PepsiCo is a leading manufacturer and seller of non-alcoholic beverages in the global beverage industry. The success of PepsiCo is mainly attributed to sound marketing strategies and product differentiation. Due to the high competition in the global and US beverage industry, PepsiCo must always review its marketing strategies and product portfolio. This will enable it to produce the right products and access new markets.
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It is against this backdrop that this report seeks to analyze PepsiCo’s situation and future prospects in the alternative beverage industry. The report begins with the five forces and driving forces analysis.
This will be followed by an evaluation of PepsiCo’s business model and financial performance. A SWOT analysis as well as an assessment of PepsiCo’s competitive strategy will, then, be conducted. Finally, recommendations on how PepsiCo can enhance its position and Future performance in the Industry will be presented.
Porter’s Five Forces Analysis
The Porter’s five forces analysis is a technique used to assess the competitive environment of a business. It particularly assists in gaining insights on the factors that affect competition in any given market. Competition in the beverages market can, thus, be explained as follows.
Threat of Substitutes
Currently, the alternative beverages are competing with a large number of substitutes. Such substitutes include carbonated soft drinks as well as juices. Additionally, the prices of alternative beverages are significantly higher than those for substitute drinks. For example, the prices for sports drinks as well as vitamin enhanced beverages were 50% to 70% higher than the prices of carbonated soft drinks of comparable sizes.
Consequently, there is a possibility that customers shifted their preference from alternative beverages to carbonated soft drinks. Contrary to alternative beverages, substitute drinks such as juices are associated with low health risks.
This differentiation is likely to make substitute drinks a better choice, especially, among customers who are concerned about their health. Thus, the threat posed by substitute products in the beverage industry is high.
The threat attributed to new entrants in the US and global alternative beverage industry is low due to the following reasons. First, the incumbent firms enjoy economies of scale. For example, Coca-Cola and PepsiCo have large production plants and operate in over 200 countries. Besides, the dominant firms command large market shares. PepsiCo, for instance, had 47.8% market share of alternative beverage market in US in 2009.
Second, there is high product differentiation in the industry in order to counter competition. For instance, most companies focus on the taste, image and energy-boosting capabilities of their energy drinks in order to ensure customer loyalty. Third, joining the beverage industry requires a lot of financial capital. It is for this reason that small firms such as Hansen have had to outsource all their production and distribution activities.
Fourth, the incumbents have a great control over the distribution channel. All small firms have contracted bottling companies and distributors such as Anheuser-Bosch to manufacture and distribute their products. Finally, the incumbents have high propriety knowledge in production and marketing. Dominants firms such as Coca-Cola have used patents to prevent new firms from accessing their production techniques.
Power of Suppliers
There are many suppliers of most of the production inputs in the beverage industry. Besides, there are many substitutes for production inputs such as packaging material. Product differentiation in the suppliers’ industry is high since the large number of suppliers leads to high competition.
Additionally, the buyers (beverage manufacturers) are important to suppliers since they purchase large volumes of inputs. However, the buyers have low switching cost. For instance, a manufacturer can easily shift from one supplier to the other. This leads to the conclusion that the suppliers have a low bargaining power.
Power of the Buyer
There are many buyers in the beverage industry. The buyers have low switching costs, and can thus, obtain their supplies from different suppliers. The suppliers’ products are highly differentiated due to competition in their industry.
Besides, the suppliers’ products are of great impotence since they determine the quality of the buyers’ end products. The threat of backward integration is, however, high since the dominant firms such as Coca-Cola and PepsiCo have the financial resources to purchase the input producing firms or to produce their own inputs. Thus, buyers have a moderate bargaining power.
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The threat attributed to competitive rivalry is very high in the beverage industry due to the following reasons. First, there are very many competitors, and this makes it difficult for each firm to expand its market share. Second, the beverage industry has a low growth rate. The industry’s growth rate is projected at 12% in five years (from 2009 to 2014).
This is attributed to the fact that the industry is at its maturity stage. Besides, the 2008/2009 financial crisis negatively lowered demand in the industry. Third, distribution in the industry is associated with high fixed costs and storage costs. Finally, the products are highly differentiated. These conditions have contributed to high competition in the industry.
Driving forces Analysis
Driving forces are both internal and external factors that cause change in an organization. The main driving forces in alternative beverage industry include the following.
The social factors include the behaviors of the consumers of various alternative beverages and the social events associated with the consumption of alternative beverages. Undesirable behaviors such as “mixing alcohol and energy drinks” led to disapproval of alternative beverages. This is because such behaviors can lead to over consumption of alcohol.
The criticism had negative impacts on the demand for various alternative beverage brands. In response to customers’ need to simultaneously consume alcohol and energy drinks, companies such as Miller-Coors developed new products, alcohol energy drinks, which contain both alcohol and energy boosting capabilities.
