PepsiCo Restaurants Position Paper


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PepsiCo Restaurants Position Paper

  1. 1. Position Paper: PepsiCo’s Restaurants<br /> Önder BARLAS<br /> Executive MBA Student<br /> Boğaziçi University, Istanbul<br />Abstract: <br />This position paper aims to evaluate “PepsiCo’s Restaurants” case study by the Harvard Business School. First a short summary, including the facts standing out from the rest will be given followed by a SWOT analysis. An initial due diligence will be conducted to investigate the advantages/disadvantages of an acquisition with Carts of Colorado and California Pizza Kitchen. <br />3483416700500<br /><ul><li>Basic Information about PepsiCo</li></ul>In 1965, believing that snacks sales well with soda (complimentary products), Pepsi-Cola, which had sales of about $450 million, merged with Frito-Lay Company, a $184 million snack foods concern,. Afterwards the combined company was named PepsiCo. Its organization had eight major parts: Pepsi-Cola North America, Pepsi-Cola International, Frito-Lay, Inc., PepsiCo Foods International, Pizza Hut Worldwide, Taco Bell Worldwide, Kentucky Fried Chicken Corporation, and PepsiCo Food Systems Worldwide.<br /><ul><li>Facts and Figures</li></ul>Soft Drinks:<br />Soft drinks represented 35% of PepsiCo's sales and 39% of its operating profits in 1991. With four of the top-selling U.S. soft drinks (Pepsi, Diet Pepsi, Caffeine Free Diet Pepsi, and Mountain Dew), the company held nearly a third of the $47 billion U.S. soft drink market. Internationally, PepsiCo's share of the $11 billion market was about 15%:<br /><ul><li>Snack Foods </li></ul>With top-selling brands, such as Doritos, Lay's, Fritos, and Ruffles, Frito-Lay's share of the $10 billion U.S. snack chips market was nearly half, and PepsiCo Foods International (PFI)'s share of the $13 billion international snack chips market was about one-quarter.<br /> <br />Restaurants:<br />The U.S. foodservice industry had sales of about $250 billion in 1991, and industry experts expected sales to double in the following 10 years. PepsiCo's strategy is based on this forecast assuming that quick service restaurants would remain the largest segment. They identified several major trends:<br />•Simplicity and Convenience.<br />•Value rather than prestige and status<br />•Growth in ethnic product categories<br />•Growth in health and nutrition <br />After that analysis PepsiCo’s decision was to invest in quick service-, casual dining and- take-out –segments.<br />In 1986, PepsiCo purchased Kentucky Fried Chicken. Combined with Pizza Hut and Taco Bell, the purchase made PepsiCo the international leader in number of restaurant units. In 1991, PepsiCo's restaurant segment attained the highest revenue of the company's three segments, surpassing soft drinks for the First time. That year, restaurant sales and operating profits were 36% and 26% of the total, respectively. <br /><ul><li>SWOT Analysis of PepsiCo’s Restaurants</li></ul>First a short SWOT analysis of PepsiCo will be conducted:<br />Strengths:<br /><ul><li>Each PepsiCo company’s business strategy aligns with the corporates’ business strategy to invest in quick service, casual dining and take-out segments.
  2. 2. Continuous double digit grow through aggressive strategies
  3. 3. Strong innovative spirit within the company
  4. 4. Well segmented restaurant brands
  5. 5. Tacho Bell: The discount leader in the fast-food industry serves ethnic (Mexican) food.
  6. 6. Pizza Hut: Italian style pizza for average income level
  7. 7. KFC: A dinner operation, selling freshly-prepared fried chicken for average income level
  8. 8. Internal movement of manager allows good experience sharing
  9. 9. Investments in technology increases efficiency</li></ul>Weaknesses:<br /><ul><li>Strong resistance to higher management control, because companies act as themselves when it comes to operational issues. Lack of cooperation between brands lead to increase in fixed cost which should be decreased through synergies (The Toilet Paper victory)
  10. 10. Lack of casual dining segment competence. The Salsa Rio Grill & Salsa Bar, a 115-seat restaurant serving Mexican and Southeastern foods, was Taco Bell’s, whereas Pizza Hut Café was Pizza Huts’ casual dining trial. Both were unsuccessful and have been closed in a year. The reason could be that casual dining restaurants are more expensive than quick service restaurants. The brand images of Pizza Hut and Tacho Bell were not just enough to convince the customer to pay more
  11. 11. Bargaining power of B2B customers (franchises) are high, because in terms of new methods, franchises act concerned as they main interest is their own revenue, not PepsiCo’s
  12. 12. PepsiCo’s main competitors in restaurant segment are also its potential customers. Burger King, for example is a potential customer for Pepsi, but a competitor to PepsiCo’s restaurants</li></ul>Opportunities:<br /><ul><li>Shared purchasing of raw materials could lead to savings about %100 million annually.
