CASE 23
PepsiCo’s Diversification Strategy
in 2018: Will the Company’s New
Businesses Restore Its Growth?
John E. Gamble
Texas A&M University–Corpus Christi
P
epsiCo was the world’s largest snack and bever-
age company, with 2017 net revenues of approxi-
mately $63.5 billion. The company’s portfolio
of businesses in 2018 included Frito-Lay salty snacks,
Quaker Chewy granola bars, Pepsi soft-drink products,
Tropicana orange juice, Lipton Brisk tea, Gatorade,
Propel, Bubly, Quaker Oatmeal, Cap’n Crunch,
Aquafina, Rice-A-Roni, Aunt Jemima pancake mix,
and many other regularly consumed products. The
company viewed the lineup as highly complemen-
tary since most of its products could be consumed
together. For example, Tropicana orange juice might
be consumed during breakfast with Quaker Oatmeal,
Stacy’s pita chips and Sabra hummus might make a
nice snack, and Doritos and a Mountain Dew might
be part of someone’s lunch. In 2018, PepsiCo’s busi-
ness lineup included 22 $1 billion global brands.
The company’s top managers were focused on
sustaining the impressive performance through strat-
egies keyed to product innovation, close relationships
with distribution allies, international expansion,
and strategic acquisitions. Newly introduced prod-
ucts such as Bubly sparkling water, Mountain Dew
Ice, Doritos Blaze tortilla chips, Sweet Potato Sun
Chips, LIFEWTR functional waters, Lemon Lemon
sparkling lemonade, and the 1893 premium line of
flavored colas accounted for 15 to 20 percent of all
new growth in recent years. New product innovations
that addressed consumer health and wellness con-
cerns were important contributors to the company’s
growth, with PepsiCo’s better-for-you and good-for-
you products becoming focal points in the company’s
new product development initiatives.
In addition to focusing on strategies designed to
deliver revenue and earnings growth, the company
maintained an aggressive share repurchase and divi-
dend policy, with a planned $7 billion returned to
shareholders in 2018 through share repurchases of
$2 billion and dividends of approximately $5 billion.
The company bolstered its cash returns through care-
fully considered capital expenditures and acquisitions
and a focus on operational excellence. Its Performance
with Purpose plan utilized investments in manufactur-
ing automation, a rationalized global manufacturing
plan, and reengineered distribution systems to drive
efficiency. In addition, the company’s Performance
with Purpose plan was focused on minimizing the
company’s impact on the environment by lowering
energy and water consumption and reducing its use
of packaging material, providing a safe and inclusive
workplace for employees, and supporting and invest-
ing in the local communities in which it operated. For
example, PepsiCo had expanded access to safe water
to nearly 16 million people in water-stressed parts
of the world between 2006 and 2018. In addition,
Performance with Purpose planned to reduce average
sugars, saturated fat, and sodium in its food and bever-
age portfolio each year through 2025 and saved more
than $600 million in operating expenses by 2016.
Even though the company had recorded a
number of impressive achievements over the past
decade, its growth had slowed since 2011. In fact,
the spikes in the company’s revenue growth since
2000 had  resulted from major acquisitions such as
Copyright ©2018 by John E. Gamble. All rights reserved.
C-266 PART 2  Cases in Crafting and Executing Strategy

the $13.6 billion acquisition of Quaker Oats in 2001,
the 2010 acquisition of the previously independent
Pepsi Bottling Group and PepsiCo Americas for
$8.26 billion, and the acquisition of Russia’s lead-
ing food-and-beverage company, Wimm-Bill-Dann
(WBD) Foods for $3.8  billion in 2011. Since 2011,
the company had favored targeted “tuck-in” acquisi-
tions of leading brands in popular new healthy food
categories. Nevertheless, PepsiCo’s revenues contin-
ued to decline as annual consumption of carbonated
soft drinks fell each year and its international busi-
ness units struggled. A summary of PepsiCo’s finan-
cial performance between 2013 and 2017 is shown in
Exhibit 1. Exhibit 2 tracks PepsiCo’s market perfor-
mance between 2013 and June 2018.
COMPANY HISTORY
PepsiCo, Inc., was established in 1965 when Pepsi-
Cola and Frito-Lay shareholders agreed to a merger
between the salty-snack icon and soft-drink giant. The
new company was founded with annual revenues of
$510 million and such well-known brands as Pepsi-
Cola, Mountain Dew, Fritos, Lay’s, Cheetos, Ruffles,
and Rold Gold. PepsiCo’s roots can be traced to
1898 when New Bern, North Carolina, pharmacist
Caleb Bradham created the formula for a carbonated
beverage he named Pepsi-Cola. The company’s salty-
snack business began in 1932 when Elmer Doolin, of
San Antonio, Texas, began manufacturing and market-
ing Fritos corn chips and Herman Lay started a potato
chip distribution business in Nashville, Tennessee. In
1961, Doolin and Lay agreed to a merger between
their businesses to establish the Frito-Lay Company.
During PepsiCo’s first five years as a snack and
beverage company, it introduced new products such
as Doritos and Funyuns, entered markets in Japan
and eastern Europe, and opened, on average, one
new snack-food plant per year. By 1971, PepsiCo had
more than doubled its revenues to reach $1 billion.
The company began to pursue growth through acqui-
sitions outside snacks and beverages as early as 1968,
but its 1977 acquisition of Pizza Hut significantly
shaped the strategic direction of PepsiCo for the next
20 years. The acquisitions of Taco Bell in 1978 and
Kentucky Fried Chicken in 1986 created a business
portfolio described by Wayne Calloway (PepsiCo’s
CEO between 1986 and 1996) as a balanced three-
legged stool. Calloway believed the combination of
snack foods, soft drinks, and fast food offered consid-
erable cost sharing and skill transfer opportunities,
and he routinely shifted managers among the com-
pany’s three divisions as part of the company’s man-
agement development efforts.

