Pepsi Company is an American multinational company that manufactures and distributes foods and beverages to over 200 countries. The company was founded in Delaware, United States in 1965. Its headquarters are in Purchase, New York. The company has five divisions, namely: PepsiCo American Foods (PAF), PepsiCo Europe, PepsiCo Americas Beverages, and PepsiCo Asia Middle East and Africa (AMEA). The company manufactures non-alcoholic beverages including carbonated soft drinks, ready-to-drink tea, and juices. It also manufactures foodstuffs such as flavored snacks, chips, cereals, dairy-based products, and pasta. Pepsi Company owns nine of the forty largest packaged goods trademarks within the United States. It owns several brands, including Pepsi, Gatore, Lays. The company and its subsidiaries generate more than $1 billion in revenue each year. Before becoming Pepsi Company, the multinational company was registered as Pepsi-Cola Company in 1902. After various rebranding efforts, owners settled with the brand Pepsi. Its mission is to become the world’s premier consumer products company dedicated to convenient foods and beverages. In addition to this, the company seeks for producing financial rewards to investors as well as providing opportunities to communities in which it operates. Its fundamental principles of working emphasize honesty, fairness, and integrity.
The company’s financial landscape is doing exemplary well. In 2015, Pepsi Company expects seven (7) percent constant core earnings per share growth. Considering that the company has a history of devaluing its growth, it is possible that the predictable growth surpasses estimated levels. For instance, in 2013, Pepsi projected its growth to be 7% while the actual growth amounted to 9%. Additionally, Pepsi Company has succeeded over the last period to grow its revenue as well as dividends per share at an average growth of 9% annually. Based on this history, it is possible that the company surpasses its 7% target.
Standard Industrial Classification
Standard Industrial Classification (SIC) code for Pepsi Company is 2086. This SIC code classifies manufacturing companies that deal with bottled and canned soft drinks and carbonated waters. Since Pepsi Company operates within foods and beverage industry, its SIC code resembles that of beverage manufacturers. The first three digits of the code signify the industry group while the first two numbers of the code specify the major group.
Pepsi Company manufactures and distributes a range of convenient and enjoyable foods and beverages in five divisions. It targets non-alcoholic beverage consumers as well as those people who are diet cautious. Its main customers include official bottlers and autonomous distributors as well as food retailers and food service distributors. Pepsi Company grants its bottlers exclusive contracts in which the latter are empowered to sell and produce certain beverage goods that bear Pepsi trademarks within a stipulated geographic area. Such strategic customer arrangements enable Pepsi to charge them for concrete, Aquafina royalties and finished products, as well as to specify appropriate manufacturing process necessary for ensuring product quality.
Pepsi does not sell directly to consumers. Instead, it relies on and provides financial incentives to its consumers to help in promotion and distribution of company products. The incentives for independent retailers and distributors include product placement fees, volume-based rebates, promotion and displays. The company’s customers also comprise of bottlers and food service distributors. Pepsi Company provides bottler funding which is negotiated on an annual basis to bottlers as a means of supporting variety of consumer and trade programs. Moreover, the company offers consumer incentives, pricing discounts, and other promotional offers in order to attract new customers.
Major customers of Pepsi Company include Wal-Mart, Sam’s club, Starbucks, Family Dollar Stores, Big Lots, Campel Soup, Yum brands, and Darden restaurants. The largest customer for Pepsi Company is Wal-Mart stores, which generates approximately $114,826 million in revenue in quarterly reviews. Big Lots, Darden restaurants, and Campbell soup are respectively the second, third, and fourth largest customers of Pepsi Company.
Pepsi uses a three-channel distribution network to reach its customers. Its products reach the market through direct store delivery, third-party distributor networks, and customer warehouse. Because of the highly competitive nature of the industry, Pepsi has to reach its customers using the most effective means. As such, the company chooses the most relevant distribution channel based on consumer needs, local trade practices, and product characteristics. Under direct store delivery system, the company supplies products directly to retail stores, which form part of its customers. This system enables Pepsi to merchandise to its retailers with maximum visibility. In addition, the system is considered suitable for products, which are constantly restocked and sensitive to marketing and promotions. Under third-party distributor network system, the company sells beverage products and foods to businesses, schools, restaurants, and stadiums. This is possible through vending distributors and food service operators. The other distribution option is realized through customer warehouse, a less expensive distribution channel in which the company opts for distributing products that are less perishable and fragile. Pepsi uses customer warehouse when goods are not purchased impulsively.
