PepsiCo’s diversification in the world market

Pepsi-Cola came into being in 1898, when Caleb D. Bradham, introduced “Brad’s Drink,” a blend of Peps-Cola, carbonated water and sugar. Bradham later renamed the drink “Pepsi-Cola”. The company “Pepsi-Cola” was launched in 1902 in the back room of the pharmacy of Bradham, as the business began to grow it was officially registered with the U.S. Patent Office on June 16, 1903 as “Pepsi-Cola”. (Pepsi Store – History of the Birthplace of Pepsi). 1

As time passed by Pepsi-Cola moved away from the low-price strategy and launched an extensive marketing campaign to boost the company’s image. In 1950, Pepsi- Cola had the slogan,

“Be sociable, have a Pepsi”.

The number of CEO’s, Presidents changed over time but the essence of the culture of Pepsi-Cola remained intact, from Donald M. Kendall, CEO in 1963 to Wayne Calloway. CEO in 1986, the company remained consistent with its emphasis on people, the company backed people, not projects, in its resource allocation decisions, and these decisions were made quickly.

Wayne Calloway was resolute to continue in the strong tradition of the company and the previous CEO, of identifying investment opportunities, which had potential the potential to make the company grow. These opportunities would eventually lead to higher sales, higher earning growths and increase in company’s value on the stock market.

Over the years PepsiCo has been able to build a dominant market share in the world as provider of snack foods or beverages, during the process PepsiCo has made key decisions, both positive and negative. To attain this position several acquisitions of fast food chains were made and precedinmg divestitures as well. ( PepsiCo’s Diversification Strategy, oppapers.comHYPERLINK “http://www.oppapers.com/essays/Pepsico-s-Diversification-Strategy/248234). 2”)HYPERLINK “http://www.oppapers.com/essays/Pepsico-s-Diversification-Strategy/248234). 2”.HYPERLINK “http://www.oppapers.com/essays/Pepsico-s-Diversification-Strategy/248234). 2” HYPERLINK “http://www.oppapers.com/essays/Pepsico-s-Diversification-Strategy/248234). 2″2

PepsiCo’s diversification strategy can be viewed in three broad categories:

Soft Drinks

Soft drinks represented 35% of PepsiCo’s sales and 39% of its operating profits in 1991.To make the figures even better Pepsi Co acquired acquire several of its franchised bottlers, including some of its largest ones. It also acquired the international operations of Seven-Up, the third largest soft drink operation outside the United States, for $246 million.

Snack foods

Pepsi-Cola acquired Frito-Lay in 1965 and with brands such as Doritos, Lay’s, Fritos, and Ruffles, Frito-Lay’s share of the $10 billion U.S. snack chips market was nearly half, and PepsiCo Foods International (PFI)’s share of the $13 billion international snack chips market was about one-quarter. In 1989, PepsiCo purchased two U.K. snack companies-Smith Crisps, Ltd. and Walker Crisps, Ltd.-for $1.34 billion, becoming the leading snack food company in Europe.

Restaurants

In 1986, PepsiCo purchased Kentucky Fried Chicken. Combined with Pizza Hut and Taco Bell, the purchase made PepsiCo the international leader in number of restaurant units. In 1991, PepsiCo’s restaurant segment attained the highest revenue of the company’s three segments, surpassing soft drinks for the first time.

With three top line restaurants under its charge, Pepsi Co was on its way to constructing a recognizable three-legged stool. The CEO Calloway, felt that the new structure would bring the company success and costs would decrease significantly by transferring of skills across the three chains.

PepsiCo’s strategic planners believed that quick service restaurants would remain the largest segment over the following decade. They had identified several major industry trends. First, they believed that simplicity and convenience were becoming increasingly important as people worked longer hours and had less leisure time. Second, they thought that, due to economic pressures and an overall decline in consumer interest in prestige and status, consumers would look for value. Third, they identified variety as a significant trend, remarking that growth in ethnic product categories tended to reflect the increasing diversity of the U.S. population. Finally, they believed that the health and nutrition trend that had begun in the 1980s would continue as the population aged. Based on this analysis, PepsiCo thought the quick service, casual dining and take-out segments would be attractive opportunities for investment.

Why Should PepsiCo acquire Carts of Colorado (CoC) and California Pizza Kitchens (CPK)?

Carts of Colorado (CoC)

Carts of Colorado (COC), is a Denver designer, manufacturer, and merchandiser of mobile food carts and kiosks (Carts of Colorado,HYPERLINK “http://www.cartsofcolorado.com/index.htm).3” INC).3

Carts of Colorado was setup by two brothers, Stanley and Daniel Gallery from Denver, Colorado. Both had previous experience of working in their mother’s restaurant, they took credit card cash advance, and setup a cart .The business did good, they expanded and had 20 carts by 1984.The carts of Chicago-Style Sandwiches did not meet the standards of Federal Food & Drug Administration (FDA), so Stan modified the cart and produced one that did more than meet the current standards. In 1984, the Gallery brothers established Carts of Colorado to manufacture carts.

It would be extremely beneficial for PepsiCo to acquire Carts of Colorado (CoC) for a number of reasons. Firstly CoC has clients ranging from Burger King, Coca-Cola Company, Dunkin’ Donuts, Mrs. Fields, and Disney, this acquisition would enable Pepsi Co to tap into a new market and become a supplier to these big companies. Secondly CoC had a potential to grow into an even better and bigger company, as the founders were willing to invest for the technological advancement of the carts, such as radio telecommunications and computers. Lastly the point which goes in favor of acquiring CoC is that they had they purchased their largest competitor, for $65,000 in 1990, so basically they were market leaders.

