Strategic analysis of Pepsi Co.

Strategic analysis of Pepsi Co.Strategic Analysis PepsiCos Restaurant Business DivestmentIntroductionIn 1997, Pepsi Co announced that it would spin-off its eating place transmission line into a separate publicly traded conjunction with issuance of tax free new stocks. The argument put forward by the PepsiCo upside management was that the degenerate would like to cin one casentrate on its perfume carbonated beverage business. It would be complemented by the high profit yielding bit foods social class of Frito Lays.The figures below for FY 96, show that the eating house business contributed the least to the profits earned by PepsiCo conglomerate. This was largely attributed to the sluggish growth in this segment.PepsiCo was compelled to take the divestment route to rise its stock price and somewhat mollify the investors, analysts and the markets in general.I believe the new restaurant company will be a powerful brass section with great potential. For the separated compan ies, independence would make them far more capable of improving their operations to create solid, sustainable growth.PepsiCo emphasized that it already has taken stairs to prep are its compasss for independence, including consolidating their payroll, accounting, purchasing, data processing, construction and real- nation functions as well as unifying foreign operations under a single management team. Franchisees uncoerced to comment on the spin-off gave upbeat assessments of the deal.David Adelman, restaurant analyst at Dean Witter Reynolds predicted that Intangible boon to the spun-off restaurant company would be greater dress of ownership. Its managers could be inspired by a more direct compensation correlation amongst what the company earns and their rewards.Larry Walker, controller for Holland Foods Inc., a 17-unit KFC franchisee in Texarkana, Texas, said that, afterwards the spin-off, These separate companies will have a clearer direction. PepsiCos been a conglomeration you get confused when you try to run that many businesses.Besides TGI would benefit from certain advantages once it is spun off from PepsiCo Sound commercial credit ratingHigh cash flow contribution from franchising fees and royaltiesStrong asset base in its real estate portfolio and ownership of nearly 13000 restaurantsPepsi did non transfer any of its $9.5 million outstanding debt to the new companyTricon Global International (TGI)Tricon Global International (TGI) is the holding company for the three restaurant brands of PepsiCoKentucky Fried Chicken (KFC)Taco BellPizza HutIt owns, franchises or licenses the 29,000 worldwide branches of the three cooking stoves, whose worldwide sales exceeded $20 billion in FY 96 and was second only to $32 billion sales of McDonalds. The newly formed entity TGI would besides be the worlds largest chain in terms of the do of outlets under its management, with around 29000 units.Kentucky Fried Chicken (KFC)Kentucky Fried Chicken was started in 193 9 in Corbin, Kentucky. After ownership changed hands through the decades, it was fin anyy acquired by PepsiCo in 1986 and rechristened as KFC.KFC primarily offers fried chicken recipes of which the iconic one is the Original Recipe prepared with secret blend of 11 herbs and spices. It was devised by the restaurant chain founder, Colonel Harlan Sanders. It later started to complement the mainstay product with add-ons like bread, potatoes, gravy, desserts and non-alcoholic beverages and also offered non-fried chicken dishes.The food is prepared and delivered on made-to-order basis, as and when guests place orders.KFC is the market d stabbinging card in chicken QSR with 55% of the market share in the US in 1997. As of 1997, KFC operates 10397 outlets in 79 countries.In the US, KFC operates 5120 outlets either through franchises or through licensees. TGI is aggressively developing non-traditional outlets like educational campus, airports etc, where it expects to realize significant re venue that would reinforce sales from traditional outlets.KFC also has a significant internationalistic presence, with its major markets as belowTaco BellTaco Bell was founded by Glen Bell in 1962 in Downey, California. It gradually grew into a restaurant chain specializing in Mexican food with a pan-American outlet network. The chain was acquired by PepsiCo in 1978 and made a part of its restaurant chain.Taco Bell offers ordinary Mexican food like tacos, burritos, salads and nachos. The delivery is done after preparation of the order placed by the customer. As of 1997, it was the dominant player in the Mexican fast food category, commanding 72 % share of the US market. Pizza HutPizza Hut was started in 1958 by Frank and Dan Carney in Wichita, Kansas. At the time of its debut, pizza parlors dedicated outlets for pizza was unheard of, and the concept soon caught up across the US. Business expanded, even went overseas (starting with Canada) and PepsiCo finally took over the firm i n 1977, to make it an integral part of it restaurant division.The main offerings are pizzas, appetizers, pasta, sandwiches, dessert and non-alcoholic beverages.Pizzerias prepare the food after the customer places the order while take counters serve readymade pan pizzas. Future RoadmapTGI would adopt the following scheme to re-invigorate the erstwhile restaurant business of PepsiThe top priority was to addresses the high employee turnover endemic to the industry. To follow through this goal, Tricon gave each Restaurant General Manager (RGM) a one-time, $20,000 stock option grant called