Pepsico's 'Focus' Strategy

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Case Details:

Case Code : BSTR118
Case Length : 15 Pages
Period : 1996-2004
Organization : Pepsico
Pub Date : 2004
Teaching Note :Not Available
Countries : USA
Industry : Consumer Packaging

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Background Note

PepsiCo was formed in 1965 by the merger of Pepsi-Cola and Frito-Lay⁵ (#1 maker of snack chips in the world). The company's popular drink, Pepsi-Cola⁶ had been invented in 1898. In a bid to generate faster growth for the company, PepsiCo diversified into the restaurant business through a series of takeovers. It purchased Pizza Hut in 1977, Taco Bell in 1978 and Kentucky Fried Chicken in 1986. Soon, PepsiCo emerged as a world leader in the restaurant business.

In 1986, PepsiCo was reorganized and decentralized by combining its beverage operations under PepsiCo Worldwide Beverages and snack food operations under PepsiCo Worldwide Foods. In 1986, PepsiCo purchased 7-Up International, the third largest franchise soft drink outside the US. In 1988, the company reorganized along geographic lines - East, West, South and Central regions - each with its own president and senior management staff. Over the years, PepsiCo took several steps to bring its three restaurant chains together into a single division so that they could grow rapidly. The company brought all operations under a single senior manager and combined many back office operations like payroll, accounts payable and data processing, purchasing real estate, construction, and information technology.

The company also took up aggressive re-franchising to improve financial returns and restaurant operations. With revenues of $17.80 bn, in 1990, PepsiCo was ranked among the top 25 of the Fortune 500 companies. By 1995, PepsiCo's sales had crossed $30.42 bn, and with 480,000 employees, Pepsi had become the third largest employer in the world after Wal-Mart and GM.

Roger Enrico (Enrico) became the CEO of PepsiCo in 1996. Immediately afterwards, PepsiCo's performance deteriorated as it faced intense competition from Coca-Cola in both the domestic and overseas markets. For the fiscal year 1996, PepsiCo's beverages division reported an operating profit of just $582 mn on $10.5 bn in revenues as compared to Coca-Cola, which reported an operating profit of $3.9 bn on $18.5 bn revenues. In the same year, Pepsi Cola's market share lagged behind Coca Cola by the maximum margin in over two decades. According to Beverage Digest, an industry newsletter, Coca-Cola's Sprite brand had replaced Diet Pepsi as the fourth-largest selling soft drink in the US while Diet Pepsi had dropped to seventh...

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5] Frito Lay's snack food operations started in 1932 when two separate events took place. In Texas, Elmer Doolin bought the recipe for an unknown product. The product was Fritos brand corn chips and his firm became the Frito Company. That same year in Nashville, Herman W. Lay started his own business distributing potato chips. Lay later bought the company that supplied him with the product and changed its name to HW Lay. The Frito Company and HW Lay merged in 1961 to become Frito-Lay.

6] Caleb Bradham, a pharmacist, invented Pepsi-Cola in New Bern, North Carolina, when he was experimenting to create a new drink for his customers. Bradham started selling the drink and when it gained popularity, he decided to set up a company to market his drink. Pepsi-Cola Company was set up in 1902, where Bradham mixed the syrup himself and sold it through soda fountains.