Zachary Thiele

MGT 460

Individual Case Analysis

Pepsico Restaurants

Executive Summary

Pepsico has been around since the 1890s as a carbonated beverage company and flourished as a low cost leader through the turn of the century through World War 2. The company changed from a low cost leader to an aggressive competitor, this is most certainly evident through its acquisition of Frito Lay and various fast food locales that took place mostly in the 1980’s. At this point in time Pepsico is deciding if purchasing the companies Carts of Colorado, a fast food vending service, and California Pizza Kitchen, a casual dining pizzeria, are good investments.

Carts of Colorado generated $7 million in sales last year and have 100 employees at its disposal. The company vends many fast food restaurants, all of which are not currently owned by Pepsi, at various venues and the carts cost around $1,200 and make nearly as much as a restaurant.

California Pizza Kitchen is a chain that originally focused on providing unique and often times bizarre ingredients for casual dining pizza. Now they focus on California cuisine in general and have had a few leadership changes throughout the years. The company made $34 million last year with locations in 8 different states and appears to be expanding quickly in the near future.

Pepsico has focused on being an aggressive competitor in recent years and plans to overtake Coca Cola by going in as many different routes as possible. By purchasing these chains Pepsico hopes to achieve more brand recognition as well as acquire more “fountain space”, essentially making them the only beverage option in restaurants with the exception of water.

Though Pepsico is focusing on both at the same time and simply purchasing the companies outright I would recommend the company purchase portions of Carts of Colorado and rebrand the company, purchase one California Pizza Kitchen location or few of them, and talk to their current restaurants and gauge their opinion, especially Pizza Hut’s as not to create brand confusion or unnecessary competition within the company.

If Pepsico were to take these measures the uncertainty of purchasing a company that may lose money is lost. This in addition to expansion of the brand will increase overall sales, not just sales at these venues due to exposure of the product to the public. Pepsi will then I nthe process be differentiating their strategy by focusing not just on beverages but also food products. Thus in the process they are changing the scope of competition. No longer is competition simply between beverages but now it is between restaurants as well. Though they may not be number one in beverage sales they could be the number one money maker out of the two major beverage companies.

Industry Analysis

The food industry made roughly 250 billion dollars last year and many of these dollars were restaurants currently owned by Pepsico. Twenty-five percent of food service revenue was generated by quick service restaurants, while 2% went to delivery and 7% went to take out. All of these mediums are currently covered by Pepsico however the company currently does not

have any restaurants in casual dining or the “other” category. Casual dining creates 10% of that 250 billion dollars, and the other category which would encompass Carts of Colorado has 12% of the market. Therefore 22% of the market is currently lost by Pepsico, which equates to 55 billion dollars of market that Pepsi is not receiving any revenue from. Porter’s five forces are an excellent way to examine this decision for Pepsico. First of all a big thing to look at is if it will be difficult to purchase up these companies and run them as is.

The cost associated with buying each company is relatively low compared to how much Pepsi makes every year so simply buying the company outright is not a burden. However what does contribute to this cost is if the companies will change after the buyout and possibly change the quality the companies currently put out on their own. These companies are also both relatively new and could naturally go under anyway due to lack of interest later down the line. Pepsi has had success with buying up new fast food restaurants in the past but it could simply be a market looking for a product they do not yet have.

Currently Coca Cola is not focusing on buying its partners; it is simply relying on tried and true partnerships that have lasted throughout the years as well as the fact that they are the reigning soda champion. By buying up its partners as well as those companies within the food industry seen as up and coming the company has retained and increased market share. Also by owning the company that sells its product it would be nearly impossible for Coke to come in and begin selling their products. Therefore, Pepsi may have competitors looking to buy these companies so there may be a time factor but it is certainly not a threat from Coke.

Besides Coke though, a substitute Pepsi needs to look out for is themselves since they already own Pizza Hut those employees or customers could confuse California Pizza Kitchen and feel that spending more on the same companies “type of product” could be a waste of money. Pepsico needs to be sure they are advertising that it is a unique California restaurant with intriguing and out of the box toppings on their signature pizza, rather than advertising the locale as a casual pizza restaurant.

