Back to Basics: Marketing Strategies for Pepsi-Cola - Case Study Example

Back to Basics: Marketing Strategies for Pepsi-Cola SITUATION ANALYSIS Company Background Pepsi-Cola was first formulated by Caleb Bradham, a pharmacist from New Bern, North Carolina in 1898, and the company in its present form, PepsiCo Inc., was formed in 1965 by the merger of Pepsi-Cola with the Frito-Lay Company. In its first year, the company recorded sales of $510 million with its modest product line, which included Pepsi, Diet Pepsi, and Mountain Dew soft drinks, and four snack-food products from the Frito-Lay side of the operation. (PepsiCo Corporate Site, 2008) PepsiCo’s portfolio has grown considerably; the company now produces hundreds of food and beverage products and can boast of 18 individual brands with annual sales of over $1 billion, led by Pepsi, which has sales approaching $20 billion. Table 1 – PepsiCo Mega-Brands (Source: PepsiCo 2008 Annual Report, 2009: 3) Company Organization PepsiCo is organized into three major business units, which are further divided into six reporting divisions, as illustrated by Table 2: Table 2 – Business Units and Divisions of PepsiCo (Source: PepsiCo 2008 Annual Report, 2009: 43) Until 1997, PepsiCo Americas Foods (PAF) included Pizza Hut, Taco Bell, and KFC restaurants, but those operations were divested to become a separate company – now known as Yum! Brands – by the beginning of 1998. PepsiCo still maintains a modest ownership stake in Yum!, however, and the restaurant group is an important outlet for PepsiCo products. (Steinriede, 1997) Recent Financial Performance Highlights PepsiCo posted total net revenue of $43.251 billion in 2008, a 10% increase from 2007, but a modestly slower growth rate than the 12% recorded from 2006 to 2007. Restructuring costs and unfavorable performance of commodity hedges accounted for nearly $1 billion in expenses against the company’s bottom line in 2008. PepsiCo American Beverages (PAB) saw its operating profit decline by 18.5% in 2008, earning $460 million less than 2007, circumstances which could most likely be largely blamed on the economic recession. On the positive side, all other divisions of the company posted at least modest revenue growth, with very strong performance coming from the Latin America Foods (LAF) and Middle East, Asia & Africa divisions, posting 26% and 25% increases, respectively. (2008 Annual Report, 2009: 56-57) Competition PepsiCo’s most significant competitor is, as always, the Coca-Cola Company, although there are noteworthy competitive threats from a number of smaller producers and store-brand products. Coca-Cola again held a larger market share in carbonated soft drinks than PepsiCo in 2008, 42.7% versus 30.8%, and while both companies lost fractional percentages of market share to competitors such as Dr. Pepper/Snapple and Red Bull, PepsiCo’s loss was slightly higher. In terms of brands, Coke is still number one at 17.3% versus Pepsi-Cola at 10.3%, which is followed very closely by Diet Coke at an even 10%. Even though sales volumes were significantly lower industry-wide in 2008, the Coke brand nonetheless managed to post a modest increase in market share, while Pepsi-Cola lost 0.4% of its market share. (Beverage Digest, 2009) In terms of revenue, Coca-Cola posted $31.944 billion in 2008, a 10.7% increase over 2007, much less than the nearly 20% growth in revenue the company enjoyed from 2006 to 2007. (2008 Annual Review, 2009: 7) PepsiCo’s Mission & Objectives Since 2006, PepsiCo has followed an overall strategic vision called “Performance with Purpose”, which Chairman and CEO Indra K. Nooyi describes as “growing the business, and acting as ethical and responsible citizens of the world.” (2008 Annual Report, 2009: 4) In practical terms, this might be better described as carefully managing the brand in order to support continued growth. To that end, PepsiCo has been investing heavily in R & D and infrastructure in developing markets, particularly Brazil, India, Mexico, and China, and employs the EquiTrax TM program to monitor its brand performance. (Kish, Riskey, & Kerin, 2001) In addition, the company has implemented a cost-cutting program which is intended to improve efficiency and save $1.2 billion in operating costs over the next three years. (2008 Annual Report, 2009: 6) This should, in concept, free up money for PepsiCo