PepsiCo International A research and analysis Project

Executive Summary The following assignment is a research study on one of the biggest corporation in the industry of Food and beverages. PepsiCo which was founded in the back of a pharmacy room in the year 1902 is now a corporate as big as any in the whole wide world. The following assignment follows an in depth review of the financial stability and well being of the company at the same time also provided an insight of the companys planning for it near future. Pepsi has planned to triple the amount of its good by the year 2020 which will turn it into an industry giant soon.

Contents 1. Introduction .................................................................................................................... 4 2. Purpose of Topic Selection: ............................................................................................ 4 3. Purpose of Company Selection ....................................................................................... 5

4. Brief Background of the Company .................................................................................. 5 5. Current Scenario of PepsiCo ........................................................................................... 5 6. Brand and Products of the Company .............................................................................. 6 7. Business Units ................................................................................................................. 6 8. A Peek inside the industry .............................................................................................. 6 9. The goals and targets of the Report ............................................................................... 7 10. Knowledge accumulation:............................................................................................. 7 11. Evaluation from the Financial Perspective: .................................................................. 9 11.2 Evaluation and Analysis In terms of Profitability ........................................................ 9 12. Analysis of the Business .............................................................................................. 14 12.1 SWOT Analysis........................................................................................................... 14 13. Conclusion ................................................................................................................... 17

1. Introduction For the purpose of research and project analysis, the topic which has been chosen is The financial performance and business analysis of a company for three year period. 2. Purpose of Topic Selection: My interest in the topic comes from the keen knowledge which I have developed through my ACCA studies. Not only does ACCA provide me with affluent knowledge of finance it also makes me capable enough to observe the financial performance of an organization through research. So the selection of the topic has is based on interest and knowledge regarding the topic of the research. Not only research work on this topic will enhance the knowledge which I have gained through my studies it will also open new avenues of growth for me in my field. The reason for not selecting the other topics even besides being attracted to them was because of the lack of information of these topics and I believe I might possess all the skills necessary to work on those topics.

3. Purpose of Company Selection The company which has been selected for the topic of the research is PepsiCo. The purpose for the selection of the company is my having worked there as an internee. This opportunity was provided to me by PepsiCo in their research house. Since my internship provided me with knowledge of the beverage industry and also an insight of Pepsi Co it was easy for me to select and work on this company as I have prior knowledge of the company. Not just that Pepsi Co is among the biggest names in the industry and possesses great market value. The third reason for selecting Pepsi Co as the company for the research is its global recognition and sales. It makes easier to perform research work on an organization when it has achieved global recognition and therefore can be studied from several aspects. 4. Brief Background of the Company Not many people who consume Pepsi on a regular basis are aware of the fact that it was in fact the origination of a pharmacist to help in digestion. The New Bern, NC, drug store in the 1890s came up with an aiding drug for digestion which contained one ounce of syrup and five of soda water. This beverage formula was to be mixed and drank in need to help digestion. As it turned out today it is the worlds favorite drink (Pepsi, 2011). In the start the beverage was known as Brads Drink but later it came to be known as Pepsi-Cola when in the year 1898 Bradham transformed the name of the drink. In the back room of the pharmacy where Bradham worked he launched Pepsi-Cola in the year 1902. In 1903 Bradham was awarded with the trademark of Pepsi-Cola. In the year 1965 PepsiCo came into being through the merger of Pepsi-Cola and Frito-Lay Chief Executive Officer and President of Pepsi Donald M. Kendall and Chairman and CEO of Frito-Lay. 5. Current Scenario of PepsiCo PepsiCo today is among the biggest brands in the world. The most famous product of the company is Pepsi which is also the most demanded beverage in the world (Pepsi, 2011). PepsiCo does not only own Pepsi but also many other products which are demanded all over the world. Its list of products known and respected for high quality and promotion of good health are: Tropicana, Quaker Oats, Lays and Gatorade besides Pepsi which has always been the consumers number one choice.

