Pepsi Strategic Analysis

Strategic Analysis of Pepsico

Pepsico was formed in 1965 after the merger of Pepsi and  Frito-Lay. Since then, the brand has continuously worked on transforming its portfolio and to grow its popularity and market share. Today, it is among the leading soda brands of the world with only Coca Cola having  the resources and capabilities to match its strength. Pepsi is a truly global brand that saw excellent financial performance in 2017. The industry is going through a period of transition and apart from the sweeping health trends technological changes are also affecting Pepsico’s business. To find faster growth, it has focused on digitisation, commerce and sustainability. It has set a performance agenda for itself that it is going to follow in near future called Performance with Purpose Agenda 2025.

Pepsi is among leading snacks and beverages brands that has 22 iconic billion dollar brands in its product portfolio.  It is continuously innovating its marketing and product strategy to find faster growth globally. With competition in the soda industry intensifying, every brand has to invest a lot in marketing. Product innovation has also become key to growing a brand’s popularity and competitiveness.  Pepsi has added more healthy and nutritious choices in its product portfolio. Apart from that it is investing heavily in marketing and R&D. Today, Pepsi’s brand and products are popular worldwide with their sales in more than 200 countries. Its investment in digital technology has started bearing results and the fantastic financial results of 2017 were due to the efforts Pepsico has made over the last five years. Now, the soda giant is focusing on CSR and sustainability to maintain a great image and reputation.

External Analysis of Soda Industry:

The global soda industry is being affected by several factors and various kinds of forces in the 21st century. Sweeping health trends, changing lifestyles and demographics across the globe are all affecting its sales and profits.  Rising health consciousness has made people switch to healthy drinks. This is the one important factor that has led to the growth in the sales of energy and health drinks. Reports show that 2017 was overall a good year for the soda brands. Bottled waters are seeing the highest growth as per a report by the beverage digest.

A 2018 report by Beverage Digest showed that in 2017 American consumers spent 2 billion dollars more on the non alcoholic beverages. Pepsi and Coca Cola have continued to bring new products ad innovating their packaging to attract new customers. The lion’s share of growth in the soda industry in 2017 was driven by growth in the sales of bottled water, soft drinks and energy drinks. Beverage digest reports for last two years show that bottled water has been highly popular in these years as Americans have found a healthier way to quench their thirst. Last year the industry had a total sales of 135.7 Billion dollars and both bottled water and soft drinks added a billion each to the entire sales. According to the beverage digest report for 2017, value growth in each category was as follows:

Carbonated soft drinks (+1.3%);

water (+3.8%);

RTD teas (+1.5%);

and RTD coffees/dairy-based and other (+11.7%)

juice/juice drinks (-0.9%)

and sports drinks (-1.8%)

In 2016 the bottled water brands  posted very healthy growth with Aquafina and Poland Spring having posted highest sales followed by Dasani. In this way, while the soda industry has achieved impressive growth during the recent years in US, it is the bottled waters and soft drinks including energy drinks that were leading the growth of the industry.

A SWOT analysis highlighting the strengths, weaknesses, opportunities and threats before Pepsi.

 

Strengths:

  • Strong brand image:

Pepsico is a global brand with a strong brand image and that is why it is a leader in the soda industry with only one closest rival Coca Cola being able to challenge its strength. The brand is famous all over the globe and its products sell in more than 200 countries.  Currently, Pepsi has just one major rival – Coca Cola. However, with a  strong image and excellent reputation Pepsi has managed the competitive pressure very well. The soda giant also invests a lot in marketing and reputation management. Not just advertising and marketing, Pepsico invests in CSR and sustainability to retain its popularity and customer’s trust.

  • Strong financial performance –

Strong financial performance is also among the key strengths of Pepsi. In 2017, Pepsico’s net organic revenue grew by higher than 2%. This performance was based on the efforts the brand made in last five years. In this period it made major investments into marketing, digitization and other areas.  Pepsico’s net revenue rose to $63.5 billion dollars. This represented a growth of around 725 million dollars over the previous year. High level of net revenue and income allows Pepsico to spend more on things like marketing and Research and Development.

