SYNOPSIS

PEPSICO IN 2007: STRATEGIES TO INCREASE SHAREHOLDER VALUE

Submitted to:

Dr. Vithal

Professor of Finance & Strategy

Submitted by:

Garvit Garg

INDIAN INSTITUTE OF PLANTATION MANAGEMENT, BANGALORE

December 2nd, 2009

PepsiCo Inc. was established in 1965 when Pepsi-Cola and Frito-Lay shareholders agreed to

merge. The roots can be traced to 1898 when Caleb Bradham, a pharmacist, created the formula

for a carbonated beverage he named Pepsi-Cola. By 1971, PepsiCo had doubled more than its

revenues to reach $1 billion. The years 1977, 1978 and 1986 marked acquisitions of Pizza Hut,

Taco Bell and KFC and this paved way for a balanced three legged stool (snacks, soft drinks and

fast food). By 1196, it had become clear to PepsiCo’s management that the potential strategic

benefits existing between restaurants and PepsiCo’s core beverage and snack businesses were

difficult to capture. In 1997, CEO Roger Enrico spun off the company’s restaurants as an

independent, publicly traded company to focus PepsiCo on food and beverages. The Quaker Oats

acquisition at $13.9 billion brought Quaker’s most valuable asset Gatorade under PepsiCo. After

the completion of Quaker Oats acquisition in August 2001, PepsiCo made a number of small,

tuck-in acquisitions. The combination of acquisitions coupled with PepsiCo’s core snacks and

beverage businesses allowed the revenues to increase from approximately $20 billion in 2000 to

more than $35 billion in 2006. PepsiCo’s corporate strategy was diversification and a relatively

new element of PepsiCo’s corporate strategy was product reformulations to make snack foods

and beverages less unhealthy. This brought GFY and BFY products into limelight. In 2006,

Frito-Lay brands accounted for 31 percent of PepsiCo’s total revenues and 51 percent of the

company’s profits. In 2007, improving the performance of the division’s core salty brands and

further developing health and wellness products were key strategic initiatives. Revenues to

PepsiCo’s beverage segment in North America had expanded because the company broadened its

line of non carbonated beverages like Gatorade, Aquafina, Tropicana and Starbucks Cold Coffee.

To compete with Coke, PepsiCo started coming up with new brands and strategies on improved

local distribution. Power of one strategy proved of immense benefit to PepsiCo. Developing an

understanding of consumer taste preferences was a key to expanding into international markets.

In 2006, 75 per cent of Quaker Oats international sales were that of $500 million. PepsiCo’s

management was dedicated to capturing strategic benefits within the business line up throughout

the value chain. PepsiCo’s financial managers expected the company’s line up of snack,

beverage, and grocery items to generate cumulative management operating cash flows of $15

billion between 2007 and 2009. Acquisitions and restructuring led PepsiCo to increase the value

delivered to its shareholders through share price appreciation and a rising dividend. PepsiCo’s

INDIAN INSTITUTE OF PLANTATION MANAGEMENT, BANGALORE

strategies seemed to be firing in 2007. The company’s current growth rates were sustained.

Dividends to shareholders had grown at a compound annual rate of 15 percent between 2001 and

2006 to reach $1.16 per share. In May 2006, the company’s board announced a new $8.5 billion

share repurchase program that would expire on June 30, 2009.

INDIAN INSTITUTE OF PLANTATION MANAGEMENT, BANGALORE