to better withstand the stresses of a recessionary environment and pursue further growth opportunities in promising markets. Core Competencies & Competitive Advantages In the broadest sense, PepsiCo’s core competencies are in the beverage and snack food markets, two industries that are natural partners. But it is in the way that PepsiCo approaches those markets that turns its core competencies into competitive advantages over Coca-Cola. Even though Coke is Pepsi’s main competitor, Pepsi has developed a core competency of finding market niches that allow it to grow in areas where Coke is weaker, thereby avoiding, as paradoxical as it sounds, direct competition to some degree. (Capelli & Crocker-Hefter, 1999, and Yoffie, 2002) PepsiCo also has a core competency in management organization and decentralization, altogether different from the rigid structure at Coca-Cola. This in turn gives PepsiCo distinct competitive advantages in terms of innovation, flexibility to meet market circumstances, and a comparatively easier process of diversification, as exemplified by its vast range of products. (Capelli & Crocker-Hefter, 1999: 201-202) Product & Pricing Comparison The challenge in developing a strategic marketing plan for Pepsi’s oldest product is that its major competitor shares so many similar characteristics. Pepsi-Cola was first sold in 1898; Coca-Cola is a little older, having been invented in 1886. Pepsi is by far PepsiCo’s biggest-selling product, as is Coke for the Coca-Cola Company. Both companies see a majority of sales of these products from their overseas markets. And the price of a can or bottle of Pepsi is virtually the same – in fact in most places is exactly the same – as the price of a can or bottle of Coke. Both Pepsi and Coke follow similar pricing strategies, with end retail prices being determined – within certain parameters – by local bottlers and retailers. Without conducting an extensive price survey of hundreds or even thousands of market areas, overall average retail prices are impossible to determine, and rapid, sometimes even daily, changes in pricing quickly renders such data obsolete. For example, between 1988 and 2000, the US average retail price of soft drinks and concentrate – the ‘syrup’ which is mixed with carbonated water to produce soft drinks – fluctuated greatly: Table 3 – Retail Soft Drink and Concentrate Prices, 1988-2000 1988 1990 1992 1994 1996 1998 2000 Retail price (288 oz. case) $8.78 $8.99 $8.87 $8.63 $8.70 $8.55 $9.08 Concentrate price (288 oz. equivalent) $0.79 $0.86 $0.97 $1.00 $1.07 $1.14 $1.29 Consumer Price Index (1988 = 100) 100 110 119 125 133 138 146 % change in retail price 1.2% -0.7% -1.4% 0.4% -0.9% 3.1% % change in CPI 5.1% 3.6% 2.8% 2.9% 1.9% 2.8% (Source: Yoffie, 2002, Exhibit 6) In a 12-year period, the Consumer Price Index increased by an average of 3.2% annually, the price of the basic component of soft drinks increased by 4.2% annually, but the retail price of soft drinks only increased by an average of about 0.28%, and was in decline for half that period. (Yoffie, 2002) It would seem that the actual price of the product is much less important than the company’s flexibility in being able to maintain prices comparable to its competition. Pepsi has an advantage in this respect, as was found by a study that modeled the change in prices relative to the company’s income, and found that Pepsi is far less likely to raise prices than Coca-Cola in response to changes in income. (Perloff, Golan, & Karp, 2000) That indicates that Pepsi has far greater flexibility in pricing than its most significant competitor; the margin is still very small, but given that the two companies account for over $77 billion in revenue between them (2008 Annual Report [Pepsi], 2008 Annual Review [Coca-Cola]), even a fraction of a percentage point is still a significant amount of money. Using the Boston Growth Matrix to Visualize the Strength of PepsiCo’s Divisions The Boston Growth Matrix is valuable for placing the marketing of Pepsi-Cola in strategic perspective. Of all PepsiCo’s divisions, the only one which can be characterized as a “dog” – having both low growth and relatively low market share – is the UK & Europe component of Pepsi International. Elsewhere, Pepsi-Cola is a part of divisions which are either “stars” – having both strong growth and market share – or “cash