Demographic factors such as age and occupation also influenced the consumption of alternative beverages. For instance, energy drinks are frequently consumed by teenage males, sports professionals, and manual laborers. Vitamin-enhanced beverages on the hand are highly purchased by adults.
The marketing of most alternative beverages depend on social events. Most producers build their brand image by sponsoring sports activities, and music festivals. For instance, Red Bull sponsors sports such as athletics as a way of marketing its energy drinks. They also depend on celebrity endorsements to enhance the popularity of their products.
The economic performance of a country or region has significant effect on demand for alternative beverages. The financial crisis in US, coupled with the maturity of beverage industry led most producers to seek new markets.
The rapid economic growth in emerging economies, especially in Asia, is expected to enhance demand for alternative beverages. Consequently, producers are exporting their products to overseas markets such as Australia.
At the firm level, high cost of production has forced firms to seek efficient distribution techniques. For instance, small firms outsource various production and distribution activities in order to lower costs.
As competition intensify, firms focus on product differentiation on the basis of quality. This has been achieved through modern technology that facilitates research and development and efficiency in production.
Modern communication technology enhances marketing in the industry by facilitating the design of clever adverts and appealing packaging. Communication technology also promotes synchronization of supply chain activities for firms that outsource various production and distribution activities.
Political and Legal Factors
Alternative beverages such as energy drinks and relaxation drinks have been associated with health risks such as heart arrhythmia. This has a negative impact on the production of these products.
For instance, Miller-Coors had to eliminate the caffeine in its energy drink when attorney generals counseled for the ban of energy drinks with high caffeine content. Besides, health professionals are advising the public to avoid consuming relaxation drinks that contain kava.
Dominant firms such as Coca-Cola and PepsiCo owe their success to their core competencies. Both firms boast of a strong brand image. Besides, they have vast experience in production, and this enables them to access new markets. Finally, environmental factors such as weather patterns affect the consumption of alternative beverages. For instance, energy drinks are likely to be consumed on a hot day.
PepsiCo’s Business Model
PepsiCo directly produces and distributes its range of beverages in the markets it operates in. The customer segments served by PepsiCo include teenagers, adults, sports professionals and celebrities. The value proposition of the firm is characterized with a wide range of beverages and foodstuffs.
The company sells both carbonated drinks such as sodas and alternative beverages such as energy drinks, vitamin enhanced drinks and sports drinks. In order to create value for its customers, each of the company’s drinks is tailored to meet specific needs for every customer segment. For instance, sports drinks are tailor made for sports personalities.
PepsiCo offers its value proposition through different distribution channels. Its products are retailed by “supermarkets, supercenters, restaurants, and natural food shops”. The company also reaches its customers by sponsoring sports and music events as well as advertising its products.
PepsiCo ensures customer loyalty by maintaining positive relationships with them. For instance, it ensures timely delivery of all alternative drinks to retailers such as convenience stores.
The firm has the largest market share for alternative beverages in US, 47.8%. Thus, the sale of alternative beverages is the main revenue stream for PepsiCo. Other revenue streams include the sale of carbonated drinks and snacks.
The key resources that support PepsiCo’s business model are a strong brand image, high product visibility (operates in over 200 countries) and a stable financial position. However, the firm incurs high sales costs (about 46% of its net income).
Evaluation of PepsiCo’s Financial Performance
The firm’s revenue in the 2007 financial year was $ 34,474 million. The revenue grew to $43,251 in 2008, reflecting a 9.6% growth. However, the revenue declined by 0.04% to 43,232 million in 2009. PepsiCo incurred sales costs amounting to $18,038 million in 2007, and $ 20351 million in 2008. This reflected a 12.8% increase in sales costs. In 2009, it managed to reduce its sales costs by 1.2% to $ 20,099 million.
In 2007, PepsiCo made a profit of $ 7,182 million. The profits fell by 3.1% in 2008. Thus, it made $ 6,959 in operating profits. However, the firm managed to increase its profits by 15.6% in 2009. Thus, it made $8,044 in operating profits.
The above information shows that PepsiCo increased its revenue by 9.6% in 2008. However, the increase in sales costs over the same period led to a 3.1% reduction in profits. The reduction in sales costs by 1.2% probably led to the 15.6% increase in profits. Overall, the company remained profitable between 2007 and 2009. We can conclude that it is financially stable.
PepsiCo has the following strengths. It has a large market share that enables it to earn high revenues. Overall, PepsiCo is the “fourth-largest producer of food and beverages”. It also has the largest market share of alternative beverages in US. PepsiCo has a well established brand image. It sells some of the most popular drinks such as Lay’s and Tostito.
The brand image is a core competence that enables it to venture into a variety of markets, thereby increasing sells. Finally, PepsiCo has a stable financial position. Consequently, it can easily finance its expansion programs.
The main weakness of PepsiCo is its inability to outperform Coca-Cola (its main competitor) in the manufacture and sell of carbonated soft drinks. Since carbonated soft drinks and alternative beverages are substitutes, PepsiCo might lose its overall market share if there is a major shift in preference in favor of carbonated soft drinks.