    • Global presence supported by a strong supply chain and distribution network – A well managed global supply chain and distribution network is like Pepsico’s backbone upon which its entire business empire rests. In 2017, Pepsico further extended its foodservice partnerships thus increasing its distribution and expanding market share. The brand brings its products to the market mainly through direct store delivery, customer warehouses and distributor networks. Depending upon the customer needs as well as local trade practices and product characteristics, it selects the distribution network to use. A very large number of suppliers located throughout the world in several countries supply Pepsico with raw materials at low prices.
    • Strong marketing capabilities – Pepsico is also known for great marketing and its strong marketing capabilities. It invests a very large sum in marketing. In 2017, Pepsi spent more than 4 billion dollars on marketing out of which 2.4 billion dollars went solely to advertising. It has also improved its digital capabilities over the last 4 years by making a very large investment in this area. The result has been its digital campaigns being highly successful in the recent years. The ‘Bring Home Happiness’ campaign Pepsico launched in Greater China became highly successful and achieved more than 1 billion views of its 20 minute long video. Similarly, more marketing campaigns run by the brand, several of which were run solely though digital channels were highly successful and popular among its customers.
    • Large and varied product portfolio – Pepsi also has a very large and varied product portfolio. There are 22 billion dollar brands in its product portfolio, each of which earns it more than a billion dollar every year in revenue. During the recent years, the brand has innovated its product portfolio further and added more nutritious and healthy products in snacks as well as beverages categories. Pepsi is continuously investing in making its production and supply chain agiler. It is also spending heavily on research and development so that its supply chain can be made more sustainable and it can bring healthier products to the market.

 

Weaknesses –

  • Over-dependence on the US market: Pepsi is present globally. However, it still depends on the US market for a very large part of its revenue. In 2017,  more than 58% of its revenue came from US. Only 42% of its revenue came from outside US. In order to reduce its dependence on the US market, it must release more of its healthier products into the global markets and particularly Asia. However, the brand has also felt the pinch of a stronger dollar.
  • Reduced Net revenue in Middle East :

The brand’s net revenue in the Middle East dropped in 2017. This decline was due to weakening Egyptian currency. Fluctuations in the international currency exchange rates have had a detrimental effect on the revenue of Pepsi from time to time.

 

Opportunities:

  • Technological innovation down the distribution network: There are several opportunities available to Pepsi which can help it grow its brand and businesses. Technological innovation and digitization can also provide it with growth opportunities in a number of areas from supply chain management to manufacturing apart from marketing and distribution. Both digitization and IoT have brought major growth opportunities and can help Pepsi’s distribution network expand and be more efficient. Investing in R&D and product innovation as well as digital technology offers faster growth opportunities and options for market expansion to Pepsi.
  • CSR and water recycling: Investing in CSR and water recycling is also an opportunity that Pepsi can easily exploit for a better reputation and to grow its popularity. While it has already invested a lot in these two major areas, there are more opportunities before it. Investing in CSR is very important for the brand to maintaining a strong image and reputation. It is because in past, Pepsi has faced a lot of protest for having caused water crisis in several regions.
  • Partnerships with related businesses: Partnerships with related businesses can also help the brand find faster growth. Pepsi formed a partnership with Starbucks some years ago for selling ready coffee beverages. It can enter into new and more similar partnerships with other fast food and beverages brands to grow its sales and revenue.
  • Growth through acquisitions: The brand can also find faster growth by acquiring related brands which could also help it venture into new areas.

Threats:

    • Legal and regulatory threats: Legal and regulatory threats pose a major risk before big business brands like Pepsi. Compliance risks may sometimes lead to major fines and can result in losses. It is why Pepsi focuses especially on compliance and has compliance teams dedicated to taking care of compliance issues. Noncompliance can result in losses that may often run into billions.
    • Competitive pressures: Competitive pressures can also lead to big risks for a global brand and its business. Coca Cola is the biggest competitor of Pepsi and the two brands are engaged in intense rivalry that keeps raging and getting even intense. Both of the brands invest heavily in marketing and if any of Pepsi’s new products flops, it can result in losses and higher competitive pressure.
    • Stronger dollar and fluctuation in foreign currency exchange rates: A stronger dollar and fluctuating foreign currency exchange rates can result in financial losses for Pepsi. For past several years, the US dollar has kept growing stronger internationally causing a fall in  revenue from Pepsi’s international business.

PESTEL ANALYSIS of Pepsico

Pepsi is a global brand and operating in a global environment can be highly challenging. There are several factors that may try to hinder growth and their nature may vary from market to market. A PESTEL analysis helps understand how these factors can affect the growth of a global brand like Pepsi. PESTEL is an acronym for political, economic, social, technological,environmental and legal. All these factors are of immense importance in the 21st century and affect businesses as well as their growth and profitability in various ways.