People have become busier with changing times and want to eat quicker, therefore the quick service, or fast food restaurant has become a great place to sell a soda. This coupled with the acquisition of Frito Lay have increased Pepsi’s dominance in purchasing the complements to its products. Therefore since Pepsi has not only bought many fast food restaurants but also increased the profitability of the industry. The next step would be to dip their toes into the food cart industry as well as casual dining.

At this point in time Carts of Colorado is the cheapest per cart in term of design, though not necessarily the cheapest to purchase or most profitable. The company does however account 20% of its sales to Pepsi products and by creating many new partnerships with companies like Burger King and Dunkin Donuts this could be a bridge point for the company. Though the number of $7 million a year may not be enormous it could be the stepping stone to create lucrative partnerships with these other companies in addition to the fact there is little cost involved in the business. These other competitors could catch up to Carts of Colorado in terms of low cost set up and make their carts even cheaper and increase unexpected rivalry in the industry shortly after Pepsico’s purchase.

California Pizza Kitchen has expanded quickly in roughly ten years and though 40% of its sales are from pizza the restaurant is seen by the public as a California cuisine restaurant, not necessarily just pizza. The restaurant chain is in many tourist locations including Washington D.C. and Las Vegas and with its current 25 locations making 32 million last year, each location generates a little over a million dollars a year. The partnership would boost each company and could possibly make California Pizza Kitchen capture more of the 25 billion dollar share that casual dining currently has. This is a highly competitive industry and with California Pizza Kitchen being a newcomer it may be difficult to get larger market share with the likes of T.G.I. Fridays and Chili’s among others that are already largely successful and can be found nearly everywhere.

Customers are looking for ways to go somewhere quick with their busy schedules and though they may want different food at every meal they would like a Pepsi brand beverage with every meal. This can definitely increase these companies profitability overall by bringing in the die hard Pepsi fan. However some customers may always want a soda with their meal and may dislike Pepsi so Pepsi not only will lose beverage sales but also food sales at that location and the possibility of these acquisitioned companies making less profit next year is entirely a possibility.

One last thing Pepsi needs to look at is the perspective and production of its suppliers. They need to examine and see if after purchasing both of these companies or even parts of each if their suppliers will be able to keep up and meet the increased output expected. If they are unable to do so they also need to examine their bottlers and see how much it would cost to increase output at each facility and see if it is worth it as well as feasible with their current facilities to supply these restaurants and carts. Pepsi needs to be cautious and aware of economies of scale and keep in mind that its suppliers could be hurt by the move with a dramatic increased in expected production output. They need to be in close contact with their suppliers to ensure that producing more does not incur unexpected extra costs or burdens. However economies of scope could be incredible low since suppliers are already producing so much the extra cost may be an insignificant amount to them.

If Pepsico were to take control of these companies it is taking competitive advantage and penetrating these new markets by beating Coke to the punch. This is done both in terms of innovating how they sell their products and how they work their supplemental products. (See appendix 1)

Firm Analysis

Pepsi has been one of the biggest companies in the soft drink industry since near its inception and remains to be the largest strength of Pepsico. This as well as the company’s mindset to be the best at any cost which has been a strategy and mindset implemented partway through the companies lifespan after postwar soda sales were dragging. This mindset carries through to its workforce. If someone does something incorrectly that negatively affects market share they are fired.

The eighties saw Pepsi and Coca Cola embark in the Cola Wars that brought both companies major publicity and saw major changes in the soft drink industry. Each move the company made was highly publicized. While Coke tried new things, New Coke, for instance. Pepsi began to acquire complements such as Frito Lay and various fast food restaurants including Kentucky Fried Chicken, Taco Bell and Pizza Hut. These acquisitions brought Pepsi more overall revenue without actually creating new products as well as forced major players in the quick service dining industry to carry their products and only their products. Pepsi has used integration strategy in scoping that people want to pay little to eat out and want to eat quick and Pepsi has seen value in this, therefore integrating their low cost products is an easy and essential add on at fast food venues. This gave the company an ambixterous strategy, where they focused not only on their core competency, which was soda, but also purchased complementary products, something their competitors were not doing. (see appendix 2)

This new market of vending carts as well as casual dining offers great opportunities for Pepsico to expand take more control of the market. By buying California Pizza Kitchen and Carts of Colorado the company will be able to infiltrate new markets. Though Pepsi is already sold at many casual dining restaurants owning their own could become very fruitful, especially with an up and coming company like California Pizza Kitchen. This company is aggressive which definitely fits within the company culture of Pepsico and focuses on being different, which also fits along Pepsi’s advertising lines.