California Pizza Kitchens (CPK)

California Pizza Kitchen (CPK) was started by Larry Flax and Rick Rosenfield, both were assistant U.S. attorneys for the Department of Justice; both had a passion for cooking and the two setup their own restaurant. (California Pizza Chicken).4

CPK targeted “young, upscale singles and couples, families, and elderly retired people seeking a moderately priced, yet comparable-quality alternative to fine dining restaurants.”

Acquisition of CPK will prove to be profitable business for PepsiCo as CPK is a thriving and profitable business with potential to grow even further. Secondly their core competency, that is, constant adding of new items in the menu and the high level of service make it a well reputed restaurant in the market.

Lastly the employees of CPK were committed to the company as it provided them job security and opportunities of moving up to the higher positions in the chain administration. This would be a welcome addition in the task force of PepsiCo.

Why shouldn’t they acquire them?

Carts of Colorado (CoC)

Firstly, the Stanley brothers were not the best people to work with; they wanted complete control over their own business. After selling 30% of their business to a venture capital firm ,they eventually forced the new management out ,as the Gallery brothers were vary of the way the business was been run.

Secondly CoC was not the lowest cost cart manufacturer in the market, as the Gallery brothers had made a number of modification to the carts, e.g. (smaller carts, while increasing their food storage and cooking capacity) and invested in upgrading cart technology, they were not the cheapest option around.

California Pizza Kitchens (CPK)

Firstly the owners of CPK, Flax and Rosenfield had been hesitant to franchise the concept. Secondly Flax felt that it would be fatal to sell the company now after putting in so many years of hard work, he wanted to take it forward and had decided to make the company public. As he said:

“It would kill me to sell now for $100 million and sit on the sidelines and watch somebody else either destroy it or do great with it.” (Michael Barrier, Nation’s Business, March 1991, p. 14.) 5

It would take long negotiating talks to convince Flax and Rosenfield to sell up the company.

What do you recommend?

According to my opinion PepsiCo should make very possible effort of acquiring Carts of Colorado (CoC) and California Pizza Kitchens (CPK). Since both the businesses are vibrant and progressive, making profits they would be a welcome addition to the food chain of PepsiCo. The other point which favors the acquisition is that both the businesses have the potential for growth, CoC is investing in technology which will make it even more cost efficient, where as on the other hand CPK has limited its advertising to store openings, but it received an avalanche of free press because of its distinctive menu, its fast-paced growth, and the unusual backgrounds of its cofounders.

If bought to whom they should report?

PepsiCo has always focused on a decentralized structure and the emphasis the firm placed on entrepreneurial management, Pizza Hut, Taco Bell, and KFC each operated with a great deal of autonomy. One restaurant CEO remarked, “Calloway really wants to know just three basic pieces of information from us: (1) when we change the top people in our business, (2) when we change our strategy, and (3) what our capital expenditures are.”

Continuing in the PepsiCo’s tradition, if both the businesses were bought, each should be appointed with a separate CEO and that person should report to the CEO of PepsiCo. This would keep the roles of both the businesses separate instead of been lead by a single person.

Does PepsiCo add value to its restaurant business?

PepsiCo always has a strategic plan in place before acquiring a business or launching a new product in the market. Same is the case with the restaurant industry, PepsiCo had carefully planned out how they could add value to the businesses been acquired and how the business would help PepsiCo improve. PepsiCo’s strategic planners believed that quick service restaurants would remain the largest segment over the following decade. We can consider each of the three restaurants owned by PepsiCo separately:

Pizza Hut

In 1986 the development and roll out of Pizza Hut delivery took place under the leadership of the then CEO of Pizza Hut .This was primarily done as Pizza Hut was facing competition from Domino’s which focused mainly of delivery. Pizza Hut was repositioned by PepsiCo into pizza distribution, this meant expansion into non-traditional locations, such as airports, amusement parks, stadiums, and school lunch rooms, using free-standing kiosks. A number of other measure were been considered to bring value to the Pizza Hut franchise such as concepts of,

One in quick service iv. Introduction of new dishes6

Casual dining

Pizza Hut Café

Taco Bell

When PepsiCo bought Taco Bell in 1978, it was the country’s largest chain of quick service Mexican restaurants, selling tacos, tostadas and burritos. John Martin, CEO of Taco in 1983 took a number of steps to bring value to the Taco Bell restaurants, which mainly were:

Introducing new dishes for the first time in 10 years

Shift in focus, from production to customer service

K-minus. (reduced the size of the average Taco Bell kitchen)

MIS project, called TACO (Total Automation of Company Operations) introduced

Empowering employees at all levels

Revamping the compensation system to include more performance-based compensation

Slashing of prices for a range of basic items

Kentucky Fried Chicken

PepsiCo acquired KFC in 1986, as the largest chicken chain in the world. John Cranor III became president and CEO of Kentucky Fried Chicken in 1989, he took a number of steps to ring value to the franchise, mainly of those were:

Restructuring US and international operations

Renovation program,

New computer program

Targeted college campuses

Making the products more health-conscious

Roasted and barbecued chickens and chicken sandwiched introduced.

The points above show that PepsiCo brings value to it restaurants business in every possible manner to make it more profitable and customer accommodative.

Is PepsiCo’s current organization of its restaurants chains appropriate?

PepsiCo’s organizational structure of its restaurant chains focuses on decentralization and with each chain given autonomy to conduct their operations. In this way each chain runs its business in its own way, while keeping a sense of loyalty across the divisions. Senior management was of each chain was open to sharing of ideas, while keeping the secrets of their own chain well guarded.

In discussing coordination across the restaurant chains, senior corporate executives stressed that joint activity should be initiated by divisions, not headquarters. Division presidents should have the privilege to decide whether or not a given division would participate in any specific joint activity.

This organizational structure makes it possible for PepsiCo’s restaurant chains to effectively conduct their business, without intervention and according to the vision they have in mind.