  13. 13. As there is %33 and %31 increases in operating profits between 1991-1989, PepsiCo could focus more in international restaurant market rather than local.
  14. 14. Investments in the health and nutrition segment could create a first mover advantage</li></ul>Threads:<br /><ul><li>KFC shows cost inefficiency between the years 1989-1991. With increasing net sales, net operating profits are decreasing which could be led due to poor economies of scale management. If this run continues, it seems likely that KFC will confront losses.
  15. 15. Due Diligence Results</li></ul>In this section basic due diligence factors will be discussed regarding a possible acquisition of Carts of Colorado and California Pizza Kitchen.<br />Economies of scale: This refers to the fact that the combined company can often reduce its fixed costs by removing duplicate departments or operations. Since “Carts of Colorado” is producing carts, which is not a part of PepsiCo’s core business no economies of scale could be achieved. By acquiring “California Pizza Kitchen” PepsiCo there is a slight chance that fixed costs would decrease, as they both operate in restaurant business. It would be a tough task for the PepsiCo management to integrate its processes to their restaurant chain as PepsiCo’s decentralized approach does not allow them to benefit from economies of scale. <br />Economies of scope: <br />As “California Pizza Kitchen” is a casual dining restaurant which offers special pizza products more exclusive than Pizza Hut, selling both brands in one store would decrease the demand for both.<br />Increased revenue or market share: The acquisition of “California Pizza Kitchen” can increase PepsiCo’s market power in the casual dining segment (by capturing increased market share).<br />Cross-selling: Cross selling potentials could be used by acquiring “Carts of Colorado”. KFC and Tacho Bell could offer franchise opportunities bundled with “Cart of Colorado” products.<br />Synergy & Cannibalization: <br />Real synergies could only be obtained through a merger with Pizza Hut and build a new brand that uses the casual dining experience of “California Pizza Kitchen”. To consolidate “California Pizza Kitchen” into a Pizza Hut brand could have brand cannibalization effects as they would then be present on the same segment and eventually compete against each other.<br />Resource transfer:<br />Since “Carts of Colorado” is producing carts, which is not a part of PepsiCo’s core business resource transfers would have no benefits. By acquiring “California Pizza Kitchen”. PepsiCo can use its human resources for their own success (distinctive menu, building customer loyalty). They could learn how to achieve high average table turnover and revenues per unit much higher than typical restaurant ($ 3.000.000 against $ 1.200.000).<br />Vertical integration: <br />-Kentucky Fried Chicken targeted factories with "huge populations" because its products had "tremendous blue-collar appeal. The chain also targeted college campuses because for many students, convenience was a priority. <br />-Pizza Hut plans expansion into non-traditional locations, such as airports, amusement parks, stadiums, and school lunch rooms—using free-standing kiosks.<br />-Tacho Bell wants to reach airports,' stadiums, retail stores, colleges, and other nontraditional settings with carts, kiosks, and other downsized modular units.<br />To realize the goals mentioned above, PepsiCo needs modular units. Therefore a backward integration by purchasing “Carts of Colorado” would create efficiency as they can decrease the delivery times of modular units for PepsiCo and the average time to penetrate in these locations. They produce carts for each specific brand with specific use such as a pizza cart with mini pizza owen, or more storage capacity etc…Contrary to that “Carts of Colorado” could lose customers from other firms, who directly compete with PepsiCo restaurants.<br />Financial Opportunities:<br />By looking to the latest financial results, it can be noticed that “Carts of Colorado” nearly tripled its income in one period. California Pizza Kitchen has increased its income by %44. Regarding the brief information filtered from the text, no financial problems exist for both firms.<br /><ul><li>Strategies for Future Use</li></ul>If managed properly “California Pizza Kitchen” may have strong synergies with Pizza Hut. Pizza Hut have plans to move towards the Casual dining segment where “California Pizza Kitchen” is a champion The culture of internal movement and promotion through success seems to fit well under PepsiCo’s traditional management style.<br />The acquisition of “Carts of Colorado” could have backward integration benefits but would also include risks as the technology is not one of PepsiCo core businesses. If not managed efficiently, “Carts of Colorado” may lose its competitive advantage and PepsiCo would be bound either to buy not competitive carts or to let its subsidiary incur losses.<br />In this context the acquisition of “California Pizza Kitchen” seems to be less risk averse and efficient. As international sales are increasing in double digits “California Pizza Kitchen” could be used to penetrate in international casual dining markets. Carts can be purchased from other manufacturers, but you cannot buy business know-how unless you acquire the main source.<br /><ul><li>References</li></ul>Montgomery, C., Magnani, D., PepsiCo’s Restaurants, 26 pages. Publication date: Jan 14, 1994<br />