6. Brand and Products of the Company The companys diversified portfolio consists of a list of beverages, snacks and healthy dietary products. Among the famous names are Mountain Dew, Pepsi, Tropicana, Seven up. Miranda, Gatorade, Aquafina, Sierra Mist, Lipton, SoBe, Quakcer Food and Snacks, Frito-Lay North America, Sabritas, Gamesa, Doritos, Chipsy, Cheetos, Ruffles and Red Rock Deli (Pepsi, 2012). 7. Business Units Pepsi Beverage Company (PBC) Pepsi Beverage Company is the business unit and its operations are run in United States, Mexico and Canada. It entails seventy five percent of the Companys beverage volume for North America (Pepsi, 2011). PepsiCo Americas Foods: PAF which is the abbreviation for PepsiCo Americas Foods is located in the North and South of America and is a popular business unit for PepsiCo food and snacks (Pepsi, 2012). PepsiCo Asia, Middle East and Africa: PepsiCo Asia, Middle East and Africa (AMEA) is known for its production of the top most and high quality food and snacks not only does it make but sells and also markets beverages, syrups and goods in finished form. This production is under the name of various successful brands (PepsiCo, 2010). 8. A Peek inside the industry In the year 2008, the global food and beverage sector which consists of the farming, production, distribution catering and retail was known to be valued at less than $6 Trillion USD. This industry is known to be the witnesses of constant growth and also among those who have been it regular contributors (Business week, 2010). The Food and Beverage industry has only a few numbers of players who have maintained their position at the top for quite a while such as Coca0Cola, Pepsi-Cola, Kraft Foods, Unilever and Cargill.

If one looks ate the mount of share each country has in the food and beverage industry it will be known without a doubt that it is Europe who is the biggest contributor of the industry. Europe is known for to generate around 1.4 Trillion USD revenues in the year 2007. After Europe the second position holder was U.S with revenue of 1 Trillion USD. Furthermore, it has come to be known that India and China have also shown signs of emerging among the major contributors of the industry in terms of raw material. Inflation and economic conditions have had strong and negative impacts on almost every industry but the food and beverage industry have remained less influenced with the industrial conditions. This is because food and beverages are those products which are sold no matter what buying conditions the world faces people drink and eat in all sorts of conditions even when they cannot manage to buy clothes and other accessories (Business week, 2010). 9. The goals and targets of the Report The report analyses the targets and goals of the company in terms of business and finance. It usually goes through a period of 3 years. The ultimate objective comprises: 1. Evaluating the overall performance of the organization in terms of finance through ratios, for the years 2008, 2009 and 2010. 2. Evaluating the outcomes of the organization with the main rival of the organization, this is Coca Cola. The comparison is from the year 2008 to the year 2010. 3. The strengths, weakness, opportunities and threats of the company are evaluated in terms of the business outcomes and apart from SWOT, usually balance score card is also used. 10. Knowledge accumulation: There was a lot of information which was available about the Pepsi Co and thus I have taken advantage and included in my project. Text Books: In order to get an insight about the model of the business and in order to analyze the ratios of finance, the books from the KPP publishers and RAP are utilized. P5 ( Advance Performance Management )

P4 ( Advance Financial Management) P3 ( Business Analysis ) P2 ( Corporate Reporting )

The Annual Reports: The main information about the financial performance of the Pepsi Corporation is provided through the annual reports. For the purpose of this project I have utilized the website information in the form of soft copies. Not only the information about the financial results of the company is given but also about the areas where Pepsi corporation is performing, the brands of the Pepsi Co, the present and forthcoming chances , the assignments and prospective obligations. These annual reports were utilized: Annual Account For Year 2009 Annual Account For Year 2010 Annual Account For Year 2011