YUMBUCKS. This plan provided an opportunity to earn even more options based on the RGMs restaurant performance, along with a unique program to recognize outstanding restaurant teamwork.Through product innovation, advertisement, promotions and customer suffice, TGI would aim to gain same stash away sales growth. Tricon also would combine the three brands within single restaurants in an effort to g ive customers more choice under the same roof and increase the chance of a share of their wallet.By working closely with top-performing franchisees and company operators, TGI would seek more effective ways to bring down approachs. To supplement economies of scale, TGI purchases its food, radical goods and equipment for all its U.S. restaurants through a $4 billion cooperative. The company also uses new technologies that simplify operations and improve service time.Tricon would focus on reducing complexity and redundancy, general and administrative expenses. In this regard, company leaders and franchisees from all three brands would meet to discuss Tricons one-system approach, share best practices and explore bundled brand blowup opportunities.Tricon would try to enhance shareholder value by investing in high return restaurant units and exiting persistently low return units. Besides on that point would be added focus on sales margin growth, reducing redundancies and well thoug ht out expansion plans.PepsiCo has decided to align itself with a divers(prenominal) strategy where its restaurant business would not fit into the scheme of things.Restaurant business is more management-intensive and labor-centric compared to the beverage or snack food distribution business. PepsiCos core loudness is in marketing and distribution. It would be best put into effect in the other two divisions where it has historically yielded good returns. However the inconsistency between the requirements of restaurant business and PepsiCos capabilities was pulling down the performance of Pepsi stocks and causing much angst to the investors and markets alike.PepsiCo realized that the food-service business is becoming increasingly competitive with a large number of established players. Growth has started to plateau in the domestic market which is not helping to increase the groups revenues.While other players mostly standalone, were aggressively pursuing overseas markets, TGI neck tie with PepsiCo was not helping matters. thither was bureaucratic delays and large lead time in decision making, being a division of a conglomerate.PepsiCo could not woo into the fountain-dispensed soft drinks business, long dominated by Coke. It was partly collect to Cokes monopolistic actions by which it did not provide food service distributors to deal with Pepsi. Food service distributors provide broad variety of consumable supplies like food, drinks, paper etc to restaurant chains, movie theaters etc. Also PepsiCos ownership of food chains did not allow it to effectively pitch for fountain service business with firms which were essentially its rivals in food business.In the light of these, PepsiCo decided to concentrate only on business where its core strengths could be leveraged. Thus the renewed and exclusive focus on beverages and snack food segment which would entail divestiture of the restaurant business.In the light of the higher(prenominal) up developments, it would be important to deliberate on the decision and its impact through different aspects of strategic management perspectiveExternal Environment AnalysisThe outer environment can be further classified asGeneral environmentIndustry environmentCompetitive ornament The analysis of the competitive landscape for TGI starts with an overview of the food beverage segment. The food services sector in the US can be classified based on the mode of distributionFull-service restaurantLimited-service/Quick-service restaurant (QSR)CafeteriaSnack non-alcoholic beverage bar Food service contractorCatererMobile food serviceAlcoholic drinking establishmentIn addendum to this, thither is considerable overlap with other business which act as non-traditional distribution centers and dispense food beverage service Grocery or dodge storesGasoline filling stationsSupermarketsEducational establishmentBusiness Level StrategyPepsiCo has followed a differentiation strategy at the business level due to the fol lowing reasonsThe wide portfolio of products including carbonated beverages and snack foods help it reach out to a vast demography among the customer base. The assortment of choices enables various customers to meet their recreation demands through PepsiCo products of their preference.PepsiCo is a ball-shaped company with operations in several countries. In order to obtain a share of wallet of consumers in different regions, it must provide products that are tuned to the tastes and preferences, prevalent in those local regions. This also explains the rationale behind having variety of products so that buyers perceive value for money through their preferred brands.PepsiCo operates in a duopoly market competing with Coke only. It enquire not adopt a cost leadership strategy as some(prenominal) the pot majors take price signals from each other and adjust markup prices accordingly, to retain market share and revenue. There has rarely been an all-out price war between the two which w ould have ultimately bled both to huge losses. This allows both players to compete on the basis of differentiated products targeted at a wider and more diverse customer baseTGI on the other hand needs to follow an unified