PepsiCo has the following opportunities in the industry. The threat attributed to new entrants is low in the industry. This means that competition is not likely to increase as a result of new firms joining the industry. Thus, PepsiCo has the opportunity to increase its production in order to meet future increases in demand.
The low bargaining power of suppliers in the industry is also an opportunity for PepsiCo. In particular, it has the opportunity to bargain for cheap supplies. Besides, it has the opportunity to obtain high quality inputs as suppliers compete among themselves. The rapid growth in purchasing power in emerging economies is an opportunity for PepsiCo to expand by joining the emerging markets.
The threats facing PepsiCo include the following. The threat attributed to substitute products is likely to constrain PepsiCo’s ability to increase the prices of its products. This will have a negative impact on revenue and profits. Besides, it can lead to significant loss of market share. The threat attributed to competitive rivalry is likely to reduce PepsiCo’s revenue and ability to expand.
This is because sales and marketing costs rise as firms attempt to counter competition through advertising and differentiation. The alternative beverage industry in US where PepsiCo has the largest market share is at its maturity stage. Besides, the economic down turn in US has shifted demand away from alternative beverages. Thus, PepsiCo’s revenue streams from the US market are likely to reduce.
PepsiCo’s Competition Strategy
As a dominant firm in the beverage industry, PepsiCo is pursuing market leadership strategies. The company has focused on market expansion programs by joining new markets. Additionally, the firm focuses on new product development in order to find new market segments.
PepsiCo is also keen in defending its large market share in various regions. This has been achieved through innovation that helps to improve its marketing mix. Such innovative activities involves promotion blitz that engage celebrities and the youth in order to ensure customer loyalty. The firm’s products are constantly improved and differentiated on the basis of quality, tastes and visibility.
The expansion strategy is likely to help PepsiCo to maintain its dominant position in the industry, especially, in the alternative beverage market. However, in addition to being defensive of its market share, PepsiCo needs to be offensive. As more firms compete for the alternative beverage market share, PepsiCo should also aim at increasing its market share for alternative beverages as well as carbonated soft drinks.
Given the analysis of PepsiCo’s competitive and internal environment, the following recommendations can be considered by its management in order to improve its competitiveness.
Cost Leadership Strategy
In order to pursue this strategy, PepsiCo must aim at producing at the lowest cost in the industry. Thus, it can sell its products at the prevailing prices, thereby making higher profits than its competitors. In order to enhance market penetration for its new products, PepsiCo can reduce its prices below the prevailing prices. This will lead to an increase in market share for the new products.
The cost leadership strategy can be implemented by improving production efficiency which reduces production costs. The firm can also focus on optimal outsourcing in order to avoid unnecessary costs. PepsiCo can gain access to cheap and reliable supply of raw materials through backward integration.
PepsiCo has the ability to pursue cost leadership strategy since it has the financial resources to invest in production assets. Such an investment will be an entry barrier to the small firms that lack adequate financial resources. PepsiCo also has the experience and expertise in manufacturing high quality products. Additionally, its efficient distribution channel will enable it to reduce sales costs.
The benefits of this strategy are as follows. First, the ability to reduce prices will act as an entry barrier to firms that intend to join the alternative beverage industry where PepsiCo has the largest market share. Second, PepsiCo can use low prices to counter the threat attributed to substitute products. Finally, competing on the basis of price will enable PepsiCo to counter the threat attributed to competitive rivalry in the industry.
This involves producing products that “offer unique attributes that are valued by customers”. Currently, every firm in the industry is focusing on product differentiation, thus, PepsiCo can only defend its market share by doing the same. In this context, the firm must continue to improve its existing range of products. This will enhance customer loyalty. Besides, it must produce new products that meet emerging needs of the market.
PepsiCo has the ability to pursue the differentiation strategy since it has the financial resources to undertake research and development. The research and development will help in developing high quality products. Additionally, it has a reputation for producing high quality products through innovation.
The benefits of differentiation strategy include the following. Customer loyalty will act as an entry barrier if potential entrants can not attract PepsiCo’s customers. The customers will be attached to the differentiating characteristics, and this helps in countering the threat posed by substitutes. Finally, brand loyalty will help in countering competition.
PepsiCo is a leading manufacturer and seller of various beverages and foodstuffs. The analysis of the competitive environment indicates that suppliers have low bargaining power. The substitute products and competitive rivalry pose high threats in the industry. However, new entrants have low threats for the incumbents. These forces present both threats and opportunities to PepsiCo as discussed above.
The main driving forces in the industry include technology, social, core competence, political/legal and economic forces. PepsiCo’s main strengths are its brand image and large market share. Its main weakness is its inability to lead in the carbonated soft drink segment. In order to improve its competitiveness, the firm can pursue both cost leadership and differentiation strategies.
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