EXHIBIT 1 Financial Summary for PepsiCo, Inc., 2013–2017 (in millions, except
per share amounts)
2017 2016 2015 2014 2013

Net revenue $ 63,525 $ 62,799 $ 63,056 $ 66,683 $ 66,415

Operating profit 10,509 9,785 8,353 9,581 9,705
Provision for income taxes 4,694 2,174 1,941 2,199 2,104
Net income attributable to PepsiCo 4,857 6,329 5,452 6,513 6,740
Net income attributable to PepsiCo per common $3.40 $4.39 $3.71 $4.31 $4.37
share - basic
Net income attributable to PepsiCo per common $3.38 $4.36 $3.67 $4.27 $4.32
share - diluted
Cash dividends declared per common share $3.17 $2.96 $2.76 $2.53 $2.24
Total assets 79,804 73,490 68,976 69,634 76,762
Long-term debt 33,796 30,053 29,213 23,821 24,333

Source: PepsiCo 2017 10-K.

 Case 23  PepsiCo’s Diversification Strategy in 2018: Will the Company’s New Businesses Restore Its Growth? C-267

EXHIBIT 2  Monthly Performance of PepsiCo, Inc.’s Stock Price, June 2013–

June 2018

(a) Trend in PepsiCo, Inc.’s Common Stock Price

$125
120
115
110

Stock price
105
100
95
90
85
80
75
2014 2015 2016 2017 2018
Year

(b) Performance of PepsiCo, Inc.’s Stock Price versus the S&P 500 Index
+80%
S&P 500 +70%
+60%

Percent change
(July 2013 = 0)
+50%
+40%
+30%
+20%
PepsiCo’s Stock +10%
Price +0%
-10%
2014 2015 2016 2017 2018
Year

