Pepsi Case Study Essay
Pepsi Case Study
Maintain competitive focus, while splitting PepsiCo and creating governance for the new Pepsi Bottling Group.
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 doomed if they continued down the same path. Pepsi made the right choice exiting the casual dining market, with a slimmed down more focused future they could now focus on new profitable ventures.
Pepsi’s biggest challenge now was to “reinvent itself and become a more formidable competitor.” A looming opportunity for Pepsi to be a more effective competitor would be if they were to mimic Coca-Cola’s CCE, which would raise billions of dollars. The result would make Pepsi more competitive and responsive to their customers by allowing them to separate and focus on different functional areas of the company. The newly created Pepsi Bottling Group (PBG) would be the world’s largest manufacturer, seller and distributor of carbonated and non-carbonated beverages, which will provide PBG billion in cash when it goes public. The biggest challenge however was not the IPO, but rather creating a system of corporate governance to see PBG into the future. Craig Weatherup, current president of PepsiCo, CEO of worldwide beverages is faced with splitting PepsiCo’s worldwide bottling company from its concentrate business and the public offering of the PGB, which he would become CEO, and establishes their governance.
Business began in the Great Depression when it started competing with Coke offering twice the volume for the same price. The cola wars officially began in the 1950’s and continued throughout the century. Intense advertising battles, new packaging, new product introductions, international expansion and price wars erupted between the two companies. Pepsi captured Soviet markets and scored other international successes while Coke international success was dwindling due to poor relations with bottling partners. Pepsi profited from another of Coke’s mistakes, when Coke launched “New Coke”. However, Pepsi’s luck was short lived when Coke reinstated its old recipe.
Originally Coca-Cola agreed to fix price contracts to allow for some adjustment with bottlers. In the 1980’s coke announced a refranchising plan that would eliminate weak bottlers, and expand large bottlers outside of their geographic territories. Additionally coke started to buy all of its bottlers, and created Coca-Cola Enterprises (CCE), and independent bottling subsidiary, selling 51% of its shares. By 1998, CCE accounted for more than 60 per cent of Coke North America’s volume and had worldwide sales of approximately $15 billion. The environment of PBG’s IPO was not ideal despite its anticipation by the market as everyone and everything was focused on the dot-com world. Identification and Evaluation of courses of action
In order to stay competitive with Coca-Cola, PBG must happen in order to bring in cash flows for future investments. The most difficult task will be to assemble the new board for Pepsi Bottling Group and meeting deadlines by which the CEO of Pepsi must have a board of directors in place. Corporate governance is the set of rules affecting the way Processes, customs, policies, laws, and institutions a corporation is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. The most likely form of governance for Weatherup to take would be the market-based, most common in the U.S. because of its correlation with the stock market and prices. Since the markets are the primary source of capital, investors are given the most power in determining corporate policies. Therefore, the system relies on the capital markets to exert control over the corporation’s management.
Weatherup knew that changes of this magnitude could cause widespread confusion, so one way he could quickly assemble a board and governance would be to fall back on old colleagues and executives of PepsiCo and model PBG with similar persons and mechanisms. An option would be to try to imitate Coca-Cola’s board, and obtain members from their board. Mimicking successful past behaviors of Coca-Cola has boasted well for PepsiCo in the past, so it is likely that new governance similar to theirs would work too. In the past, it has shown that when Pepsi deviates from what Coke is doing it often results in negative outcomes for Pepsi. Having a similar board of directors could keep Pepsi in more of a Coke frame of mind and combine the best from both worlds. A negative drawback to this option would be that it would be very possible for future conflicts of interest and corruption with such close ties.
Another option could be, for all of the responsibilities Weatherup is facing he could simply appoint someone else whom he sees fit, from the new board, to serve as CEO in the near future, and have them work closely with Weatherup as he establishes systems, and policies making sure everything stays in line with the original focus. That way you would have his knowledge, skills, and expertise to establish the governance and complete all of the executive duties, but his predecessor would be there watching to see how it was all created and will soon run, it would be similar to an apprenticeship. A positive outcome is that everything would occur on time by the preferred persons.
A negative is that people may have doubts in the new CEO’s ability to run the company without the presence of Weatherup, and such uncertainty, could cause for stock prices to fall. Another option could be for Weatherup to ask for an extension for when PBG goes public. He is said to be “wearing many hats, stretched too thin, etc.” Extra time would prevent Weatherup from having to rush through policy establishing processes, and could give him the option of picking the very best board of directors available rather just the first people available. Another pro to this option is that it is mentioned that the dot-com. stocks are what is making all the money, so waiting to sell the IPO’s could turn out to be more profitable in the long run.