cost-leadership and differentiation strategy due to the nature of the industry it operated in Dining is a higher involvement activity compared to purchasing cola or snacks. While rest of PepsiCos business required more of a product marketing approach, the restaurant group was more of service business. Differentiation is the key in such a scenario to attract customers. Variety in terms of menu options, ambience etc leads to higher footfalls. Also the local divisions in foreign countries need to be geared up to cater to the local needs.Unlike a duopoly in cola segment, restaurant business has many established competitors. This has led to pressure on the price front resulting in reduced margins. To stay competitive, all players have to minimize cost and pass on the b enefit or risk losing customers. As evident from the discussion above, the business level strategy for cola snacks divisions and that of the restaurant division are divergent. PepsiCo would have conflict in its day to day operations as well as long-term planning while trying to manage the requirements of the business. collective Level StrategyPepsiCo has been trying to adopt a corporate level strategy of related linked diversification due to the following reasons The cola and the snack food business would lead to synergy in the corporate activities. While beverages could be mass produced in bottling plants, separate and dedicated manufacturing facilities for snack foods would be required. The raw materials would also be procured through different routes. The ingredients of cola would primarily be water, sugar and chemicals and plastic or glass bottles. These could be obtained freely or from institutional suppliers like sugar mills, bottle manufacturers etc. The inputs for snack fo ods would be farmed vegetables sourced through the contract farming route.In spite of the diverse operational requirements of both the business, there exists ample opportunity to leverage the core competencies of PepsiCo for both type of products marketing muscle and wide distribution network. Both the products could be marketed by sharing the expertise within the divisions and the reach could be extended using the superior supply chain and logistics arrangements of PepsiCo.Such a synergy would not benefit the restaurant business. It not only has operational divergence with the soft drinks and snack foods business, but also the core competencies of PepsiCo in marketing and distribution cannot be meaningfully transferred. More of a service orientation is required for the restaurant division apart from managing disparate supply chain, large base of fixed assets especially real estate. The human option perspective would also be different as in managing workers who are service provid ers rather than working in production lines.On the other hand, TGI would need to follow a corporate level strategy of dominant businessThe mainstay would be restaurant business and each of the constituent brands can leverage the common pool of resources of the company. Existing real estate, previously being utilized by a single brand, can be shared among the others to focus on new store growth.The supply chain can be streamlined through coordination with logistics providers to reduce redundancy in operations. Suppliers can be managed in an integrated manner to reduce costs through economies of scale. This can be achieved by consolidating the procurement process of the restaurant brands with TGI.The business can be consolidated by working with top performing franchises to improve efficiency and drive shareholder value.ConclusionThe above mentioned facts and ensuing analysis of PepsiCos strategic decision to divest its game in TGI, point to a few aspects that stand out. The restauran t business is a dominant player in all the QSR categories it operates in sandwich, pizza and chicken. There are also ample growth opportunities in overseas markets though the US domestic market is gradually maturing and growth is slowing down there.Pepsis core competencies in marketing distribution do not fit well with the requirements of a service-oriented business like QSR. Also PepsiCo would like to pursue customers with differentiated products across a broad portfolio like beverages, snack foods, health energy drinks etc. To this effect it would like to bring synergy in its manufacturing and customer reach for all products. This would necessitate diversifying into related categories and focus on growth in these.TGI on the other hand, has to not only to offer differentiated service to its customer, but also needs to compete on the cost front more vigorously. The business of TGI is such that it is concentrated in the food service sector and there is not much scope or rationale for diversification. This would lead to loss of focus and much ground would be lost to the competitors.There is evidently some incompatibility in the operational as well as corporate strategy of PepsiCo and TGI. This would hamper the prospects of both the groups in the long run and seriously undermine the global growth prospects of TGI which is so critical at this point of time.That the divestment decision was well thought and done with lot of foresight, was vindicated by the more than average returns of both PepsiCo and TGI shares thereafter.Pepsi was able to arrest the slide in its margin and seriously challenge its rival -Coke in many emerging markets like South Asia, Eastern atomic number 63 etc.TGI on the other hand was able to maintain its dominant position in the QSR and also increase its global footprint substantially