PepsiCo strengthened its portfolio of snack foods
and beverages during the 1980s and 1990s with the
acquisitions of Mug Root Beer, 7-Up International,
Smartfood ready-to-eat popcorn, Walker’s Crisps
(United Kingdom), Smith’s Crisps (United
Kingdom), Mexican cookie company Gamesa, and
Sunchips. Calloway added quick-­service restaurants
Hot-n-Now in 1990; California Pizza Kitchens in
1992; and East Side Mario’s, D’Angelo Sandwich
Shops, and Chevy’s Mexican Restaurants in 1993.
The company expanded beyond carbonated bever-
ages through a 1992 agreement with Ocean Spray
to distribute single-serving juices, the introduction
of Lipton ready-to-drink (RTD) teas in 1993, and
the introduction of Aquafina bottled water and
Frappuccino ready-to-drink coffees in 1994.
By 1996 it had become clear to PepsiCo manage-
ment that the potential strategic-fit benefits existing
between restaurants and PepsiCo’s core beverage and
snack businesses were difficult to capture. In addi-
tion, any synergistic benefits achieved were more
than offset by the fast-food industry’s fierce price
competition and low profit margins. In 1997, CEO
Roger Enrico spun off the company’s restaurants as
an independent, publicly traded company to focus
PepsiCo on food and beverages. Soon after the spin-
off of PepsiCo’s fast-food restaurants was completed,
Enrico acquired Cracker Jack, Tropicana, Smith’s
Snackfood Company in Australia, SoBe teas and
alternative beverages, Tasali Snack Foods (the leader
in the Saudi Arabian salty-snack market), and the
Quaker Oats Company.
C-268 PART 2  Cases in Crafting and Executing Strategy
PepsiCo’s Better for You and
Good for You Acquisitions
PepsiCo’s $13.9 billion acquisition of Quaker Oats
in 2001 was the company’s largest ever acquisition
and gave it the number-one brand of oatmeal in the
United States, with more than a 60 percent category
share; the leading brand of rice cakes and granola
snack bars; and other well-known grocery brands
such as Cap’n Crunch, Rice-A-Roni, and Aunt
Jemima. However, Quaker’s most valuable asset in its
arsenal of brands was Gatorade.
Gatorade was developed by University of
Florida researchers in 1965, but it was not marketed
commercially until the formula was sold to Stokley-
Van Camp in 1967. When Quaker Oats acquired the
brand from Stokely-Van Camp in 1983, Gatorade
gradually made a transformation from a regionally
distributed product with annual sales of $90 million
to a $2 billion powerhouse. Gatorade was able to
increase sales by more than 10 percent annually dur-
ing the 1990s, with no new entrant to the sports bev-
erage category posing a serious threat to the brand’s
dominance. PepsiCo, Coca-Cola, France’s Danone
Group, and Swiss food giant Nestlé all were attracted
to Gatorade because of its commanding market share
and because of the expected growth in the isotonic
sports beverage category.
PepsiCo’s Focus on “Tuck-In”
Acquisitions (2002 to 2018)
After the completion of the Quaker Oats acquisition in
2001, the company focused on integration of Quaker
Oats’ food, snack, and beverage brands into the
PepsiCo portfolio. The company made a number of
“tuck-in” acquisitions of small, fast-growing food and
beverage companies in the United States and inter-
nationally to broaden its portfolio of brands. Tuck-in
acquisitions in 2006 included Stacey’s bagel and pita
chips, Izze carbonated beverages, Netherlands-based
Duyvis nuts, and Star Foods (Poland). Acquisitions
made during 2007 included Naked Juice fruit bever-
ages, Sandora juices in the Ukraine, New Zealand’s
Bluebird snacks, Penelopa nuts and seeds in Bulgaria,
and Brazilian snack producer Lucky. The company
also entered into a joint venture with the Strauss
Group in 2007 to market Sabra—the top-selling and
fastest-growing brand of hummus in the United
States and Canada. The company acquired the
Russian beverage producer Lebedyansky in 2008 for
$1.8 ­billion, and in 2010 it acquired Marbo, a potato
chip production operation in Serbia.
In 2010 and 2011, the company executed its larg-
est acquisitions since the 2001 acquisition of Quaker
Oats. In 2010, PepsiCo acquired the previously inde-
pendent Pepsi Bottling Group and PepsiCo Americas
for $8.26 billion in cash and PepsiCo common
shares. The acquisition was designed to better inte-
grate its global distribution system for its beverage
business. In 2011, it acquired Russia’s leading food
and beverage company, Wimm-Bill-Dann Foods, for
$3.8 billion. The combination of acquisitions and
the strength of PepsiCo’s core snacks and beverages
business allowed the company’s revenues to increase
from approximately $29 billion in 2004 to more than
$66 billion in 2013.
PepsiCo made small “tuck-in” acquisitions total-
ing less than $500 million annually after its acqui-
sition of Wimm-Bill-Dann Foods. The company’s
$200 million acquisition of sparkling probiotic bever-
age brand, Kevita, in 2016 and its 2018 acquisition of
Bare Foods for an undisclosed amount were its most
noteworthy acquisitions made after 2010. Both acqui-
sitions were intended to expand its lineup of lower cal-
orie and lower sodium “Guilt-Free Products.” Global
sales of health foods were estimated at $1 ­trillion in
2017. The sales of Better for You (BFY) and Good
for You (GFY) brands accounted for approximately
50 ­percent of PepsiCo’s annual sales in that year.
Exhibit 3 presents PepsiCo’s consolidated statements
of income for 2015 to 2017, while the company’s
balance sheets for 2016 and 2017 are presented in
Exhibit  4. The company’s calculation of free cash
flow for 2015 through 2017 is shown in Exhibit 5.
PEPSICO’S BUSINESS UNIT
PERFORMANCE
PepsiCo’s corporate strategy had diversified the com-
pany into salty and sweet snacks, soft drinks, orange
juice, bottled water, ready-to-drink teas and coffees,
purified and functional waters, isotonic beverages,
hot and ready-to-eat breakfast cereals, grain-based
products, and breakfast condiments. Most PepsiCo
brands had achieved number-one or number-two posi-
tions in their respective food and beverage categories
through strategies keyed to product innovation, close
relationships with distribution allies, international
 Case 23  PepsiCo’s Diversification Strategy in 2018: Will the Company’s New Businesses Restore Its Growth? C-269