The Financial Press (newspapers): In order to get an idea about the future business and stock performance the data was taken from the Financial Times, Wall Street journal and the New York Times. There was a lot of information available in form of articles and also other information. The internet: Internet had been the main source of information for my research purpose. Website of the organizations, Pepsi Co and its competitor Coca Cola were thoroughly searched and used. Annual reports from the websites of this organization provided extensive information. Google played a vital role for the Research Project Analysis (Business week, 2010). The Permanent Limitations: For the RPA there is a limitation imposed for the word count which is only 6500 words could be used to give an overview about the overall performance and working of the Pepsi Corporation. And also there has been a restriction to use only limited information. The information has to be

from restricted sources. However only the perfect source has been utilized and if there had been and source of information that had been doubtful was dropped. There was a variety of information that was available however due to lack of perfection and authenticity that information was left out (Business week, 2010). 11. Evaluation from the Financial Perspective: In order to get an insight about the overall performance of the organization, analysis and evaluation through the financial data is the main source. The financial data gives an overview about the companys ability to pay off its liabilities, its performance in terms of profitability, its overall position in terms of debt and equity as to whether company is debt based or equity based. It also gives an idea about whether the company is at loss or whether the company is outperforming other rivals in the industry in terms of profitability. Ratio analysis is used to check the trend of the company and it is compared with the rival firms in the industry or with the performance of the company in the past. But the ratio analysis has some of its own limitations which do not allow one to depict the true picture of the company. The financial figures of companies are arbitrary which are dependent upon companys accounting policies and therefore are not always effective in comparison. Moreover financial ratios are taken from the past which do not represent the current position of the company. These figures sometimes show profits of business whereas in reality the nature of this profit is nominal when calculated by considering the rate of inflation and in actual company is not experiencing growth. Such considerations need to be taken into account during analysis. Company Performance over the Years A clear idea about the company could be obtained through the Statement of Balance Sheet and through the Income Statement. It gives an idea about the health and performance of the company respectively. Data from Dec 2009 to Dec 2011 has been utilized for the Pepsi Co. outcomes in terms of financial results (PepsiCo, 2011). 11.2 Evaluation and Analysis In terms of Profitability The ratio of the profitability gives an idea of the performance of the firms in terms of profits obtained by the firm in business and overall. This ratio of profitability is looked upon by the shareholders. If the overall ratio for the company is higher than those of the key competitors in

the industry it means that the company is performing at par than its rivals and enjoying an edge above them. Profit Margin Usually net profit margin of the company is calculated and it is obtained by dividing the overall net profit of the company by its sales. Mostly this net profit margin is given in the form of the percentage. This gives an idea about how effective a company is at controlling the overall cost. Traditionally, the higher, the better (Brag, 2007).

Net Profit Margin

16% 14% 12% 10% 8% 6% 4% 2% 0% 2009 2010 2011 Series1 11% 10% 14%

(Source: investopedia) As one can see that over the three year period the overall net profit margin of the company has decreased from a percentage of 11% in the year 2010 to 10% in the year 2011. It was greatest for the year 2009. There was an increase in the year 2009 as the market was in favor of the brand and also the charges for the restructuring and also the charges of impairment were minimised. In the year 2010 there was a decrease in the margin with a percentage of 3%, although there had been an overall increase in sales by the percentage of 34%. The main reason of the decline was due to the settlement of the fair value, and and also because of accumulating the inventory and 1266 dollars in million was recognized as the charges for the integration. However 398 dollars in million was

for the settlement of the fair value. Also there was an enhance in the cost of the distribution which was 7.7 dollars in billion. The increase in the overall expensedue to amortization was 86 percent. There was an enhance in the percentage of the income of bottling equity which was 101% but this increase was cancelled because of the cost of finance which was 127 in precentage. And thus the income of the bottling equity does not play a vital role in the contrbution of the net profit margin. By the year 2011 the net profit margin of the company further declined and reached a value of ten precent (PepsiCo, 2011). However there was an increase in sales in the year 2011 but because of the cost of finance and because of no icnome by the bottling equity the overall net profit margin of the company was declined by a percentage of 1%. The ratio of Fixed Asset Turnover : This ratio gives an idea about the revenue that has been produced due to the investment in the fixed assets of the company. It gives an understanding about how productive the firm had been (Brag, 2007).

