Pepsi Case Study
Strategic issue
Maintain competitive focus, while splitting PepsiCo and creating governance for the new Pepsi Bottling Group.
Internal Analysis Pepsi was invented in 1893, establishing a franchise bottling system of 270 bottlers by 1910. Pepsi struggled in its early years declaring bankruptcy twice. The 1970’s and early 80’s, Pepsi surpassed Coke for the first time. Bottling was a capital-intensive business and involved highly specialized production lines. Bottling and canning could cost between $4 million to $10 million each with a minimal investment cost for a small bottling facility of $25 million to $35 million. It was estimated that 80 to 85 plants were required for full U.S.-distribution, with the cost of a fully efficient large plant with a capacity of 40 million cases to be $75 million in 1998. Among top bottlers in 1998, packaging accounted for 50 per cent of costs of goods sold, concentrate 33 per cent, sweeteners 10 per cent, and labor most of the remaining variable costs. While bottlers’ gross profits often exceeded 40 per cent, operating margins were very thin. Given the intense service provided by the bottlers, the relationship between the bottlers and end retailers was critical to success and sales. Pepsi structured its contracts with bottlers so that bottlers were required to purchase concentrate from Pepsi at prices set by Pepsi, giving them much greater flexibility. In the mid 80’s, Pepsi began acquiring many of its independent bottlers and by the mid 1990’s, Pepsi owned half of these outright and had equity positions in many others. Pepsi focused heavily on diversification within the beverage industry as well as beyond that in first into snack foods, with the merger forming PepsiCo and again with Frito-lay, purchased fast-food chains and casual-dining restaurants. Some of these endeavors went well such as the snack foods while restaurant expansion was failing. Analysts became concerned that Pepsi was over extending itself and was in
Maintain competitive focus, while splitting PepsiCo and creating governance for the new Pepsi Bottling Group.
Internal Analysis Pepsi was invented in 1893, establishing a franchise bottling system of 270 bottlers by 1910. Pepsi struggled in its early years declaring bankruptcy twice. The 1970’s and early 80’s, Pepsi surpassed Coke for the first time. Bottling was a capital-intensive business and involved highly specialized production lines. Bottling and canning could cost between $4 million to $10 million each with a minimal investment cost for a small bottling facility of $25 million to $35 million. It was estimated that 80 to 85 plants were required for full U.S.-distribution, with the cost of a fully efficient large plant with a capacity of 40 million cases to be $75 million in 1998. Among top bottlers in 1998, packaging accounted for 50 per cent of costs of goods sold, concentrate 33 per cent, sweeteners 10 per cent, and labor most of the remaining variable costs. While bottlers’ gross profits often exceeded 40 per cent, operating margins were very thin. Given the intense service provided by the bottlers, the relationship between the bottlers and end retailers was critical to success and sales. Pepsi structured its contracts with bottlers so that bottlers were required to purchase concentrate from Pepsi at prices set by Pepsi, giving them much greater flexibility. In the mid 80’s, Pepsi began acquiring many of its independent bottlers and by the mid 1990’s, Pepsi owned half of these outright and had equity positions in many others. Pepsi focused heavily on diversification within the beverage industry as well as beyond that in first into snack foods, with the merger forming PepsiCo and again with Frito-lay, purchased fast-food chains and casual-dining restaurants. Some of these endeavors went well such as the snack foods while restaurant expansion was failing. Analysts became concerned that Pepsi was over extending itself and was in