EXHIBIT 3 PepsiCo, Inc.’s Consolidated Statements of Income, 2015–2017

(in millions, except per share data)
2017 2016 2015

Net Revenue $ 63,525 $ 62,799 $ 63,056

Cost of sales 28,785 28,209 28,731
Gross profit 34,740 34,590 34,325
Selling, general and administrative expenses 24,231 24,805 24,613
Venezuela impairment charges — — 1,359
Operating Profit 10,509 9,785 8,353
Interest expense (1,151) (1,342) (970)
Interest income and other 244 110 59
Income before income taxes 9,602 8,553 7,442
Provision for income taxes 4,694 2,174 1,941
Net income 4,908 6,379 5,501
Less: Net income attributable to noncontrolling interests 51 50 49
Net Income Attributable to PepsiCo $ 4,857 $ 6,329 $ 5,452
Net Income Attributable to PepsiCo per common share
  Basic $3.40 $4.39 $3.71
  Diluted $3.38 $4.36 $3.67
Weighted-average common shares outstanding
  Basic 1,425 1,439 1,469
  Diluted 1,438 1,452 1,485
Cash dividends declared per common share $3.17 $2.96 $2.76

Source: PepsiCo, Inc. 2017 10-K.

EXHIBIT 4 PepsiCo, Inc.’s Consolidated Balance Sheets, 2016–2017 (in millions,

except per share data)
2017 2016

ASSETS
Current Assets
Cash and cash equivalents $ 10,610 $ 9,158
Short-term investments 8,900 6,967
Accounts and notes receivable, net 7,024 6,694
Inventories 2,947 2,723

(Continued)
C-270 PART 2  Cases in Crafting and Executing Strategy

EXHIBIT 4  (Continued)
2017 2016

Prepaid expenses and other current assets 1,546 908

Total Current Assets 31,027 26,450
Property, Plant and Equipment, net 17,240 16,591
Amortizable Intangible Assets, net 1,268 1,237
Goodwill 14,744 14,430
Other nonamortizable intangible assets 12,570 12,196
  Nonamortizable Intangible Assets 27,314 26,626
Investments in Noncontrolled Affiliates 2,042 1,950
Other Assets 913 636
Total Assets $ 79,804 $ 73,490

LIABILITIES AND EQUITY

Current Liabilities
Short-term debt obligations $ 5,485 $ 6,892
Accounts payable and other current liabilities 15,017 14,243
Total Current Liabilities 20,502 21,135
Long-Term Debt Obligations 33,796 30,053
Other Liabilities 11,283 6,669
Deferred Income Taxes 3,242 4,434
Total Liabilities 68,823 62,291
Commitments and contingencies
Preferred Stock, no par value 41 41
Repurchased Preferred Stock (197) (192)
PepsiCo Common Shareholders’ Equity
Common stock, par value 1 2/3 cents per share (authorized 3,600 shares, 24 24
 issued, net of repurchased common stock at par value: 1,420 and 1,428
shares, respectively)
Capital in excess of par value 3,996 4,091
Retained earnings 52,839 52,518
Accumulated other comprehensive loss (13,057) (13,919)
Repurchased common stock, in excess of par value (446 and 438 shares, (32,757) (31,468)
  respectively)
Total PepsiCo Common Shareholders Equity 11,045 11,246
Noncontrolling interests 92 104
Total Equity 10,981 11,199
Total Liabilities and Equity $ 79,804 $ 73,490

Source: PepsiCo, Inc. 2017 10-K.

 Case 23  PepsiCo’s Diversification Strategy in 2018: Will the Company’s New Businesses Restore Its Growth? C-271

EXHIBIT 5  Net Cash Provided by PepsiCo’s Operating Activities, 2015–2017

2017 2016 2015

Net cash provided by operating activities $ 9,994 $ 10,673 $ 10,864

Capital spending (2,969) (3,040) (2,758)
Sales of property, plant, and equipment 180 99 86
Free cash flow $ 7,205 $ 7,732 $ 8,192

Source: PepsiCo, Inc. 2017 10-K.