Pepsi has ownership interests with its bottling customers. The company has less than a half of ownership of these consumers; hence, it does not consolidate their results. Nonetheless, the company has classified PBG, Pepsi bottling venture, and Pepsi Americas as its anchor bottlers. The anchor bottlers participate in bottler funding programs.
Pepsi recognizes its customers as the key to the company’s success. This is the reason the company believes in friendly and close collaborations with every customer, striving for building trusted relationships with all customers. In Greece, Pepsi sells products directly to wholesalers and retail chains. It also sells to cantinas, kiosks, and other small scale and large-scale companies.
Determinants of Demand
In the United States, Pepsi Company is the second largest non-alcoholic beverage manufacturer. Its dominant position helps drive demand and enjoy favorable relationships with retailers. Such relationship with retailers allows the company to have major shelf space in which the company operates influencing consumer-shopping patterns. In addition to this, a strategic alliance with retailers increases the coincidence of purchase of its complementary food and beverage products. Customers are allowed to invest in Pepsi Company through the exchange-traded funds, which increase the company’s attractiveness to customers.
Various factors influence demand for Pepsi products including pricing, income, consumer expectations, and price of related goods among other factors. There is a high demand for Pepsi products because the company engages in friendly pricing through cost leadership strategy. The prices of its products are always affordable irrespective of geographic location. This makes products not only accessible to consumers but also attractive. There exists an inverse between the price and amount of product produced, which consumers are willing and able to purchase. In a perfect market, consumers are willing to buy products that are retailed at a low price compared to those being highly priced. The inverse relationship is regarded as the law of demand. In this context, customers are willing and able to buy more of Pepsi products because prices are relatively low.
Income also determines the amount of products that consumers are willing and able to buy. With high income, consumers will tend to purchase more because they have means and ability to buy. Generally, when income increases, demand for product will also increase. Having ventured in consumables industry, Pepsi is strategically positioned to sell to customers and to influence demand by offering attractive products regardless of consumer income. Nonetheless, since income plays an important role in determining demand value, its effect in terms of Pepsi products demand is not an exception. With some market segments earning more than others, the demand for its products thus vary.
The prices of related and substitute products also influence the demand for Pepsi products. In a comparative analysis considering Pepsi pricing and that of competitors, Bailey established that Pepsi product pricing is excessively lower than competitors' one. For instance, a 500ml can of non-Pepsi coke is retailed at $0.15 higher than that of Pepsi. Since goods are considered to be substitutes for one another, consumers do not have to use them both. Therefore, consumers have to choose between one an another option making Pepsi the most attractive choice. In addition, the law of demand makes it obvious that consumers will go for cheaper brand.
It seems that Pepsi products are manufactured to match tastes and preferences of consumers. Pepsi provides consumers with a wide range of products to choose from; thus, they have alternatives when it comes to selection. This way, customers are able to develop demand for products available to them. Another factor which plays role in influencing demand for Pepsi product is consumer expectations. Consumers are expecting high-quality and tasty products. To match these expectations, Pepsi constantly engages in consumer surveys and promotion strategies, which allow the company to collect feedback and ask consumers what they desire from the company's products. In its manufacturing efforts, Pepsi tries to incorporate consumer demands into its products making almost all of them to match consumer desires. Finally, the seasons influence demand for different products manufactured by Pepsi. For instance, in summer season, consumers will tend to drink cold and carbonated beverages. However, during cold seasons and winter, consumers will tend to prefer warm beverages. This way, a range of available options makes it possible to provide consumers with products that match season needs.
