PESTLE and SWOT analysis of PepsiCo 2017
- For Coca Cola Pestle and Swot analysis, see Coca Cola Pestle & Swot.
- For Unilever Pestle and Swot analysis, see Unilever Pestle & Swot.
PepsiCo is an American based multinational corporation that is engaged in the manufacture, marketing and distribution of a broad range of snack foods and beverage brands including the iconic Pepsi Cola, which was formulated in 1898 by a pharmacist who founded The Pepsi-Cola Company. It became PepsiCo in 1965 after a merger with Frito-Lay, Inc. PepsiCo owns 22 billion dollar brands, referring to individual brands each generating annual retail revenue in excess of US$1billion (Annual Report 2016). These include Pepsi-Cola, Frito-Lay, Doritos, Gatorade, Quaker, Tropicana etc. The company is headquartered in Purchase, New York. Net revenue for the year ended 31st December 2016 was US$62.8 bn on operating income (pre-tax profit) of US$9.7bn (Annual Report 2016).
2.0 PepsiCo PESTLE analysis 2016-2017(Opportunities and threats)
2016 was a challenging year for the United States carbonated soft drinks (CSD) market, which has continued to decrease for nine straight years as total sales and volume of sugary sodas consumed by Americans, has continued to decline for 11 consecutive years. According to Kell (2017), this is part of a long-term trend driven by consumer fears over the use of high calorie sugars and artificial sweeteners such as high fructose corn syrup and aspartame, two of the most controversial artificial sweeteners often used in diet colas. The use of such sweeteners is also the reason why sales of even diet sodas, supposed to be the industry saviours, continued to dip in 2016 with Diet Pepsi seeing a volume decline of 9.2% compared to 4.3% for Diet Coke as consumers opt for healthier options (Kell 2017).
With carbonated drinks like Pepsi Cola losing market share to non-carbonated drinks such as bottled mineral water, many food and beverage firms including PepsiCo are remaking their brand portfolios either through innovative reformulations of existing products or adding new product categories in order to tackle new food and beverage trends (Kell 2017b).
In the following section, we will identify the major food and beverage trends that are driving PepsiCo’s external market environment including the US soft drinks industry in general. This will help us understand how the beverage firm can utilise its brand competencies so as to take advantage of macro environmental opportunities while at the same time neutralising emerging threats that may undermine its progress.
2.1 Political environment
PepsiCo and other beverage firms including Coca Cola are currently embroiled in a battle over proposals by a number of US states over the introduction of a soda tax on artificially sweetened beverages such as diet soda. The soda tax which was first introduced in Berkeley in 2015 was also adopted by Philadelphia taking effect from January 2017. The tax which raises soda prices by 3 cents per ounce in the Philadelphia has recently been successfully passed in four other state cities including San Francisco, Oakland, Seattle in Washington and Boulder Colorado (Esterl 2017). If more states successfully follow through with similar proposals designed to reduce soda consumption, it will hurt Pepsi sales at a time when unit case volume sales are already in decline as carbonated drinks lose their popularity among health-conscious consumers. Soda taxes have already been shown to reduce soda consumption with a UC Berkeley study in August 2016 showing a 26% drop in the consumption of soda among low-income Berkeley neighborhoods after the Californian city introduced a soda tax in the previous year (Anwar 2016; Cohen 2016).
2.2 Economic environment
A stronger dollar in 2016 put significant pressure on PepsiCo revenues derived from overseas businesses (Kell 2017). Foreign-exchange swings saw the company spinning off its Venezuela operations from its accounts due to an inability to exchange the local currency (Yuk 2016). The strong dollar in conjunction with broader negative trends in soda consumption in PepsiCo’s core North American market meant 2016 revenue fell by 0.4% from US$63.1billion in 2015 to US$62.8 in 2016 (Annual Report 2016).
2.3 Social environment
The macro social environment can include changes in people’s lifestyles, fashion, labour composition, social mobility and other demographic trends that have the potential to either threaten PepsiCo or avail opportunities to them. One such lifestyle change with future potential to affect Pepsi sales dramatically is consumer-focus on healthy beverages. With soda consumption in the United States falling to a 30 year low in 2016 (Sun 2017), bottled water consumption finally managed to overtake soda to become the largest beverage category by volume (see figure 1). Americans are now drinking more bottled water than sugary drinks amid increased concern over their impact on health, in particular Type 2 diabetes and obesity rates, which have risen to among the highest levels in the world (Purdy 2016).