expansion, and strategic acquisitions. The company Frito-Lay North America

was committed to producing the highest-quality
As of 2018, key trends that were shaping the indus-
products in each category and was working diligently
try were a growing awareness of the nutritional con-
on product reformulations to make snack foods and
tent of snack foods and product innovation. Most
beverages less unhealthy. The company believed that
manufacturers had developed new flavors of salty
its efforts to develop good-for-you and better-for-you
snacks such as nacho cheese tortilla chips and sea
products would create growth opportunities from the
salt and vinegar potato chips to attract the interest of
intersection of business and public interests.
snackers. PepsiCo continued to innovate to increase
PepsiCo was organized into six business divi-
its share of snack foods with new varieties of chips
sions, which all followed the corporation’s general
like Lay’s Poppables, Simply Organic Doritos, and
strategic approach. Frito-Lay North America manu-
Himalayan Pink Salt Red Rock Deli chips.
factured, marketed, and distributed such snack foods
In 2018, Frito-Lay owned the top-selling chip
as Lay’s potato chips, Doritos tortilla chips, Cheetos
brand in each U.S. salty-snack category and held
cheese snacks, Fritos corn chips, Grandma’s cook-
more than a 2-to-1 lead over the next-largest snack-
ies, and Smartfood popcorn. Quaker Foods North
food maker in the United States. Frito-Lay’s market
America manufactured and marketed cereals, rice and
share of convenience foods sold in the United States
pasta dishes, granola bars, and other food items that
was more than five times greater than runner-up
were sold in supermarkets. North America Beverages
Kellogg’s market share. Convenience foods included
manufactured, marketed, and sold beverage concen-
both salty and sweet snacks such as chips, pretzels,
trates, fountain syrups, and finished goods under
ready-to-eat popcorn, crackers, dips, snack nuts and
such brands as Pepsi, Gatorade, Aquafina, Tropicana,
seeds, candy bars, and cookies.
Lipton, Dole, and Propel throughout North America.
Innovations were also directed at making increas-
Latin America manufactured, marketed, and distrib-
ing the percentage of sales of BFY and GFY products.
uted snack foods and many Quaker-branded cereals
By 2025, Frito Lay North America (FLNA) expected
and snacks in Latin America. The division also pro-
that 75 percent of its global foods portfolio volume
duced, marketed, distributed and sold PepsiCo bev-
would not exceed 1.3 milligrams of sodium per calo-
erage brands in Latin America. Europe Sub-Saharan
ries and 1.1 grams of saturated fat per 100 calories.
Africa manufactured, marketed, and sold snacks and
Good-for-you (GFY) snacks, such as Bare Foods
beverages throughout Europe and the lower portion
baked fruit and vegetable snacks acquired in 2018,
of the African continent, while the company’s Asia,
offered an opportunity for the company to exploit
Middle East, and North Africa division produced,
consumers’ desires for healthier snacks and address a
marketed, and distributed snack brands and bever-
deficiency in most diets. Americans, on average, con-
ages in more than 150 countries in those regions. A
sumed only about 50 percent of the U.S. Department
listing of PepsiCo’s leading brands is presented in
of Agriculture’s recommended daily diet of fruits and
Exhibit 6. Select financial information for PepsiCo’s
vegetables. Other GFY snacks included Stacy’s Pita
six reporting units is presented in Exhibit 7.
C-272 PART 2  Cases in Crafting and Executing Strategy

EXHIBIT 6  PepsiCo, Inc.’s Leading Brands by Category, 2018

Top Global Brands Good for You Brands Better for You Brands Fun for You Brands

• Pepsi • Bubly Sparkling Water • Lemon Lemon • Fritos

• Lays • Quaker Oats Sparkling Lemonade • Lay’s
• Mountain Dew • KeVita Probiotic • Stacy’s Chips • Starbucks Ready-to-
• Gatorade Beverages • Alvalle Fruit Juices Drink Beverages
• Tropicana • Aquafina • H2OH! • Mountain Dew
• Diet Pepsi • Tropicana • Smartfood Snacks • Cheetos
• 7-Up • Naked Juice • Lay’s Baked • Yedigun Soft Drinks
• Doritos • Sun Bites Whole Grain • Grain Waves • Sabritas Chips
• Quaker Oats Snacks • Propel • Walkers Chips
• Cheetos • Sabra Hummus • Pure Leaf • Mirinda Soft Drinks
• Mirinda • Gatorade • Duyvis Oven Roasted • Pepsi
• Lipton • LIFEWTR Snacks • Doritos
• Ruffles • Pepsi Zero Sugar • Kurkure Chips
• Tostitos • Tostitos
• Aquafina
• Pepsi MAX
• Brisk
• Mist TWST
• Fritos
• Diet Mountain Dew
• Starbucks Ready-to-
Drink Beverages
• Walkers Chips

Source: Pepsico.com.