cows” – having a relatively strong market share but slow or moderate growth, as illustrated by Table 4. The Boston Growth Matrix suggests two strategic objectives for Pepsi-Cola: First, to maintain and improved the brand’s market share in the North American market, and second, to take advantage of growth opportunities in the Middle East, Asian, and African markets to secure a strong brand and market position. Table 4 – Boston Growth Matrix of PepsiCo’s reporting divisions STARS Middle East, Asia & Africa Latin America Foods QUESTION MARKS Quaker Foods N. America CASH COWS Frito-Lay N. America PepsiCo Beverages N. America DOGS UK & Europe (Source: Derived from 2008 Annual Report, 2009) MARKET & ENVIRONMENT OUTLOOK Beverage Sector Trends & Outlook The drastic economic declines worldwide in 2008 add an element of uncertainty in forecasting trends for the beverage industry in the near- and medium-term future. The PowerShares Dynamic Food & Beverage ETF (stock symbol: PBJ) is an Exchange-Traded Fund managed by Invesco that tracks the food and beverage sector, and is a useful thumbnail guide for assessing overall trends. Included among the fund’s 30 individual holdings are both Pepsi’s and Coke’s major bottling concerns, PepsiAmericas and Coca-Cola Enterprises, diverse retail concerns such as Yum! Brands, McDonald’s, Safeway, and Winn-Dixie Stores, and a number of major producers and distributors such as Sysco, Archer Daniels Midland, Hershey, General Mills, and Dean Foods. (Invesco PowerShares, 2009) Currently, the fund yields a modest 1.31%, and as of the end of March had a year-to-date loss of -10.28%. Since September 2008, the fund has been extremely volatile, with a downward trend from about 15.50/share at the end of 2008 to approximately 13.00/share as of May 2009. (Yahoo! Finance, 2009) The fund is weighted 85% to 15% toward consumer staples rather than discretionary spending; interestingly, both Pepsi’s and Coke’s bottlers are included within the staple category. Clearly, the food & beverage industry has suffered from the recession, and at present it is difficult to determine which direction the sector will take in the future. Some analysts, however, are optimistic about trends in the beverage industry, and point to solid statistics that indicate good prospects for growth. Industry analyst Euromonitor International notes that the soft drinks market experienced 3.8% volume growth through 2008 despite the recession, and while cautious about future prospects, forecasts a general continuation of the trend. This will be led by a 5% growth in the Asia-Pacific markets, and strong demand, particularly for carbonated drinks, in countries like Argentina and Turkey. (Perez, 2009) While North American and European volume and sales continue to decline, the conventional wisdom at this point is that Pepsi look to these promising markets for the focus of its marketing efforts. PEST Analysis Table 5 illustrates the political, economic, social, and technological factors that can affect Pepsi’s success in international markets. These factors are derived from PepsiCo’s own assessment of its business risks, as detailed in the 2008 Annual Report. Table 5 – PEST Analysis of Pepsi in International Markets POLITICAL ECONOMIC SOCIAL TECHNOLOGICAL Differences in laws and regulations. Worldwide economic recession. Changes in consumer tastes & preferences. Information technology differences between business units & geographical areas; standardization cannot be accomplished all at once. Political instability & civil unrest. Income distribution in target markets. Age of population; Pepsi more appealing to younger consumers. Outsourcing of some business processes. Business & product taxes. Fluctuations in currency exchange rates. Dietary constraints – of particular importance in countries w/ large Muslim or Hindu populations. Local infrastructures: electricity, water, roads & other transportation facilities; construction & maintenance standards. Labor regulation & relationship w/ unions and other labor organizations. Downward shift in consumer spending, possible preference for lower-priced substitutes. Cultural & social reactions to marketing. Product & job safety; production standards. Diplomatic conditions, agreements, and relationships between the US & other countries. Volatile commodities prices affecting raw materials. Language