Figure 1: US beverage market growth 2015-2016
The good news is that PepsiCo like rival Coca Cola, seems to have long been aware of consumer trends to cut back on sugar intake and has embarked on remaking its brand portfolio either through innovative reformulations of existing products or adding new product categories in order to tackle these social trends driving food and beverage consumption. The launch of Tropicana Essentials Probiotics was for instance, a move to tap into the rapidly growing healthy juices category. It has also introduced to the market reduced sugar versions of 7Up, and it is currently poised to generate millions from its new premium water brand LIFEWTR (Kell 2017b).
2.4 Technological environment
When it comes to the technological factors affecting PepsiCo in the macro environment, it is the digital revolution, more specifically the emergency of online marketplaces, which is proving to be revolutionary in its impact on the way legacy beverage companies such as PepsiCo transact with consumers (Annual Review 2016). The pace of retail technological change especially the growing acceptance of digital bots, artificial intelligence, driverless delivery networks, 3-D printing and other technologies with a focus on speed, convenience and ubiquity are enabling shoppers to operate seamlessly across and between all retail channels. According to CEO Indra Nooyi, mobile technology and ecommerce present a great opportunity for firm to communicate with customers directly on a more personalized level. The company is already looking at launching select online grocery stores as a way to expand the deliverability of its beverage and snack product portfolio (Gee 2017).
2.5 Legal environment
PepsiCo recently agreed to revise labels on Naked Juice drinks following a lawsuit filed in 2016 by consumer advocacy group the Center for Science in the Public Interest (CSPI). The lawsuit alleged that PepsiCo deliberately deceived consumers, misleading them about the actual ingredients in Naked Juice. The lawsuit aimed to prove that PepsiCo was using misleading statements like "no sugar added" and "only the best ingredients" (Addady 2016). The company agreed to revise labels on Naked Juice drinks with statements that accurately reflect ingredients and will emphasize key facts such as “Fruit Juice is Not a low calorie food” as well as emphasize that juice is much higher in sugar content than vegetable juice (Morran 2017).
2.6 Environmental factors
The transition to a low carbon and resource-efficient future is underway, affecting almost every sector of the global economy. However, for the world’s biggest soft drinks brands, the biggest environmental issues they continue to grapple with are local environmental considerations especially the impact of their waste from all the plastic bottles and aluminium cans for their drinks. According to Greenpeace (2017), the top six global soft drinks firms; Nestle, PepsiCo, Coca Cola, Suntory, Danone and Dr Pepper Snapple use a combined average of just 6.6% recycled plastic in their bottles with Coca Cola alone producing more than 100bn plastic bottles annually, much of it ending up in the world’s oceans rather than plastic recycling systems (Taylor and Laville 2017).
Figure 3: PepsiCo pestle analysis 2016-2017
3.0 PepsiCo BCG Matrix 2017
3.1 Cash Cows
Pepsi’s Tropicana juice is categorized as a cash cow for the company because given the declining orange juice market in the US (Morris 2017), Tropicana has managed to attain a high market share of 30.5% (Statista 2018) of the orange juice market with 2017 revenues amounting to $902.58 million in the US (Statista 2018). In addition, Pepsi’s potato chips brands such as Lays, and Ruffles are classified as cash cows due to their high revenues for instance Lays is the dominating chips brand in the US with a market share of 29.6% and a revenue of $1694.2million in 2017 (Statista 2018). Therefore, both Tropicana and Pepsi’s potato chips brands Lays and ruffles need to invest little in their brands to keep revenues and market shares high but need to invest more in Aquafina to facilitate its growth into a cash cow with stable revenue. Frito Lay, a brand of Lays is also one of worlds most valuable brands worth $14.4 Billion (Forbes 2018).
Aquafina bottled water is considered a star for the Pepsi company since it has an evolving market that is attributed to population growth that enhances bottled water consumption. The global bottled water market is expected to grow at a CAPR of 7.95% between 2017-2021 (Research and Markets 2017), therefore Aquafina being the third most selling bottled still water brand in the US with a 9.4% market share (Statista 2018) and a total revenue of $1079.36million in 2017 has ability to attain a bigger market share (Statista 2018). Although World Health Organization review found that 90% of bottled water brands including Aquafina contain microplastics, Aquafina, with large capital investments can mature into a cash cow with a stable revenue ousting its major competitors Dasani and Private Label (Readfearn 2018).
3.3 Question Marks
Pepsi’s carbonated soft drink product Mountain Dew is classified as a question mark because given its 6.7% market share in the US market, Mountain Dew has failed to attain significant revenue (Bhasin 2018). And despite the heavy investment by Pepsi group, Mountain Dew has failed to gain popularity and revenue like Pepsi beverage. However, the soft drink industry is expected to grow at a CAGR of 5.62% between 2017 and 2021 which provides an opportunity for Mountain due to attain a bigger market share. Therefore, heavy capital investments in Mountain Dew brand will facilitate its growth into a cash cow for Pepsi group with stable revenue (PR Newswire 2017).