EXHIBIT 7 Select Financial Data for PepsiCo, Inc.’s Business Segments, 2015–2017
(in millions)
2017 2016 2015

Frito-Lay North America

Net revenue $ 15,798 $ 15,549 $ 14,782
Operating profit 4,823 4,659 4,304
Capital spending 665 801 608
Amortization of intangible assets 7 7 7
Depreciation and other amortization 449 435 427

Quaker Foods North America

Net revenue $ 2,503 $ 2,564 $ 2,543
Operating profit 642 653 560
Capital spending 44 41 40
Amortization of intangible assets — — —
Depreciation and other amortization 47 50 51
 Case 23  PepsiCo’s Diversification Strategy in 2018: Will the Company’s New Businesses Restore Its Growth? C-273

2017 2016 2015

North America Beverages

Net revenue $ 20,936 $ 21,312 $ 20,618
Operating profit 2,707 2,959 2,785
Capital spending 904 769 695
Amortization of intangible assets 31 37 38
Depreciation and other amortization 780 809 813

Latin America
Net revenue $ 7,208 $ 6,820 $ 8,228
Operating profit/(loss) 908 887 (206)
Capital spending 481 507 368
Amortization of intangible assets 5 5 7
Depreciation and other amortization 245 211 238

Europe Sub-Saharan Africa

Net revenue $ 11,050 $ 10,216 $ 10,510
Operating profit 1,354 1,108 1,081
Capital spending 481 439 404
Amortization of intangible assets 22 18 20
Depreciation and other amortization 329 321 353

Asia, Middle East and North Africa

Net revenue $ 6,030 $ 6,338 $ 6,375
Operating profit 1,073 619 941
Capital spending 308 381 441
Amortization of intangible assets 3 3 3
Depreciation and other amortization 257 294 293

Source: PepsiCo, Inc. 2017 10-K.