Elasticity of Products
Substitute products for Pepsi goods are mainly competitors’ ones. The closest rival of Pepsi is Coca-Cola Company, Mondelez International Inc., Nestle waters, and Dr. Pepper Snapple Group. The competitors manufacture non-alcoholic beverages and are a threat to Pepsi products. Coca-Cola provides the largest competition because it is the leading non-alcoholic beverage manufacturer worldwide. In measuring elasticity of demand, the relationship between changes in needed quantity and price is determined. This helps understand price sensitivity in relation to demand. A small change in price is likely to cause a shift in demand patterns especially because customers will switch to substitute products. This is because beverages manufactured by Pepsi are not highly differentiated with those of competitors while pricing differs slightly. As such, demand for Pepsi products can be said to be elastic.
Price Level Relative to Customers’ Budget
Upward adjustment in product prices is likely not to keep customers from switching to alternative goods because Pepsi products are not compulsory goods. It is possible for customers to do away with consumption of such products. Additionally, because of increased competition stemming from close competitors, upward adjustment can prompt customers to switch to alternative products. The inverse is not true. When prices fall, demand will increase from within and not from external. This happens because if competitors chose to maintain their prices and Pepsi adjusts its prices downwards, loyal customers of competitors will maintain shopping competitors’ products. However, those inclined to Pepsi products will tend to purchase more. Therefore, prices retailing within customers’ budget will attract increased demand.
Durability of Product
Beverages are carbonated, thus long-lasting. This makes it possible to manufacture beverages in large quantity because their shelve life is long.
The elasticity of demand is the percentage of change in quantity demanded over the percentage of change in price. Say the price of a beverage increases by fifteen percent, the quantity demanded is likely to fall by thirty percent. This means that price elasticity of demand is two, implying such elasticity to be perfect. According to Colander, when the result of price elasticity of demand is greater than one, then the demand is perfectly elastic. Otherwise, if the result is one or less, then the demand is inelastic. In beverage industry, beverage prices are almost constant since there are no major shifts in the market. Changes in prices are gradual but it takes a very long time to alter them. From this perspective, it is possible to conclude that elasticity of demand is perfect with changes in prices, including those of competitors affecting demand for products.
Sales and Profit Growth Rates
The carbonated beverage industry is highly fragmented yet highly competitive as indicated in financial statements of companies operating within the industry. John Sicher argues that the industry has giant competitors who produced slightly differentiated products, making competition stiff. In addition, Coca Cola is the major competitor in the beverage industry. Sicher established that this company sold about 4.5 billion cases which are equivalent to one third of total cases sold in 2014. Pepsi was the second, selling 3.2 billion cases. Cadbury became the third most selling company in 2014. Thus, the market share in 2014 among the top two carbonated beverage manufacturers was shared with Coca Cola dominating by 43.1% of total market share while Pepsi commanded 31.7% of the total market share. These market share figures have declined slightly between 2013 and 2014. For Coca Cola Company, the market share decreased by 1% while that of Pepsi Company increased by 0.4%. Other companies in the carbonated beverage industry that recorded growth include Diet Coke which posted a 5% growth while other top brands witnessed a decline. Coca Cola’s market position according to market watch has declined significantly since then. Cott Corp witnessed an overall growth of 18% which is relatively higher than that of Coca Cola and Pepsi combined. According to the American Beverage Association (2014), retail sales for entire soft-drink industry in 2013 were $65.9 billion. Another analysis by Barbara Murray looking into industry averages of 2012 and 2013 revealed an average net profit of 11.29%. In addition to this, there was a current ratio average of 1.11 while the quick ratio average stood at 0.8. The average fiscal performance of the business helps to analyze the fiscal statements of the major corporations. From 2013 to 2014, Coca Cola Company recorded an increase in profit margin by 1.4, from 20.7% to 22.1%. The annual fiscal report for Coca Cola Company in 2014 indicates that 80% of the company sales stemmed from soft drinks. As such, the total sales were consistently used for financial analysis. From the report, it is evident that profits of the company have been increasing. However, the growth in profits has been painfully slow.
As it was pointed out above, the beverage industry is highly competitive while growth remains at a stable level. This means a slight increase in profit resulting from differentiation and product development. For instance, an increase of profit margins in Coca-Cola Company resulted from its venture in the energy drink product line. The energy drink product line is rapidly expanding and providing an opportunity for beverage companies to increase their profits.