The energy drink industry dominated by Red Bull has matured over the years resulting to relatively slow growth in the sector. AMP Energy drink, a brand of Pepsi is grouped as a dog because given the mature energy drink market (Buono 2017), AMP has failed a gain a significant market share in the energy drink industry. Although the brand has had sales worth over $13.7million sales in the US, it does not have a clear viewpoint about future growth given its highly competitive market (Statista 2018). Given its highly maturing market, AMP energy drink sales have decreased by $11.06million between 2015 and 2017 due to less market opportunities in the industry. Therefore, Pepsi should not invest heavily in AMP energy drink since it has limited growth.
4.0 PepsiCo SWOT analysis 2017
- Second biggest food and drinks company in the world after Nestle and ahead of Coca Cola which it surpassed recently (McGrath 2017).
- PepsiCo has a more diversified portfolio that is broader hence less reliant on beverages compared to rival Coca Cola. Snack food sales in fact contributed 52% to 2016 global revenue compared to 48% captured by beverages (Annual Report 2016; Walsh 2016).
- Strong and rising brand portfolio. Ranked 1st by Kanter Retail’s 2016 “Power Ranking® Survey” for best in-class manufacturer. Advantage Report® retailers named Pepsico first overall among fast moving consumer goods suppliers. This recognized the fact that in 2016, the company was actually the biggest driver of growth for food and beverage retailers in the US with its diverse product portfolio contributing 18% of total food and beverage retail sales growth (Annual Report 2016).
- Boasts 22 brands that earn annual retail revenue in excess of US$1billion.
- Growing premium and sugar-free product portfolio
- NFL and NBA sponsorship deals will drive marketing and brand recognition going forward.
- Too reliant on North American sales (USA & Canada) which amounted to US$39.4bn or 63% of PepsiCo’s annual global revenue (Annual Report 2016).
- Consumption of carbonated sodas has been in decline steadily over the years in the US reaching a 30 year low in 2016 (Walsh 2016; Kell 2017).
- Lucrative NFL and NBA sports sponsorship deals will drive marketing and brand recognition at a time when soda consumption is not only declining but when offers such as Diet Pepsi are losing market share to non-carbonated drinks (Walsh 2016).
- The divesture of minority stake in Britvic will help PepsiCo transform its portfolio to ensure it has more reduced sugar options (Gee 2017).
- Growth in lower-calorie beverages such as value-added bottled water (e.g. sparkling, flavored, and "vitamin" waters), coffee, teas and other high growth healthy beverages.
- As part of its initiative to diversify away from sugary drinks and towards healthier options, PepsiCo has been engaged in talks to acquire All Market, the global leader in coconut water and the owner of Vita Coco (Reuters 2017).
- According to CEO Indra Nooyi, mobile technology and ecommerce present a great opportunity for firm to communicate with customers directly on a more personalized level. The company is already looking at launching select online grocery stores as a way to expand the deliverability of its beverage and snack product portfolio (Gee 2017).
- Lots of US cities and states are reviewing proposals to implement a soda tax, a tax that already has been shown to reduce soda consumption wherever it’s introduced.
- The brand value of Pepsi dropped by 4% in 2016 to $18.2bn according to Brand Finance (2016).
Figure 4: PepsiCo SWOT Analysis 2017
5.0 PepsiCo Five Forces Analysis 2017
5.1 Bargaining power of buyers
According to Grant (2016), the ability of buyers to drive down the prices they pay depends upon two factors: their price sensitivity and their bargaining power relative to the firms within the industry. Price sensitivity is normally determined by factors like product differentiation, competition, and significance of the product to the consumer. However, consumer bargaining power is determined by factors like cost and ease of switching to purchase products from Pepsi’s competitors like Coca-Cola, as well as buyer information regarding prices of carbonated soft drinks in the market. Considering all the above factors, we can observe that Pepsi’s customers in the food and beverage industry have a relatively high bargaining power due to availability of similar products in the market that have relatively similar prices. This makes product switching costs low which gives the customer power to easily switch from Pepsi products to other products which affects its sales. In addition, Pepsi buyers such as Arby’s, Taco Bell, KFC, extra have a moderately high bargaining power because they purchase products in bulk with profits Pepsi Company (Gould Skye 2017). However, Pepsi has high customer loyalty and branding which has enabled its high revenues.