Chips, Sabra hummus, salsas and dips, and Quaker
Chewy granola bars. In 2018, FLNA manufactured
and marketed baked versions of its most popular
products, such as Cheetos, Lay’s potato chips, Ruffles
potato chips, and Tostitos ­tortilla chips.
PepsiCo’s Performance with Purpose goals
applied to all of its business units. Frito-Lay North
America’s revenues were unchanged after correcting
for the effect of a 53rd reporting week in 2017 and
its volume declined by 1 percent between 2016 and
2017. The decline in volume and flat revenues were
­reflective of the growing emphasis of consumers on
healthy snacking. However, the division was able to
boost operating profit by 3.5 percent between 2016 and
2017 through its focus on Performance with Purpose
cost reduction strategies and operating practices.
C-274 PART 2  Cases in Crafting and Executing Strategy
The division produced 25 percent of PepsiCo’s net rev-
enues in 2017 and 46 percent of its operating profit.
Quaker Foods North America
Quaker Foods North American (QFNA) produced,
marketed, and distributed hot and ready-to-eat cere-
als, pancake mixes and syrups, and rice and pasta
side dishes in the United States and Canada. The
division recorded sales of approximately $2.5 billion
in 2017. The sales volume and net revenue of Quaker
Foods products decreased by 2 percent between 2016
and 2017 as sales of ready-to-eat cereals declining in
single digits during 2017 and the sales of Roni prod-
ucts declining by nearly 10 percent between 2016 and
2017. Quaker Oatmeal, Life cereal, and Cap’n Crunch
cereal volumes competing in mature industries with
weak competitive positions relative to Kellogg’s and
General Mills. Quaker Oats was the star product of
the division, with a commanding share of the North
American market for oatmeal in 2018. More than
one-half of Quaker Foods’ 2013 revenues was gener-
ated by BFY and GFY products.
North American Beverages
PepsiCo was the second largest seller of non-­alcoholic
beverages in North America during 2017, with a mar-
ket share of 19 percent. Coca-Cola was the largest
non-alcoholic beverage producer in North America,
with a 22 percent market share in 2017. Dr. Pepper
Snapple Group was the third-largest beverage seller
in 2017, with less than 10 percent market share. As
with Frito-Lay, PepsiCo’s beverage business contrib-
uted greatly to the corporation’s overall profitability
and free cash flows and was heavily impacted by
­consumer preferences for healthier food and bever-
age choices.
In 2017, North American Beverages (NAB)
accounted for 33 percent of the corporation’s total
revenues and 26 percent of its operating profits. The
NAB division’s $1 billion brands included Gatorade,
Tropicana fruit juices, Lipton ready-to-drink tea,
Pepsi, Diet Pepsi, Mountain Dew, Diet Mountain
Dew, Aquafina, Miranda, Sierra Mist, Dole fruit
drinks, Starbucks cold-coffee drinks, and SoBe.
Analysts had noted that the strong consumer appeal
and rapidly growing sales of Naked Juice might soon
make it PepsiCo’s next $1 billion brand.
Gatorade was the number-one brand of sports
drink sold worldwide; Tropicana was the number-two
seller of juice and juice drinks globally; and NAB
was the second-largest seller of carbonated soft
drinks worldwide, with an approximate 27 percent
market share in 2017. Market leader Coca-Cola held
approximately 42 percent share of the carbonated
soft-drink (CSD) industry in 2017. Carbonated soft
drinks were the most consumed type of beverage
in the United States, but the industry had declined
by 1 to 2 ­percent annually for more than a decade.
The overall decline in CSD consumption was a result
of consumers’ interest in healthier food and bever-
age choices. In contrast, functional beverages, fla-
vored water, energy drinks, ready-to-drink teas, and
bottled water were growing beverage categories that
were capturing a larger share of the stomachs in the
United States and internationally.
PepsiCo’s Carbonated Soft-Drink Business. PepsiCo’s
CSD business had focused on product innovations to
sustain sales and market share, including new formula-
tions to lower the calorie content of non-diet drinks.
The strategy had produced some successes as the com-
pany had maintained its premium pricing differential
because of differentiation through innovations such as
higher-priced 7.5-ounce cans and the 1893 line of spe-
cialty sodas. However, the company’s CSD business
could not escape the overall decline in soft drink con-
sumption. While the decline in sales of CSDs in North
America had been an ongoing industry trend for more
than a decade, the decline was accelerating with indus-
try sales falling to a 31 year low in 2016. In addition,
bottled water sales in North America surpassed that
of soft drinks for the first time ever in 2017.
PepsiCo’s Noncarbonated Beverage Brands. 
Although carbonated beverages made up the largest
percentage of NAB’s total beverage volume, much
of the division’s growth was attributable to the suc-
cess of its noncarbonated beverages. Aquafina was
the number-one brand of bottled water in the United
States. Gatorade, Tropicana, Aquafina, Starbucks
Frappuccino, Lipton RTD teas, and Propel were
all leading BFY and GFY beverages in the markets
where they were sold. PepsiCo broadened its lineup
of functional beverages in 2016 with the acquisition
of KeVita sparkling probiotic drink with flavors such
as Mango Coconut, Mojito Lime Mint Coconut,
Lemon Ginger, and Blueberry Acai Coconut. Also,
the NAB division introduced LIFEWTR in 2017,
a purified water fortified with electrolytes as a
response to the increasing popularity of Coca-Cola’s
 Case 23  PepsiCo’s Diversification Strategy in 2018: Will the Company’s New Businesses Restore Its Growth? C-275
Smartwater. The introduction of Bubly sparkling
water in 2018 was initiated to target consumers of
LaCroix, a flavored sparking water that had been
produced since the 1980s but had enjoyed tremen-
dous success since 2016. Sales of domestic sparkling
water in North America doubled between 2015 and
2017 to reach $8.5 billion.
Latin America
PepsiCo management believed international mar-
kets offered the company’s greatest opportunity for
growth since per capita consumption of snacks in the
United States averaged 6.6 servings per month while
per capita consumption in other developed countries
averaged 4 servings per month and in developing
countries averaged 0.4 serving per month. PepsiCo
executives expected China and Brazil to become
the two largest international markets for snacks,
with significant growth also expected in the United
Kingdom, Mexico, and Russia.
Developing an understanding of consumer taste
preferences was a key to expanding into international
markets. Taste preferences for salty snacks were
more similar from country to country than were pref-
erences for many other food items, and this allowed
PepsiCo to make only modest modifications to its
snacks in most countries. For example, classic variet-