differences. Significant price inflation or deflation in target markets. Changes in vacation & leisure patterns. (Source: 2008 Annual Report: “Our Business Risks”, 2009: 46-49) SWOT Analysis of Pepsi vs. Coke Although Pepsi shares many of the same SWOT factors that affect its competitor Coke, the brand and the company have unique strengths. PepsiCo’s diverse product mix of fast-food restaurants and snack foods complement sales of Pepsi, while other drink and food products offer consumers a range of alternative choices. PepsiCo also utilizes an effective brand monitoring and management tool in EquiTraxTM, which allows the company to more effectively design marketing and promotion programs. (Kish, Riskey, & Kerin, 2001) Of particular concern to Pepsi are the weaknesses of too much concentration in the North American market – of which a considerable part is concentrated with one retailer, Wal-Mart – and the potential dilution of not only the Pepsi brand but derivative brands as well through excessive brand line extension. (Ries & Trout, 2000) Table 6 – Pepsi SWOT Analysis Strengths Opportunities Diverse brand portfolio. Good brand recognition and loyalty. Efficient brand equity management program. (Kish, et. al, 2001) Complementary product mix. Strong market position – only one really significant competitor. ‘Friendly’ restaurant units (Yum! Brands) support core product sales. Acquisitions & cooperative ventures. Emerging market growth. Weaknesses Threats 70% of revenues come from N. America; weaker global reach than Coca-Cola. (2008 Annual Report, 2009) 11% of N. American sales come from Wal-Mart; poor bargaining position with largest retailer. (Warner, 2006) Product line suffers from health-conscious consumer preferences. Restaurant units (e.g. KFC, Taco Bell) compete with each other. Brand perception weakened through line extension. (Ries & Trout, 2000) Coca-Cola. Smaller competitors, within specific markets. Economic recession – lower consumer spending. Slow growth or decline in core products (carbonated drinks). Commodity price fluctuations. Bad publicity, such as concerns over contaminated water in products in India. (“Pepsi versus Coke: an unhealthy obsession?”, 2008) Table 7 – Coke SWOT Analysis Strengths Opportunities Tremendous brand equity. Largest share of soft-drinks market. Strong global production & distribution infrastructure. Concentration on beverage products. Acquisitions & cooperative ventures. Emerging market growth. Weaknesses Threats Product mix less diverse than Pepsi. Credit rating outlook may be problematic. (Collier, 2008) Sales heavily concentrated at Wal-Mart, the same as Pepsi. (Warner, 2006) Weak share price. (Hartogh, 2007) Brand perception weakened through line extension. (Ries & Trout, 2000) Pepsi. Smaller competitors & store brands, such as those distributed by Wal-Mart. (Warner, 2006) Economic recession – lower consumer spending. Commodity price fluctuations. Media & regulator scrutiny of activities. (“Pepsi versus Coke: an unhealthy obsession?”, 2008) Market Characteristics: Why Pepsi-Cola is a Potential Winner in Asia The rapidly-developing markets in Asia, specifically in countries such as India, China, Indonesia, and Malaysia, have certain characteristics that have made them attractive markets for soft-drink producers for decades. As on Coke executive once observed about Indonesia, “they sit squarely on the equator and everybody’s young. It’s soft-drink heaven.” (quoted in Yoffie, 2002) The comment aptly sums up the Asian market: large, relatively youthful populations, a large proportion of whom live in tropical or at least very mild climates. Table 8 briefly summarizes some of these factors: Table 8 – Population profiles of India, China, Indonesia & Malaysia Population Median Age Per Capita Income (In 2008 $) Climate India 1.166 billion 25.3 years $2,800 Varies from tropical to temperate China 1.338 billion 34.1 years $6,000 Varies from sub-tropical to sub-arctic Indonesia 240.2 million 27.6 years $3,900 Tropical Malaysia 25.7 million 24.9 years $15,300 Tropical (Sources: CIA World Factbook, 2008, World Bank) These figures represent over one-third of the Earth’s population, half under the age of 34, youthful, brand-conscious, and with growing discretionary incomes. It is indeed soft-drink heaven, and particularly so for an American icon like Pepsi-Cola. MARKET & PRODUCT FOCUS FOR