Political factors:

The importance of political factors in the context of international business has increased manifold in the 21st century. It is because the government oversight and regulation of businesses has grown in this era. Political factors are affecting businesses like never before. From taxes to regulations and trade barriers, there are several factors which can affect growth. Moreover, political stability is a must for economic growth and without political stability, economic stability is not possible. Political disruption can disrupt the supply chain and sales and also affect businesses negatively in this manner. This can also have a potential negative impact on business and growth of Pepsi.  In this way, a global business like Pepsi comes across several barriers and challenges that are political in nature while doing business globally. The more friendly the political environment, the easier it is to do business.

Economic:

Economic factors have also grown in importance in the 21st century. the world has been through recession and during such periods of economic difficulty, businesses can face a large decline in sales and profits. The recession saw a decline in the level of employment worldwide and due to that a  fall in the spending power of the people. One important strength of Pepsi is its competitive pricing strategy and that has helped the brand bear major economic fluctuations. Still, when employment and people’s disposable income decline, it leads to lower spending on food and beverages. These things can harm the sales and profits. Now that the recession has passed and growth has returned, the world economy is moving faster and brands are seeing higher sales as well as profits. Economic factors in this manner have a direct effect on Pepsi’s business.

Sociocultural:

Sociocultural factors too have kept growing in importance in the 21st century. Their importance is making businesses adopt new ways of marketing and sales. The changing demographics of the global population has made businesses look towards their markets and customer base from new angles. The millennial generation is a etch savvy generation and expects to be served differently. It likes more personalised experiences and would want things faster and at affordable rates. Its taste and choices differ from the baby boomers. Moreover, depending upon the society and culture the brands also need to vary their marketing strategies and efforts. In this way, sociocultural factors have acquired a new importance in the context of international business in the 21st century.

Technological:

Technological factors have become a source of competitive advantage as well as the drivers of success in the 21st century. Technology has proved a major enabler helping businesses fill major gaps and derate extraordinary value in new ways. If pepsi is investing so much in technology and especially digital technology then it is because technology has helped it improve its performance and productivity in several new ways. Apart from marketing, the role of technology has also grown in the area of supply chain and production. In all these areas technology has become important but most of all it is the customer experience where technology is helping businesses. It is helping businesses design new, innovative and better customer experiences that help engage and retain the customer for longer. Customer engagement has become a priority for the international brands including Pepsi. It has focused on marketing and engagement using digital channels and has also been successful to a very large extent. Moreover, technology is helping brands turn their manufacturing and supply chain processes more sustainable.

Environmental:

Environmental factors have also acquired huge importance in the 21st century. Their importance has increased based on the rising environmental consciousness globally. Governments around the world have made laws related to environmental responsibility and non compliance can result in major fines in any industry. Even importantly brands that are environmentally and socially responsible have gained popularity. Even customers like the brands that are sustainable and are investing in environmental responsibility. Pepsi is also investing a lot in environmental and corporate social responsibility. In the past it had faced severe criticism for not being able to replenish water at the rate it uses.

Legal:

The legal factors are affecting the growth of businesses more strongly  than ever.  From labor to product quality and environmental impact in each and every area, the legal net is tighter than ever causing businesses to dedicate more financial and human resources to compliance. Non compliance can prove costly and therefore compliance costs are adding to the operational costs of businesses. Pepsi is also investing resources to compliance. Even in the soda industry there are lots of laws, several of which vary from market to market and require being complied with. In the past, Pepsi has had several tussles with law and it must avoiding having more in future.

Five Forces Analysis of Pepsi:

Bargaining power of suppliers:

The bargaining power of Pepsi suppliers is low which is because most of them are quite small in size and do not hold any significant financial strength either. This leads to low bargaining strength. Pepsi on the other hand has formed rules and regulations for its suppliers who are required to provide good quality raw material as well as follow sustainable practices. Apart from it there are rules related to labor also which they must follow. Pepsi can always choose from new suppliers but for a supplier losing business from Pepsi can mean a significant loss. the pressure mostly remains on the suppliers related to price and quality. Pepsi’s size, financial strength and brand image also work to reduce the bargaining strength of its suppliers.

Bargaining power of customers:

The bargaining power of customers has grown much higher in the 21st century. There are several factors apart from competition that have caused this shift in power. The customer of the 21st century is a well informed and aware customer. While the number of options before the customers has grown, it is also the changing trends and habits that have shifted bargaining power in the hands of the customers. Pepsi has been able to moderate their bargaining power to some extent using several strategies like catering to customer demand by understanding trends and bringing products that suit the consumer’s tastes better. It has a large product portfolio made of healthy as well as normal products that cater to the various customer segments from highly health conscious to those who want to satisfy their taste buds. These things have been able to moderate the customers’ bargaining power apart from excellent marketing. The overall bargaining ability of the customers is moderately high.