ies of Lay’s, Doritos, and Cheetos snacks were sold
in Latin America. In addition, consumer characteris-
tics in the United States that had forced snack-food
makers to adopt better-for-you or good-for-you snacks
applied in most other developed countries as well.
PepsiCo operated 50 snack-food manufacturing
and processing plants and 640 warehouses in Latin
America, with its largest facilities located in Guarulhos,
Brazil; Monterrey, Mexico; Mexico City, Mexico; and
Celaya, Mexico. PepsiCo was the second-largest seller
of snacks and beverages in Mexico, and its Doritos,
Marias Gamesa, Cheetos, Ruffles, Emperador,
Saladitas, Sabritas, and Tostitos brands were popular
throughout most of Latin America. The division’s rev-
enues had grown from $7.2 billion in 2011 to $8.3 bil-
lion in 2013 and accounted for 12 percent of 2013 total
net revenues. However, the division’s revenues declined
by 17 percent in 2016 as the company deconsolidated
its Venezuelan businesses in 2015 because of the coun-
try’s inflation and volatile currency.
The division’s revenues increased by 6 percent
between 2016 and 2017 as a result of price increases,
but its sales volume of snacks and beverages declined
by 1.5 percent and 2 percent, respectively, between
2016 and 2017. The division’s net price increases and
Performance with Purpose operating efficiencies led
to operating profit increases of 2 percent between
2016 and 2017.
Europe, Sub-Saharan Africa
All of PepsiCo’s global brands were sold in Europe,
as well as its country- or region-specific brands such
as Domik v Derevne, Chjudo, and Agusha. PespiCo
Europe operated 125 plants and approximately 525
warehouses, distribution centers, and offices in east-
ern and western Europe. The company’s acquisition
of Wimm-Bill-Dann Foods, along with sales of its
long-time brands, made it the number-one food and
beverage company in Russia, with a 2-to-1 advantage
over its nearest competitor. It was also the leading
seller of snacks and beverages in the United Kingdom.
PepsiCo Europe management believed further oppor-
tunities in other international markets existed, with
opportunities to distribute many of its newest brands
and product formulations throughout Europe.
The division’s snack volume sales increased by
5 percent during 2017, largely because of its tremen-
dous success in Russia where its volume increased
by nearly 10 percent between 2016 and 2017. Sales
growth in Turkey, South Africa, and the Netherlands
also contributed to the division’s volume increase
in 2017. The division’s net revenues increase by
8 ­percent between 2016 and 2017 because of the vol-
ume gains and net pricing increases. Beverage sales
grew at a weak one percent rate between 2016 and
2017, but the division’s operating profits increased by
22 percent as a result of Performance with Purpose
operating efficiencies and a gain on the sale of a
minority stake in its Britvic business. The divestiture
contributed 8 percentage points to the operating
profit growth between 2016 and 2017.
Asia, Middle East, and North Africa
PepsiCo’s business unit operating in Asia, the Middle
East, and North Africa manufactured and marketed
all of the company’s global brands and many regional
brands such as Kurkure and Chipsy. PepsiCo oper-
ated 45 plants, 490 distribution centers, warehouses,
and offices located in Egypt, Jordan, and China and
was the number-one brand of beverages and snacks
in India, Egypt, Saudi Arabia, United Arab Emirates,
C-276 PART 2  Cases in Crafting and Executing Strategy
and China. The division’s revenues had declined
from $6.4 billion in 2015 to $6.0 billion in 2017, while
its operating profit had fluctuated from $941 ­million
in 2015 to $619 in 2016 to nearly $1.1 billion in
2017. The division’s revenue declines were primar-
ily attributable to unfavorable currency exchange.
The 2016 decline in operating profit resulted from
higher commodity costs and higher advertising and
marketing expenses. The operating profit increase
between 2016 and 2017 was largely tied to its gain on
the refranchising of its beverage business in Jordan,
which contributed 14 percentage points to the overall
operating profit growth.
Value Chain Alignment between
PepsiCo Brands and Products
PepsiCo’s management team was dedicated to cap-
turing strategic-fit benefits within the business lineup
throughout the value chain. The company’s procure-
ment activities were coordinated globally to achieve
the greatest possible economies of scale, and best
practices were routinely transferred among its more
than 200 plants, over 3,500 distribution systems, and
120,000 service routes around the world. PepsiCo
also shared market research information with its divi-
sions to better enable each division to develop new
products likely to be hits with consumers, and the
company coordinated its Power of One activities
across product lines.
PepsiCo management had a proven ability to
capture strategic fits between the operations of new
acquisitions and its other businesses. The Quaker
Oats integration produced a number of noteworthy
successes, including $160 million in cost savings
resulting from corporatewide procurement of prod-
uct ingredients and packaging materials and an esti-
mated $40 million in cost savings attributed to the
joint distribution of Quaker snacks and Frito-Lay
products. In total, the company estimated that the
synergies among its business units generated approxi-
mately $1 billion annually in productivity savings.
PEPSICO’S STRATEGIC
SITUATION IN 2018
PepsiCo’s strategy keyed to building its global
brands, developing product innovations, and boost-
ing productivity through efficient operations had
produced strong operating profits and annual free
case flows through 2017. Nevertheless, the decline
in the consumption of carbonated soft drinks and
the low relative profit margins of some of PepsiCo’s
international businesses signaled possible flaws in its
corporate strategy. A lack of revenue growth and an
increased reliance on its Frito Lay North American
business unit to maintain its annual operating profits
and free cash flow were troubling metrics to inves-
tors. Since 2013, the company’s overall revenues and
net income had declined steadily and its stock price
had lagged the growth in the S&P 500.
The company was aggressively pursuing a strat-
egy to increase its GFY and BFY brands and improve
the overall healthiness of its product portfolio. Its
acquisitions of established brands such as Gatorade
and Tropicana had added to its portfolio of $1 billion
brands and new acquisitions such as Naked Juice might
soon add to that list with healthy food and beverages.
Additional product introductions and acquisitions
such as Bubly and Bare Foods might also contribute
to future revenue growth. However, some food and bev-
erage industry analysts had speculated that additional
corporate strategy changes might also be required to
restore previous revenue and earnings growth rates and
lead to increases in shareholder value.