PepsiCo: Acquisition-driven success

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Since its entrance on the market in 1893, Pepsi has grown into one of the world’s leading beverage brands. However, not content with battling Coca-Cola for top dog in the carbonated beverage market, Pepsi’s parent company, PepsiCo, has crafted their way to the position of the world’s second largest beverage and snack producer. How was this achieved? The answer is simple: effective management of their brand portfolio.

Pepsi’s first step in diversifying their brand portfolio was made in 1965 when they acquired snack producer Frito-Lay to create PepsiCo. This elevated Pepsi from just a carbonated beverage producer and increased the number of markets in which they could make an impact.

After diving into the fast food market from the late-1970s, PepsiCo restructured their brand portfolio in 1997 and returned to their core focus of snacks and carbonated beverages.

The purchase of orange juice company Tropicana Products in 1998 was the start of a move into the non-carbonated drink beverage, a strategy that was further expanded on with a merger with Quaker Oats Company in 2001. This was primarily for their Gatorade sports drink, but a number of snack foods were also added to the PepsiCo portfolio. In addition, PepsiCo also developed new products in the form of waters Amp and Aquafina, and completed several joint ventures, with their partnership with Starbucks leading to the bottled Frappuccino.

It is these developments that have seen PepsiCo grow into the world’s second largest food and beverage company:

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Brand portfolio by world’s largest food and beverage companies (image courtesy of http://www.strategicmanagementinsight.com)

In 2015/16, PepsiCo had 22 brands that generated more than a billion dollars in revenue:

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PepsiCo’s 22 Billion Dollar Brands (image courtesy of http://www.suredividend.com)

Klopper & North suggested that there are three strategies that can be used to build a brand portfolio: brand development, brand acquisitions, and brand alliances. PepsiCo have primarily adopted the brand acquisition strategy and it has paid dividends – and they have been immediate.

Amy Ritchie, CFO for investment bank ArchPoint, noted some pros of an acquisition strategy: “The benefits [of brand aquistion] tend to aggregate into two key areas. They are generally either capability building or consolidating—and capability building provides better return on investment at the one and two year marks.”

This quick return on investment can be seen in PepsiCo’s share of the US non-carbonated beverage market increasing from 37.6 percent in 2000 to 45.6 percent in 2003.

Breakdown of PepsiCo’s Q1 2016 Earnings (https://youtu.be/pZ7ZrjwVvEc)

PepsiCo’s brand reputation has also played a key role in their growth; poor brand equity would have stymied even the most shrewd of acquisitions.

Walsh et al. proposed a customer-based checklist to measure brand reputation that features five factors:
1. How does the consumer perceive the organisation in terms of how employees are treated and how it treats consumers?
2. Is the organisation regarded as a “good employer”?
3. Is it a financially stable and reliable organisation?
4. What is the quality of its products and services? Consider the age of accountability and transparency. It’s not just about quality of products, but also the integrity of products.
5. What is its contribution to society and the environment?

If one asks these questions in the context of PepsiCo, the company is found to be in good stead.

In 2013, Euromonitor International polled consumers to find the most popular snack brands in the US – the results showed that six of the 10 most popular brands were owned by PepsiCo.

CoreBrand conducted a study in 2014 that polled 10,000 executives, with brands ranked according to familiarity and favorable feelings toward them, company management and investment potential. PepsiCo ranked second.

An obvious target for criticism due to the number of high-sugar, high-calorie products in their portfolio, PepsiCo have also made nutrition and environmental issues a focus.

PepsiCo’s Recipe for the Next Billion (https://www.youtube.com/watch?v=u1k_8uKHbUY)

Speaking of an increased focus on nutrition, PepsiCo CEO Indra K. Nooyi said: “We invested in research and development to improve the nutritional value and increase the appeal of our Fun-For-You products by eliminating trans fats and reducing salt, fat and added sugar content in key brands.”

She added: “In 2014, our nutrition businesses accounted for approximately 20% of PepsiCo’s net revenue. We are one of the top companies in the world in the growing everyday nutrition space.”

In 2010, PepsiCo joined other manufactures in forming the Healthy Weight Commitment Foundation. The foundation pledged to collectively cut one trillion calories from their products sold by the end of 2012 and 1.5 trillion calories by the end of 2015. A 2014 study found the pledge had led to a reduction in calories sold in the US by 6.4 trillion – more than four times the amount they had pledged to cut by the following year.

Achievements such as this which will continue to enhance the PepsiCo brand and ensure that their reputation remains strong in an increased age of accountability and transparency. With social media and the internet resulting in a constant spotlight on brands, not even the slightest slip-up will go unnoticed. Award-winning brand consultant Simon Mainwaring highlighted this fact when he described the key to brand success as: “self-definition, transparency, authenticity and accountability.” Follow Simon on Twitter: @simonmainwaring.

Through an acquisitions-based brand portfolio strategy, and with a strong brand reputation, PepsiCo have developed into a global powerhouse in the beverage and snack industry. Acquisitions, together with clever partnerships, have given rise to immense growth, and as such continuing on this course appears prudent. While markets continue to develop and change, PepsiCo have stayed the course for many decades, and they are unlikely to lose their place in the upper echelons.

Bibliography
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Available at: http://archpointgroup.com/brand-development-building-vs-buying/
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Forbes, 2014. Coke, PepsiCo among most respected U.S. brands; Best Buy, Penney laggards. [Online]
Available at: http://fortune.com/2014/07/14/coke-pepsi-brands/
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Jurevicius, O., 2016. PepsiCo SWOT analysis 2016. [Online]
Available at: https://www.strategicmanagementinsight.com/swot-analyses/pepsico-swot-analysis.html
[Accessed 5 November 2016].
Klopper, H.B., & North, E. 2011. Brand Management. Pearson: Cape Town
Nooyi, I. K., 2015. PepsiCo Annual Report 2014. [Online]
Available at: https://www.pepsico.com/Annual-Reports/AnnualReport14/ceo_letter.html
[Accessed 5 November 2016].
Shu Wen Ng, M. M. S. a. B. M. P., 2014. The Healthy Weight Commitment Foundation Pledge. [Online]
Available at: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4171694/
[Accessed 6 November 2016].
Stephen J. Carlotti Jr., M. E. C. a. J. P., 2004. Making brand portfolios work. [Online]
Available at: http://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/making-brand-portfolios-work
[Accessed 5 November 2016].
Sure Dividend, 2016. PepsiCo’s 22 Billion Dollar Brands & Future Growth. [Online]
Available at: http://www.suredividend.com/pepsicos-22-billion-dollar-brands-future-growth/
[Accessed 5 November 2016].

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