In 2014, the net income for Coca Cola Company stood at $7 billion, $0.448 less than that of 2013. Net income for the company has been declining since 2012. The decline in net profits is attributable to lowering total revenue and increased operating expenses. However, the company’s increased working capital shows that it had sufficient funds to exploit new opportunities. However, quick declining and current ratios are worrying issues. In 2014, the company’s current ratio was 1.102, which means Coca Cola is not liquid. This shows the company may not afford enough funds to finance its short-term claims. Moreover, paying short-term debts may prove problematic to the company. The quick ratio as of 2014 stood at 0.906. Quick ratio is considered good when it is more than 1, implying that it is not desired. Coca Cola, which is the greatest competitor of Pepsi, may not be able to satisfy its short-term obligations.
Financial statements of Pepsi Company are difficult to analyze because the company does not distinguish between its business segments. For instance, over half of Pepsi profits come from snacks and other beverages, yet sales and profit figures are drawn from their two beverage subsidiaries. In 2012, total revenue of Pepsi Company amounted to $65.4 billion while the same in 2013 stood at $66.4 billion. In 2014, total revenue of company increased to 66.6 billion. The growth is replicated in gross profit while net income increased in 2013 but declined in 2014. Pepsi Company, whose financial year ends on December 27th, recorded profit margin of 7.83% and operating margin of 15.26%. According to the latest income statement, Pepsi Company has revenue base worthing 64.42 billion.
Pepsi’s operating profit is on an increase. However, the growth is sluggish. This growth is attributable to introduction of new products in industry, especially energy drinks, which is an effort of product innovation. In addition, Pepsi products gained popularity in 2014.The financial report for year 2014 showed beverage sales volume increased by 4%. This growth was attributable to high growth of non-carbonated beverages industry.
Comparing Pepsi’s financial performance to those of other three main competitors, it is evident that the industry experiences high competition and little growth. For instance, net profit margins increased for competitors as well as for Pepsi Company, but this increase was very small. Additionally, Pepsi's three competitors clearly suffer similar business challenges including financial underperformance. Comparing quick ratios and current ratios for Pepsi Company and that of competitors, it is evident that there is a lack of sufficient quick and current ratios within the industry. The reason behind such performance is explainable by evaluating expansion efforts of the companies. The three top competitors in non-alcoholic beverages industry have been engaged in the recent past in numerous expansion efforts with Pepsi, Coca-Cola and Dr. Peeper Snapple Group diversifying their product offering. The diversification is also an effort to increase profits and spread business.
Assessing the industry, one can conclude that it is mature. The market is mature too because the growth in industry has become stagnant. Financial statements of major competitors are consistent with the stagnant growth in the industry.
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The future of Pepsi and that of competitors lingers in balance if the companies fail to diversify and invest in product innovations. As a recommendation, it is important for the companies to diversify in order to remove past stagnation they are presently experiencing. Especially for Pepsi, being the second largest non-alcoholic beverage manufacturer, it places the company at a favorable position if it attains differentiation. Firstly, the company has substantial capital that can be invested in product innovation and diversification. Secondly, Pepsi has experienced and dedicated labor force that can steer the company towards the much desired change. In addition to this, the company is a leading beverage manufacturer; thus, it has an established base of loyal customers.
The beverage industry is saturated with competitors. Therefore, the threat of new entrants is insignificant. However, if a new entrant succeeds in penetrating the market, it is possible they can turn the tables around to win customers if the new entrant produces unique and differentiated non-alcoholic beverages. Reports suggest that the beverage industry is no longer expanding, and market share is on the fall because consumers are tending to opt for healthier foods. As customers become more health conscious, it creates an opportunity, which early movers might greatly benefit if well leveraged. If Pepsi Company is able to successfully introduce new products often, it will be able to increase its profits. At the same time, it will allow company to grow. Having a diverse range of product offering will tend to make the company stable. Additionally, having the diverse product line is appealing to creditors and investors. This means product diversification will place the company at a financial advantage.
Pepsi also ought to sustain its existing market share. This is possible because the company is the second largest manufacturer of non-alcoholic beverages implying that it will need to continue with existing market leadership strategies. This is important because the company’s market share is the main source of its profits. Losing global market share will lead to decline in profits and consequently affect business operations negatively. Pepsi Company will also need to work on brand strengthening in order to ensure competitors do not emerge stronger.
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