Fixed Assets Turnover

1.98 2 1.5 1 0.5 0 2009 2010 2011 1.22 1.19 Series1

(Source: investopedia) As we can see that this ratio has been decreasing evry year. It was at its highest In the year 2009 and has a value of 1.98 times, however in the year 2010 it has declined to a value of 1.22 times and by the time it has reached 2011 it value has just been equa to 1.19 times. The value in the

year 2011 has been the lowest out of the three years. There had been many reasons due to which this ratio has declined , for the year of 2009 , there was a decrease in the ratio by a percentage of 14 percent, and the reason had been the distinct actions due to pricing, an enhance in the sale payments, and due to selling of the different products in the various size of packages and also in variety of places around the world. A similar pattern could be seen for the year 2010 and there was decrease in the percentage by 38 percent. There was 2 times increase in the denominator than the numerator. The overall increase in the asset as we can see in year 2009 then in year 2010 has been increased to a percentage of 71 percent; however the sales were enhanced by a percentage of 34 percent. The rights of franchising were taken by the company and it also got the rights for the brands. The amount totaled to 949 dollars in million and 1463 dollars in millions, however there was expenditure of the capital by the amount of 8129 in millions of dollars. The overall increase in the asset as we can see in year 2009 then in year 2010 has been increased to a percentage of 71 percent; however the sales were enhanced by a percentage of 34 percent (PepsiCo, 2010). The rights of franchising were taken by the company and it also got the rights for the brands. The amount totaled to 949 dollars in million and 1463 dollars in millions, however there was expenditure of the capital by the amount of 8129 in millions of dollars. ROCE (Return on Capital Employed): It gives an idea about as how efficient a company had been in terms of gaining profits (Brag, 2007).

Return on Capital Employed

35% 30% 25% 20% 15% 10% 5% 0% 2009 2010 2011 20% 14.40% Series1 33%

(Source: investopedia) The return on capital employed for the year 2009 had been greatest, having percentage of 33 percent. As there had been better outcomes in 2009, there was an overall enhancement in the value of the net profits which was 16 percent. This was in comparison with the performance of the last year (PepsiCo, 2011). However even this increase was not sufficient, the reason had been the greater value of 21 percent due to the capital that has been employed. There was decrease in ratio in the year 2010, and the value had been by a percentage of 13 percent, this went to the percentage of 20 percent which was considered very low in a trend of three years. However there was a loan in long term that the company issued which was 6.5 in billions of dollars (PepsiCo, 2010). This load helped in acquiring the PAS and also getting PBG. There was also an enhancement in the value of the sale cost and there had also been expenditures which took away the sales. For the year 2011 the value had declined to a percentage of 30%. The reason for the decreasing pattern faced by the company had been the income from the equity bottling. It has decreased to a level of 735 in millions of dollars. To sum up it could be said that overall the patterns seems pessimistic however one can be optimistic towards the coming time as there had been many acquiring by Pepsi Co. which could be looked upon for a better future ahead.

12. Analysis of the Business In Simple terms analyzing a business can be termed as applying various disciplines in order to resolve the needs of the business and develop resolutions for the problems the business is facing. In order to analyze a business one may apply many techniques on their business in order to find which one is most suitable one. But before one may apply any of these techniques it is extremely important to study the organization form the eternal as well as the internal environment (Vranica, 2009). 12.1 SWOT Analysis SWOT Analysis gives a chance to study the chance to properly study the organization. SWOT stands for Strengths, Weakness, Opportunity and threats. With the help of the opportunities and threats that a company faces one can identify their strengths and weaknesses (Vranica, 2009).