PEPSI-COLA Defining the Market Segment The profile of the target customer for Pepsi-Cola in the Asian markets can be summarized as young (teenagers to mid-30’s in age), educated to some extent, and employed or otherwise having some source of discretionary income. Most likely, the ideal Pepsi consumer is also computer-literate, feels connected to the larger world, and shares the ambitious attitudes of his or her country’s developing economy. These customers are most likely to seek out foreign brands for the sake of style and trendiness among their peers as much as or more so than reasons of taste. (Giovetti, 2008) Thus, Pepsi-Cola can be marketed as a superior lifestyle and status product as much or more so than it can be marketed as a product which delivers superior taste and enjoyment. Positioning of Pepsi-Cola According to the Ansoff Matrix Pepsi-Cola is an established product that will continue to be marketed in largely established markets. Some market development opportunities will exist where Pepsi’s presence has not yet been established, or is very limited. The appropriate strategy for the marketing of Pepsi-Cola, however, will primarily be a market penetration and expansion strategy. Table 9 – Ansoff Matrix for Pepsi-Cola MARKET PENETRATION STRATEGY PRODUCT DEVELOPMENT STRATEGY MARKET DEVELOPMENT STRATEGY DIVERSIFICATION STRATEGY Product Differentiation While it is true that the world market is becoming increasingly homogenous, with consumers desiring many of the same tastes and lifestyles (Vignali, 2001), the boundaries of appeal can be easily pushed too far. In China, for example, foreign brands are appreciated and sought but do not seem to be wholeheartedly embraced by consumers; the country has a tradition of suspicion about ‘invasive’ foreign influences, and given a choice between a well-established and popular local brand and a foreign one, many Chinese consumers will opt for the former. (Giovetti, 2008) As developing economies grow larger and move closer to par with established economies, these attitudes are likely to intensify, not only in China but elsewhere. Therefore, Pepsi-Cola should seek a differentiation and present itself as “Your Pepsi”: produced locally by local people, and identifiable by packaging and advertising that, apart from the iconic red-white-and-blue emblem – the classic version shown above, and not the new and much-criticized “smile” emblem, which may simply confuse consumers – carries locally-appropriate branding images and language. This is to a large extent what Pepsi already does in its international markets, but the focus should be directed away from presenting Pepsi as a world brand – i.e., away from the mode of Coca-Cola – and towards being an Indian, Malaysian, Chinese, or other brand. Summarized Financial Data & Projections for the MEAA Market Discussion – Continued restructuring within the company and recovery from the global economic recession render these projections somewhat hypothetical; for example, PepsiCo has restated the past years division-level reporting for Pepsi International in 2008 due to shifting the Middle East market out of the European division. In 2009, Turkey and some Central Asian countries will be moved from the MEAA (Middle East, Asia, and Africa) division to Europe, with a restatement becoming necessary in the 2009 Annual Report. (2008 Annual Report, 2009: 44) The forecasts given in Table 10 make certain assumptions, namely: The net effect of the division reorganization in 2009 will be negligible on the MEAA market, and there will be no further restructurings of this sort. The effects of the economic recession will be felt through 2009, with growth stabilizing from 2010 onward. There will not be any comprehensively disruptive unforeseen circumstances, such as a multinational-scale natural disaster, major political upheaval or warfare, or global pandemic, other than the local circumstances in some countries which always occur to some degree. The marketing efforts for Pepsi-Cola and other Pepsi products are successful and result in increasing sales. Table 10 – Recent financial data for MEAA and 3-year forecast (in $ millions) 2006 2007 2008 20093 20103 20113 Net Revenue $3,440 $4,574 $5,575 $6,411 $7,693 $9,386 Percent change +14%1 +33% +22% +15% +20% +22% Operating Profit $ 401 $ 549 $ 682 $798 $957 $1,168 Percent change +21%1 +34% +25% +17% +20% +22% Beverage volume growth +9% to +11%2 +8% to +11%2 +11% +11% +16% +20% Notes: 1 Percent changes for 2006 are for Pepsi International as a whole. 