Fictional project about PepsiCo launching an alcoholic beverage in the US and international markets. Done as part of curriculum in Jan 2010

1. Brand Extension StudyAlcoholic Beverage MarketJanuary 8, 2010 Michael Kochan James Thomson Trey Packard Nidhi Raj

2. Agenda

3. Objectives of Today’s Discussion Provide an analysis of the alcoholic beverage industry (and associated sub-markets, including beer, wine, liquor, and the nascent pre-mixed & energy segment) Analyze PepsiCo’s operational and strategic advantages as they relate to potential entry into those markets Identify, test, and address prerequisites for successful market entry Provide strategic recommendations on whether, and how, PepsiCo should pursue a new product launch in the alcoholic beverage space 3

4. Should PepsiCo Launch an Alcoholic Beverage? Hypothesis: Current conditions are favorable for PepsiCo to launch a alcoholic beverage. Sub-Hypotheses: Scalability: Growing demand in the alcoholic-beverage market supports a new entrant. Inimitability / Defensibility: There a first-mover advantage in this market. Execution test: PepsiCo’s existing manufacturing, bottling, and distribution infrastructure can be leveraged to minimize costs through economies of scale vis-à-vis its competitors. Adding an alcoholic beverage to PepsiCo’s portfolio would not negatively impact brand equity and is compatible with core corporate values. Value Proposition: Customers perceive an added value and are willing to pay a price premium for a Pepsi-branded alcoholic beverage. Necessary Assumptions to be Tested There is sufficient space in the alcoholic beverage market for another entrant. There is a significant first-mover advantage in being the first major soft drink brand to enter the alcoholic space The infrastructure for production and distribution of soft drinks is not materially different then for alcoholic beverages (and there is significant overlap between alcoholic and nonalcoholic channels) Adding alcohol to PepsiCo's product portfolio does not conflict with its core corporate values Pepsi's brand equity can be successfully extended to the alcoholic beverage market Pepsi's brand yields a price premium that extends to alcoholic-beverage customers 4

5. Agenda

7. PepsiCo’s manufacturing and distribution capabilities can be extended to the alcoholic beverage space.

8. Nevertheless, the proposal should be rejected for two primary reasons:

9. Incompatibility with PepsiCo’s core corporate values and the company’s 5-year strategic vision, and

10. Lack of defensibility of the move due to a lack of transferability of the Pepsi brand into the alcoholic beverage space6

12. There is significant first-mover advantage in being the first major soft drink maker to enter the alcoholic beverage space

13. The infrastructure for production and distribution of soft drinks is not materially different then for alcoholic beverages

14. Adding alcohol to PepsiCo's product portfolio does not conflict with its core corporate values

15. Pepsi's brand equity can be successfully extended to the alcoholic beverage market

16. Pepsi's brand yields a price premium that extends to alcoholic-beverage customers7

17. SCALABILITY: Growing Demand in the Alcoholic Beverage Market will be sufficient to support a new entrant Dollars ($B) Source: Goldman Sachs Consumer Goods Forecasting Group Attractive Opportunity Source: Survey data from 100 companies across the 4 markets 8

18. SCALABILITY: New Entrants in 2009 were able to Gain Share and Achieve Profit in Certain Markets 2009 New Entrants Market (# New Entrants) Source: Analysis of financial data from selected companies Conclusion: The alcoholic beverage market is growing sufficiently to support a new entrant. The Pre-mixed beverage market has the most opportunity for a entrant to gain share and achieve profitability. 9

20. Current competitors in the market are small, regionalized, and unable to capitalize on the demand gap

21. Should Pepsi enter the space, it should be able to immediately capture a significant proportion of the underserved market

23. The number of competitive entrants will be minimal (primarily Coca-Cola),

24. A significant time lag will exist before any competitive response,

25. Price wars are not a probable outcome, and

26. Overall market growth can be sufficient to sustain multiple entries11

27. DEFENSIBILITY: In the period before competitive response, Pepsi can strengthen its first-mover position through several defensive strategies Retail Exclusivity Distribution Channel Marketing leadership Loyal Customer Base Potential Defensive Strategies to Minimize Competitive Response Leverage strong distribution network to ensure access to all underserved markets (in the US and globally) Lock up key retail locations and points-of-sale through exclusive, multi-year and multi-geography contracts Pursue key sponsorship opportunities, launch viral campaigns, and ensure distinctive product design Strong national marketing campaign to ensure uptake and strengthen brand in advance of competitive response 12