5.2 Bargaining power of suppliers
The bargaining power of suppliers has similar determinants like the bargaining power of buyers in an industry, according to Grant (2016). The only difference is that it is now the firms in the industry that are the buyers and the producers of inputs that are the suppliers. The relevant factors are the ease with which the firms in the industry can switch between different input suppliers and the relative bargaining power of each party. Considering the food and beverage industry, suppliers such as ASI international Inc who supply ingredients, Source one Packaging who supply packaging and labelling materials, Sidel Inc who supply equipment and machinery, extra have a relatively low bargaining power because there are many existing suppliers in the food and beverage industry. This gives Pepsi power to get products from suppliers at relatively low costs to improve their profit margins since it is one of the world’s largest food and beverage companies (McGrath 2017).
5.3 Competitive Rivalry
According to Grant (2016), the major determinant of the state of competition and the general level of profitability is rivalry among the firms within an industry. In some industries, firms compete aggressively to the extent that prices are pushed below the level of costs and industry-wide losses are incurred. Whereas in other industries, price competition is muted, and rivalry focuses on advertising, innovation, and other non-price dimensions. Competition intensity is determined by factors such as seller concentration, diversity of competitors, product differentiation together with excess capacity and exit barriers according to Grant (2016). Considering these factors, we can conclude that Pepsi faces intense but muted competition in the food and beverage industry mainly from Coca-Cola which produces similar products associated with similar price ranges. This has led to cola wars that are considered biggest soda rivalry in history and product innovations. For example, Pepsi ventured in production of potato chips such as Frito-Lay chips to boost its revenue and oust its competition (Bloomberg 2018). However, Pepsi faces moderate competition from fellow potato chip companies like Private label, Kellogg Co in the potato chips market because its Frito-Lay chips control most of the market share with different brands that include Cheetos, Doritos, Tostitos and Ruffles. (Statista 2018).
Also, Grant (2016) explains that barriers to exit are costs associated with capacity leaving an industry. Where resources are durable and specialized, and where employees are entitled to job protection, barriers to exit may be substantial. Considering Pepsi, the barriers to exit are extremely high forcing it to stay and compete with other companies like Coca-Cola.
5.4 Threat of new entry or barriers to entry
According to Grant (2016), if an industry earns a return on capital in exceeding its cost of capital, it will attract entry from new firms and firms diversifying from other industries which will increase competitiveness in the market and lower its profitability. However, the ease with which new entrants can access a market depends on barriers to entry and the effectiveness of barriers set my existing companies like Pepsi and Coca-Cola. The major barriers to market entry across industries are capital requirements, economies of scale, absolute cost advantages, product differentiation, access to channels of distribution, government and legal barriers, retaliation and effectiveness of barriers to entry according to Grant (2016). By applying these factors to the food and beverage industry, we conclude that Pepsi faces a high threat of entry because of low product differentiation between existing products like Pepsi and Coca-Cola. Pepsi and Coca-Cola have similar branding techniques which results in low product differentiation.
5.5 Threat of substitutes
According to Grant (2016), the price that consumers are willing to pay for a product depends on the availability of substitutes for the products. The absence of substitutes for a product means that consumers are comparatively insensitive to price. However, the existence of close substitutes means that customers will switch to substitutes in response to price increases for the product (demand is elastic with respect to price). The extent to which substitutes depress prices and profits depends on the propensity of buyers to substitute between alternatives. This, in turn, depends on their price-performance characteristics. Considering these factors, we can conclude that Pepsi faces a high threat of substitutes because its substitutes are mainly products like iced coffee, coconut water, iced herbal tea, fruit infused water, biscuits among others. However, with the growing market of ready to drink teas, Pepsi ventured in production of Brisk ready to drink tea to minimize the growing threat and create a new source of revenue (Dobos 2017).Considering these factors, we can conclude that Pepsi faces a high threat of substitutes because its substitutes are mainly products like iced coffee, coconut water, iced herbal tea, fruit infused water, biscuits among others. However, with the growing market of ready to drink teas, Pepsi ventured in production of Brisk ready to drink tea to minimize the growing threat and create a new source of revenue (Dobos 2017).
From the above analyses, we look at how various macro factors have affected the growth of Pepsi forexample new soda tax rates in US will affect the profitability of Pepsi. However the increased focus on healthy beverages by consumers gives Pepsi a wider market for its products. In the Swot analysis, we look at Pepsi's strengths, weaknesses, opportunities and threats with competitor Coca-Cola being Pepssi's major threat. In the Porters analysis, we look at how competitive rivalry, buyer power and supplier power are most likely to affect the profitability of Pepsi.
Rerences available upon request.
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