2 Volume growth is estimated from the comparisons between volume growth in Europe and Asia. 3 Forecasts reflect estimates based on PepsiCo’s announced reorganization of international markets beginning Q1 2009. (Sources: PepsiCo Annual Reports, 2006, 2007, 2008) SMART Objective for Pepsi-Cola Marketing Specific: While PepsiCo’s other brand marketing follows established plans and objectives, the marketing of Pepsi-Cola contributes to beverage volume growth of 11% in 2009, 16% in 2010, and 20% in 2011 (see Table 10). Measureable: The objective can be measured against the revenue, profit, and growth forecast goals set out in Table 10. Achievable: Much of the infrastructure and market relationships required to achieve this objective are already in place, and process refinements planned in the next three years for PepsiCo as a whole will increase efficiencies and lower costs, making further market development possible. (2008 Annual Report, 2009) Realistic: The forecast goals are ambitious, but are in line with recent growth trends and are very realistic. Timely: Growth measured on a yearly scale and forecast for three years provides adequate time for the company to achieve the objective, yet still provides assessable results reasonably quickly. Marketing Mix & Rationale PepsiCo should continue to defer to its local distribution partners for most advertising and promotional initiatives, since these are best-positioned to address local markets and cultures. There are, however, a number of general recommendations that can be made: Emphasis on Internet Advertising – Many of today’s younger consumers lead digital lives, and marketing through the Internet is often the best way to reach them. Social networks such as Facebook and communication utilities such as Twitter are perfect vehicles for carrying the Pepsi-Cola message to these valuable customers. Smaller packaging – This can either be done as a promotional initiative to introduce new customers to Pepsi-Cola, or be made a regular part of the product mix. American-sized portions are often much larger than those international consumers are accustomed to, and in areas where price is a concern, a smaller package offers the customer the option to select Pepsi-Cola at a more attractive price point. An example would be offering an 8-ounce bottle along with the usual 16-ounce package. Emphasis on seasonal- and holiday-related promotions and packaging – Countries such as India, China, and others with multi-cultural and non-Christian societies have many wonderful holidays and seasonal celebrations that do not correspond to the typical Western celebrations, and are thus often overlooked. Acknowledging these occasions through Pepsi-Cola’s marketing would be a highly effective means of connecting on a significant level with local consumers. Strongly emphasize the theme “Your Pepsi” – Apart from being a polar opposite of the current “My Coke” campaign (see the website: www.mycoke.com), the phrase sets a new tone for Pepsi’s engagement with its customers around the world – a theme of sharing, and of recognizing each others’ uniqueness. The phrase also translates fairly well, minimizing cultural gaffes due to language difficulties. For example: 你的百事 – Simplified Chinese Ang iyong Pepsi – Tagalog (Filipino) Của bạn Pepsi – Vietnamese अपने पेप्सी – Hindi; slightly problematic because it literally means “the Pepsi”, but memorable in its own right. ของคุณแป๊ปซี่ – Thai بيبسي الخاص بك – Arabic Anda Pepsi – Indonesian; literally “You Pepsi”, a result of there being no possessive articles in the Indonesian language. A Final Comment Pepsi-Cola is still by far the company’s best-selling product, and the one that has made PepsiCo’s diverse product line possible. Maintaining its heritage and aggressively marketing Pepsi-Cola to new generations of consumers will be what makes PepsiCo’s continuing growth and diversity not only possible, but virtually guaranteed. Works Cited 2006 Annual Report. (2007) PepsiCo [Internet/PDF document]. Available from: 2007 Annual Report. (2008) PepsiCo [Internet/PDF document]. Available from: 2008 Annual Review. (2009) The Coca-Cola Company [Internet/PDF document]. 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