28. EXECUTION: The infrastructure for production and distribution of soft drinks is not materially different than for alcoholic beverages Source: SEC Filings, International public filings, PepsiCo internal bottling & distribution data Conclusion: Operating margins are essentially the same for the alcoholic and non-alcoholic beverage industries. Existing bottlers and distributors of both soft drinks and alcoholic beverages cross-utilize PP&E. Significant competitive advantage should be realizable over small or regionalized competitors. 13

29. EXECUTION : Pepsi's brand equity will not be damaged by entering the alcoholic beverage market Consumer Reactions to Alcohol Proposal Survey:Please rate how this product affects your perception of the Pepsi brand where -5 means “negative affect on brand perception”, 0 means “no impact”, and 5 means “positive impact on brand perception” Source: Focus Group, January 7, 2010 Conclusion: Overall, the Pepsi brand is not damaged by introducing an alcoholic beverage, although thereare slight negative brand impacts among older loyal customers. Younger loyal and non-loyal Pepsi customers’ perception of the brand should actually improve. 14

30. EXECUTION: Adding alcohol to PepsiCo's product portfolio may conflict with its core corporate values Survey: A Pepsi-branded alcoholic beverage is not at odds with PepsiCo’s corporate strategy. 1 = Strongly Disagree, 3 = Neutral, 5 = Strongly Agree Source: Focus Group, 2009 15

32. “I would be concerned about how an alcoholic beverage might cause backlash in my markets, particularly in the Middle East and Northern Africa.” – Division Head, EMEAConclusion: Critical PepsiCo stakeholders believe an alcoholic beverage is not compatible with the Corporation’s core corporate values 16

33. VALUE PROPOSITION: While brand commands a price premium in the non-alcoholic segment, pricing power in the Alcoholic segment is driven primarily by Quality Assumption: “Key drivers of consumer purchasing behavior in the alcoholic beverage market will parallel those in the non-alcoholic space.” Non-Alcoholic Bev Market Alcoholic Bev Market H H Availability Availability Quality Brand Size Impact on Price Tolerance Impact on Price Tolerance Brand Size Quality L L H L H L Impact on Freq of Purchase Impact on Freq of Purchase Conclusion: While some variation is seen across sub-segments, consumers in the alcoholic beverage space generally place more of a premium on quality than on brand. Pepsi’s existing brand equity will not translate well to alcoholic drinks. Source: Income levels & purchase frequency by segment 17

34. VALUE PROPOSITION: Moreover, the Pepsi brand is unlikely to translate well to alcoholic markets, with the exception of the pre-mixed & energy segment Conclusion: While loyal Pepsi customers are very likely to try a Pepsi-branded alcoholic beverage in the pre-mixed and energy drink space, they are unlikely to do so in any other segment. Non-loyal customers are less likely in all cases. Loyal Customers New Customers Source: Bain & Co Focus Group, 1/7/2010 18

35. Agenda

36. Conclusions & Recommendations PepsiCo should NOT proceed with a branded alcoholic beverage. 20

37. Summary of Work Performed To-Date Timeline 12 week engagement beginning early January 2010 2 preliminary meetings after weeks 4 and 8 Final presentation at end of week 12 (early April) to CEO IndraNooyi and executive team Resources & Assignment Responsibilities 1 Partner to manage relationship with PepsiCo 1 Manager to deal with upper management at PepsiCo and manage problems during engagement 2 Consultants to manage workstreams and prepare proposals to PepsiCo 3 Analysts to collect and analyze data Strategic Question Should PepsiCo launch a Pepsi-branded alcoholic beverage? Hypothesis Current conditions are favorable for PepsiCo to launch an alcoholic beverage Analyses Does PepsiCo's brand yield a price premium that extends to alcoholic-beverage customers? Is there is sufficient space in the alcoholic beverage market for another entrant? Is there is a significant first-mover advantage in being the first major soft drink brand to enter the alcoholic space? Is the infrastructure for production and distribution of soft drinks materially different than that for alcoholic beverages (and there is significant overlap between alcoholic and nonalcoholic channels)? Can PepsiCo's brand equity be successfully extended to the alcoholic beverage market? Will adding an alcoholic beverage to PepsiCo's product portfolio conflict with its core corporate values? Data PepsiCo Interviews Surveys Published Reports Custom Reports Market Data 21