Year
(b) Performance of PepsiCo, Inc.'s Stock Price Versus the S&P 500 Index
+90%.
PepsiCo's Stock Price
+75%
4 MOBILE
+60%
+45%
)
+30%
معه
TRA
H2H
+15%
Percent Change (2006 = 0)
They
+0%
v A
-15%
-30%
S&P
-45%
T
06
1
07
T
11
T
12
1
13
09
10
14
08
15
Year
distribute single-serving juices, the introduction of
Lipton ready-to-drink (RTD) teas in 1993, and the
introduction of Aquafina bottled water and Frappuc-
cino ready-to-drink coffees in 1994.
By 1996, it had become clear to PepsiCo manage-
ment that the potential strategic-fit benefits existing
between restaurants and PepsiCo's core beverage
and snack businesses were difficult to capture. In
380
Part 2 Cases in Crafting and Executing Strategy
out of convenience store channels. In its approval
of the merger, the FTC stipulated that Gatorade and
PepsiCo's soft drinks could not be jointly distributed
for 10 years.
addition, any synergistic benefits achieved were
more than offset by the fast-food industry's fierce
price competition and low profit margins. In 1997,
CEO Roger Enrico spun off the company's restau-
rants as an independent, publicly traded company to
focus PepsiCo on food and beverages. Soon after the
spin-off of PepsiCo's fast-food restaurants was com-
pleted, Enrico acquired Cracker Jack, Tropicana,
Smith's Snackfood Company in Australia, SoBe teas
and alternative beverages, Tasali Snack Foods (the
leader in the Saudi Arabian salty-snack market), and
the Quaker Oats Company.
Acquisitions after 2001
After the completion of the Quaker Oats acquis.
tion in 2001, the company focused on integration of
Quaker Oats's food, snack, and beverage brands in
the PepsiCo portfolio. The company made a number
of “tuck-in” acquisitions of small, fast-growing food
and beverage companies in the United States aro
internationally to broaden its portfolio of brands.
Tuck-in acquisitions in 2006 included Stacy's
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 Zealand's Bluebird snacks, Penelopa
nuts and seeds in Bulgaria, and Brazilian snack pro-
ducer Lucky. The company also entered into a joint
venture with the Strauss Group in 2007 to market
Sabra, the top-selling and fastest-growing brand of
hummus in the United States and Canada. The com-
pany acquired the Russian beverage producer Leb-
edyansky in 2008 for $1.8 billion, and in 2010, it
acquired Marbo, a potato chip production operation
in Serbia.
The 2001 Acquisition of Quaker Oats
At $13.9 billion, Quaker Oats was PepsiCo's larg-
est 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
cakes and granola snack bars; and other well-known
grocery brands such as Cap'n Crunch, Rice-A-Roni,
and Aunt Jemima. However, Quaker's 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 com-
mercially until the formula was sold to Stokely-Van
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 dur-
ing the 1990s, with no new entrant to the sports bev-
erage category posing a serious threat to the brand's
dominance. PepsiCo, Coca-Cola, France's Danone
Group, and Swiss food giant Nestlé 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 suc-
cessful 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 FTC's pri-
mary concern over the merger was that Gatorade's
inclusion in PepsiCo's portfolio of snacks and bever-
ages might give the company too much leverage in
negotiations with convenience stores and ultimately
force smaller snack-food and beverage companies
In 2010 and 2011, the company executed its larg-
est acquisitions since the 2001 acquisition of Quaker
Oats. In 2010, PepsiCo acquired the previously inde-
pendent Pepsi Bottling Group and PepsiCo Ameri-
cas for $8.26 billion in cash and PepsiCo common
shares. The acquisition was designed to better inte-
grate its global distribution system for its beverage
business. In 2011, it acquired Russia's leading food
and beverage company, Wimm-Bill-Dann Foods, for
$3.8 billion. The combination of acquisitions and
the strength of PepsiCo's core snacks and beverages
business allowed the company's revenues to increase
from approximately $29 billion in 2004 to more than
$66 billion in 2013. Exhibit 3 presents PepsiCo's
consolidated statements of income for 2012-2014,
while the company's consolidated balance sheets for
2013-2014 are presented in Exhibit 4. The compa-
ny's calculation of free cash flow for 2011-2014 is
shown in Exhibit 5.
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