Strengths - Balance portfoilio - 2nd largest in North America - Revenue increase by 33% - 19 brands generating more than $ 1 billion - People at Pepsi Opportunities - Triple is portfoilio by 2020 - Nutrition business from $10 to $30 billion in 2020 - Major investment in R&D - Focusing on new health kick - Revitalize market share

Weakness - Decline in credit rating - Generation X is the target customers leaving major chunk of population - Health issues - Franchise system - Less marketing fund devoted to regular Threats Pepsi - Commanded by Coke brand - Brand sank to 3rd rank - Changing healthconsciousness attitude - Predicament faced by beverage business - Array of alternative beverages

Strengths PepsiCo is big brand name it is the largest brand in the North America and the second largest in the global food and beverage industry. It has served a balanced portfolio to both customers and the market with a range of food snacks and beverages (Vranica, 2009). PepsiCo has a strong gold on the market and like wise also strong performance when it comes to performing in the food and beverage industry. In the past three year period there has been a twenty percent increase in this performance (Vranica, 2009). In the year 2010 net revenue of the company faced an increment of 34% which for any corporation is a great achievement. Forty five percent of the revenue is earned within United States while thirty percent of it is achieved outside of United States (Business week, 2010).

According to the companys management the people working at PepsiCo are known to be its greatest strength. This is because of their constant professional development and their preparation for future leadership. As a result of this having an experienced workforce and employees polished to perfection has termed to be the greatest strength of the company (PepsiCo, 2011).

Pepsi already has a large market for both foods snacks and beverages which has captured quite a share of the competitors consumers too. It is the wide range of products which Pepsi provides that has grabbed all these customers from other rivals (Business week, 2010).

Weakness No matter how big a brand name a company has they are bound to have a few weaknesses also. When PepsiCo rating was lowered by Moody from Aa2 to Aa3, PepsiCo suffered $15 billion in debt (Vranica, 2009). PepsiCo as compared to it biggest rival Coca Cola targets younger generation which is known as generation X. Coca Cola on the other hand has portrayed itself as the family beverage. Their advertisements depict how they promote family sitting and how traditional the beverage is. This has known to become a weakness as when it comes to traditional and family time people prefer Coke over Pepsi (Business week, 2010). Franchises are said to increase the worth of the companys product but in the case of PepsiCo some difficulty s experienced. PepsiCo franchise in most situation have shown their unwillingness to support a few of PepsiCo products and they have forced the production of their own labels through the companys brand name (Vranica, 2009). Opportunities By the year 2020 PepsiCo is said to triple its range of healthy and enjoyable foods. (PepsiCo, 2012).

By the year 2020 PepsiCo is also said to grow their revenue form $10 billion to $30 billion (PepsiCo, 2012).

In order to ensure their long term performance PepsiCo carried out major investment in the area of research and development (Vranica, 2009).

PepsiCo has a new motive they are now promoting health with their drinks. The company aims to produce beverages which are more focused on the health perspectives so customers can enjoy them without being concerned about their health (Vranica, 2009).

Threats In the carbonated drinks section Coke has quite a hold over the market compared to PepsiCo. Coke has a share of 41.9% while PepsiCo only has 29.9% of the market share (Business week, 2010). Pepsi was ranked third when Coke and Diet Coke took the first two positions as major brands. This imposed as threat as even after being one of the most loved beverages Pepsi was ranked third (PepsiCo, 2011). Soft drinks are said to have a very high content of sugar and this has been among the major concerns of the health consultants. PepsiCo suffered as a result of the changing health perception and growing concerns of people regarding soft drinks and their effects on health (Business week, 2010).

13. Conclusion The above analysis of Pepsi Co indicates that the performance of the company on a general scale is satisfactory. However, the rise in profit and a constant increase in it profits when it comes to emerging markets reflects that Pepsi Co maintains a strong position in the market financially. It also highlights that Pepsi Co in the future has bright opportunities to grow (PepsiCo, 2012).

From an investors perspective Pepsi Co might be a good opportunity to invest in this can be observed by looking at the earnings of the company. Not only does the company hold a P/E ratio which is well balanced but it also has constantly increasing dividends (PepsiCo, 2012). Furthermore, a look at their leveraged ratio provides the information that Pepsi Co is as well prepared as its competitor. This is a positive aspect and a sign for the growth of the company in the future. Pepsi Co relied on its external debt in order to finance the acquisition of the company, it is said this will result in future profits (PepsiCo, 2012).