Carts of Colorado is simply an interesting venture for Pepsico to go into based on their mentality as a company since it brings the company back to its roots with a low cost restaurant essentially. The carts make nearly as much as a restaurant without as much of the staff, and can be moved as needed and could even be put in places selling Coke products to offer an easy alternative for customers as well as pose a unique way to get their soft drink of choice.

Pepsi has never owned either of these types of businesses and though they have had a streak of wins some companies are always bound for at least failure along the way. Pepsico has also only focused on fast food and Frito-Lay in partnerships and upon examining how these companies work they may hastily choose to change them. It is definitely a weakness of Pepsico since casual dining is not something they know little to nothing about as a corporation.

If they do not properly brand these new entities they could also prove to be threats for the company. Carts of Colorado suggests a very regional name and without flaunting that Pepsi owns the company it may remain static while other companies surpass it and all those potential partnerships Pepsi could have made will be lost. California Pizza Kitchen on the other hand needs to be focused as a unique dining experience that is not like Pizza Hut and is California cuisine that happens to have quality unique pizza. If Pepsi fails to do so it could hurt Pizza Hut, which is a core component of the company at this point in time. (see Appendix 3)

Possible Alternative Courses of Action

Pepsico has quite a few interesting prospects involved in their possible acquisition of these new companies Carts of Colorado and California Pizza Kitchen and have a variety of solutions available to them.

Pepsico Could buy neither company

This is definitely the worst decision Pepsico could make at this point in time. Though the idea of playing wait and see could save them money down the road, these companies are up and coming and if they do become the major market player in their specific type of dining experience Pepsico will have to spend a lot of money they did not necessarily have to.

Pepsi could buy Carts of Colorado entirely

By purchasing the entirety of Carts of Colorado Pepsico will show their buyers their commitment and belief that this asset is important to their company. This will boost the companies confidence and will allow Pepsico to create partnerships with companies they have previously been unable to. There is also potential for new products to be created through these partnerships by finding new needs in a new market segment that Pepsi had previously not had any knowledge in. Some rebranding may be necessary. Whether it simply is advertising the restaurant that is available through the cart, Burger King, for example or branding Pepsi throughout the entirety of the cart will prevent confusion or isolation due to people outside of Colorado not being interested in purchasing the cart to sell products themselves or even isolating the consumer.

Pepsi could buy California Pizza Kitchen in its entirety

If Pepsi were to purchase all of the CPK locations throughout all its eight states it would have to monitor the company very carefully. Not only is monitoring necessary to see how the company runs and to see what exactly people are looking for in a casual dining experience, especially on the beverage side, but also Pepsi needs to see if there are any weaknesses in the company as a whole. The company has had some management adjustments throughout its short life and there may be way to cut costs and there also may be ways to advertise the company that CPK has never thought of on its own.

The best way for Pepsi to follow this strategy is focus on letting those in the Pizza Hut division know that this does not interfere with their market segment and may actually increase pizza sales overall. By focusing on the California cuisine angle there will be less confusion inside the company. In addition to this Pepsico needs to be cautious not to run the company like its fast food restaurants, even though it is not an upscale restaurant it should not receive fast food quality ingredients. Freezing ingredients or buying subpar toppings for pizza will turn people away to find something that they feel is better worth their time and money. A customer is far more forgiving of a poor quality $3.00 meal than a poor quality $20.00 meal.

Pepsi could buy portions of each company in a sort of trial period

If Pepsi were to purchase portions of each company this would be a great way to have a trial run at each company to see what works and what doesn’t work to see if the full investment is worth it.

A few carts could be purchased with various food franchises as well as a few CPK locations could be purchased to see how the restaurants are run and see if the management of these companies fit with Pepsi’s without much confrontation. This will also allow bottlers to get an idea of how much more they need to produce in order to supply these restaurants and carts. If Pepsi sees that buying all of each company is a fruitful venture then they can purchase the rest of each company and will have given their suppliers enough warning to hire more people, acquire more resources and possibly even add more facilities if necessary.