Threat of substitute products:

The threat of substitute products before Pepsi is moderate which mainly arises from the products made by the rival brands. Pepsi’s main rival is coca cola which also has a large product portfolio like Pepsi. Apart from it there are several local brands and Dr pepper Snapple too that serve customers in various parts of the world and compete with Pepsi products directly. Other juice and health drink products including local and international brands also compete with the products of Pepsi. The overall threat from the substitute products remains moderate. Pepsi’s brand image and marketing abilities moderate the threat from the substitute products.

Threat of new entrants:

The threat of new entrants in the soda industry is low which is due to several factors. First of all soda industry has some of the biggest brands of the world including Pepsi and Coca Cola. Second, one can enter the local market with a small investment but still there would be a significant investment in marketing, HR and technology. Apart from these, there are legal barriers to entry that also stop new brands from entering the market. If a new brand enters the market unless it has billions for investment in marketing, it cannot grow into a significant global brand. To compete with brands like Pepsi and Coca Cola any new player must have a very large capital at hand. It is not easy to acquire a significant market share given the high level of competition in the industry. All these factors minimise the threat from the new brands trying to enter the market.

Level of competitive rivalry:

The level of competitive rivalry the industry has kept growing very high. While there are two main significant players in the industry including Coca Cola and Pepsi, the competition between the two for market share has always remained very fierce. Both the brands invest heavily in marketing as well as Research and development. The two have excellent marketing strategies and also use various other methods of engaging the customers. Moreover, these two brands have matching product portfolios and serve similar drinks and flavours. The two are also competing against each other in the energy drink and health drink market. Apart from these two there are Dr Pepper Snapple and Red Bull which are also competing with Pepsi and Coca Cola. In this way, the overall intensity of competitive rivalry in the industry is very high. Each brand is bringing new and healthier products and flavors to snatch market share from the other.

 

VRIO Analysis of Pepsi:

Resources & Capabilities of Pepsi:

Brand Image:

Pepsi’s one major resource is its brand image. the brand is known as a customer friendly brand for the youth all over the world.

Global Presence:

Pepsi and its products sell in more than 200 countries. Its global presence is one major strength of the brand.

Competitive pricing:

Another major capability of Pepsi is its pricing strategy. Pepsi’s products are priced competitively and its affordable pricing strategy has helped the brand acquire a very large customer base and market share.

Global supply chain & distribution network:

Pepsi has  global supply chain that extends into several countries. Its supply chain and distribution network extent worldwide to many nations.

Large & loyal customer base:

Pepsi has a very large and loyal customer base that is spread globally over 200 countries. Its brands are highly popular in most corners of the world.

HR& culture:

the brand also focuses on HR management and the development and career growth of its employees. It has also managed an excellent organisational culture.

Marketing capabilities:

Pepsi is also recognised as a great marketer which engages its consumers using various marketing channels.

Resources/capabilities

Valuable

Rare

Inimitable

Exploited

Implication

Brand Image

Yes

Yes

Yes

Yes

Competitive advantage

Global Presence

Yes

Yes

Yes

Yes

Competitive advantage

competitive pricing

Yes

Yes

No

Yes

Temporary advantage

Supply chain& Distribution network

Yes

Yes

No

Yes

Temporary advantage

customer loyalty

Yes

Yes

No

Yes

Temporary advantage

HR& Culture

Yes

Yes

No

Yes

Temporary advantage

marketing capabilities

Yes

Yes

Yes

Yes

Competitive advantage

Value Chain Analysis of Pepsi:

Primary activities:

Inbound logistics:

Pepsi procures its raw material and primarily agricultural raw material from several nations. It has used an excellent transportation network of private fleets that transport raw material for supplier’s facilities. Moreover, it has used advanced software for tracking and keeping records of raw materials as well as logistics. It has used IT to manage its inbound logistics very well.

Operations:

Pepsi has a large network of offices, distribution centres, warehouses, plants and other facilities worldwide. Its business is divided into six operation segments – Frito Lay North Aerica, quaker Foods North America, North America Beverages, Latin America and Europe Sub saharan Africa. These segments operate either independently or in conjunction with third parties.

Outbound logistics:

Pepsi brings its products to the market primarily through direct-store-delivery (DSD), customer warehouse and distributor networks. The distribution system it uses to bring its products to the market and the retailers mainly depends upon the customer needs, product characteristics and local trade practices. The DSD (Direct Store Delivery) system employed by Pepsi’s independent bottlers and distributors delivers, beverages, food and snacks to the retail stores.

Marketing & sales:

Pepsi spends heavily on marketing of its brand and products. In the recent years its use of digital technology for marketing and customer engagement has increased. Its 2017 marketing and promotions expenditure was 4.1 Billion dollars.

Support activities:

Procurement:

The procurement team at Pepsi is responsible for the procurement of raw materials from various parts of the world.

HRM:

The brand also focuses on HR management and employee development. It has implemented several training programs for the development and growth of its employees. It employed 263000 people in 2017 of which 113000 in US alone.

Firm Infrastructure:

Pepsi has managed a very large infrastructure including offices, Human resources and other form of infrastructure. Its buss spread over several regions worldwide.

Technology:

Technology is also an important focus in Pepsi’s business operations. The brand has increased its spending on digital technology for marketing as well as designing better customer experience. Apart from that it is investing in advanced technology in its supply chain and production system.

 

Pepsico Business Strategy & Competitive Advantage

Pepsi is a global brand that sells across more than 200 countries and has a large product portfolio. Several brands in its portfolio are million dollar brands that generate more than a billion each year in revenue. However, to be global and successful in a highly competitive industry environment requires focus on several things. Apart from a strong business and marketing strategy it also requires several sources of competitive advantage. In case of Pepsi, the brand has recently focused on revising its strategy to suit the fast changing market dynamics. The brand is spending more on digital technology and product innovation to find faster growth. Marketing is a special focus area because of the growing competition in the soda industry. Apart from Coca Cola, there are several other big and small soda, energy drinks and health drinks brands that are adding to the competitive pressure in the soda industry. In such an environment where growing health consciousness of the new generation is also seriously changing demand pattern and has led to growth in demand for healthy products, product innovation is more important than ever to remain competitive and find superior growth. In the recent years, Pepsi has added several new products to its portfolio with a  special focus on health friendly products. Apart from zero calorie and low calorie versions of existing products, health friendly juice drinks and energy drinks also feature prominently in its portfolio. Growth also requires a heavy focus on R&D which is a crucial part of Pepsico’s business strategy. Pepsi also spends heavily on advertising and promotions. The main sources of competitive advantage of Pepsi are as follows:

– Brand image/equity

– Global presence

– varied product portfolio

– customer loyalty

– marketing capabilities

– competitive pricing strategy

While several of these sources have created sustainable competitive advantage for the brand, several of them have also given rise to temporary competitive advantage for that can be strengthened further through product innovation and customer orientation. Apart from these things HRM is also an important area requiring heavy focus in 21st century for sustainable competitive advantage. PepsiCo has made smart policies and invested in the growth and career development of its employees.

Financial Analysis:

Net Revenue of Pepsico increased 1% from 2016 to 2017 rising from 62.8 Billion dollars to 63.5 Billion dollars. Cost of sales for the brand increased 2% rising from 28.2 Billion dollars to 28.8 Billion dollars. Operating profit also saw an increase of 7% rising from 9.8 Billion dollars to 10.5 Billion dollars. Net income of the brand declined 23% from 2016 falling to 4.86 Billion dollars from 6.33 Billion dollars. In the fourth quarter of 2017, Pepsi recorded a net loss of 710 million dollars.

Pepsi q4 financial release

Conclusion & Suggestions:

Pepsi is a global soda beverages brand with a large supply chain and distribution network. During recent years, Pepsi’s product portfolio has expanded to include  healthier products in both snacks and beverages category. Apart from its investment  and efforts in marketing and digitization have also started paying off and the brand’s revenues have kept rising. Its higher net organic revenue in 2017 was due to its investment and efforts Pepsi made in these areas over last five years. However, a stronger dollar, compliance pressures and competitive pressure some threat to the financial growth of the brand. To grow faster it can form new partnerships or acquire smaller related businesses.  Investing in supply chain innovation and expanding the distribution network can also help it grow faster.

Sources:

 Pepsi SWOT Analysis

https://www.pepsico.com/docs/album/investor/pepsico-inc-2017-annual-report.pdf

http://fortune.com/2017/04/19/coca-cola-pepsi-dr-pepper-soda-water/

https://www.scribd.com/doc/216565880/Value-Chain-Analysis-of-Pepsico

https://www.coca-colacompany.com/stories/report-u-s-sales-of-non-alcoholic-beverages-grow-more-than-2-billion-in-2017-carbonated-soft-drinks-bottled-water-each-account-for-about-half-of-industry-s-growth

Abhijeet Pratap

Abhijeet has been blogging on educational topics and business research since 2016. He graduated with a Hons. in English literature from BRABU and an MBA from the Asia-Pacific Institute of Management, New Delhi. He likes to blog and share his knowledge and research in business management, marketing, literature and other areas with his readers.