This last decision is the one I recommend Pepsico to perform. By purchasing portions of each company they will be able to have time to gauge the interest of all parties involved in Pepsico to see if these companies fit within the organization in every aspect. The suppliers will be able to let their parent company know how much it will cost to supply these brand new restaurants with Pepsi products.

Other parties within Pepsico could also gauge if these new companies help or hurt their business or simply remain static. A Carts of Colorado cart supplying Burger King for example may help or hurt a nearby Kentucky Fried Chicken with the new options available which is something that is difficult to determine without having a trial run. Also Pizza Hut can determine if its areas locations nearby CPK’s are affected at all or if the average consumer does not even really think of these products as substitutes.

Pepsi has potential to earn quite a bit of money in this endeavor. If they carried their percent owned of fast food to casual dining (17.6%) they would increase annual profit by 4.4 billion dollars. If they were to carry these numbers to the “other” category they would also earn an extra 5.3 billion dollars. Therefore from direct revenue alone Pepsi will earn an extra 9.7 billion dollars a year, this in addition to the increased exposure of their brand has potential to bring Pepsi to be one of the highest money making companies in the United States as long as they proceed with caution. (See Appendix 4)

Appendix 1Five Forces Analysis- Food Industry (Casual Dining and a la Carte)

Bargaining Power of Customers

Threat of New Entrants

Threat of Substitute Products

Bargaining Power of Suppliers

Competitive Rivalry within the Industry

Casual Dining Mid toHigh- If customers do not enjoy the product purchased or feel they can get better value for their money elsewhere they will leave.

Low-It is difficult to create this type of restaurant, let alone gain several locations that generate enough revenue to threaten CPK

Low- This ia very sepcific niche of high class casual dining pizza with a California flair

Low- The ingredients supplied to make the food products at CPK are easily obtained and as long as they fit the same levels of quality customers will not know.

Mid toHigh- Though CPK is definitely on the rise they only represent 32 million over a billion dollar industry and are only in 8 states out of fifty. Let alone international locations.

A la Carte Mid to High- With a cart based business people may be unwilling to purchase due to instability of location and worries of a cart being as clean as a full fledged restaurant

High- At this point in time Carts of Colorado is the cheapest manufacturer, but does not have a majority of market share. Each cart only costs 1,200 so it s very easy to enter the market.

High- Pepsi needs to ensure that this industry is funded and they outperform competition due to the low costs involved. The key is to create fruitful partnerships with food suppliers.

High- The key is to create fruitful partnerships with food suppliers. The carts are simply a venue, without actual food being supplied there is no chance for revnue or longjevity

Mid to High- If a restaurant feels that another company can be seen by more people or has a larger share of the market they will change. Also a big client like Burger King could choose to change companies due to a recent end of contract with Pepsi

Appendix 2Core Competencies of Pepsi

Appendix 3SWOT Analysis of Pepsico

Willing to try anything new to beat Coke, even copying

when necessary

Their advertisements

also reflect company culture

Focus on purchasing

products that are

supplements

A highly competitive

beverage industry with a

fresh take.

Strengths Weaknesses Opportunities Threats

Pepsi knows its products are

popular and what supplements that are essential to their business. They have had

successful partnerships in

the past that have boosted their

revenue. They have tried and true success in

the past and surely can

perform this again due to their quality business

techniques, products and

expertise

Pepsi has experience in the

fast food and snack food

industry which are both outside

their original scope of expertise.

However food that is provided through a cart or by casual dining

could be a challenge. If they try to run these companies like previous ones

they will flop and Pepsi will not only gain bad

P.R. but also lose money.

Pepsico also did have a failure with La Petite

Boulangerie that never quite got

bigger than it was at the point of

Pepsi’s purchase

Pepsi has the opportunity with

Carts of Colorado to gain

notoriety by providing their products in new venues and this

goes for California Pizza Kitchen as well.

Each of these restaurants may only bring in a

small bit of revenue but

could create new partnerships for Pepsi as well as

get them the experience they need to purchase more companies in each of these dining aspects.

Though Coca Cola may not be

pursuing the acquisition of its supplements it

could decide this is a venture

worth pursuing. In addition to this

each of these industries have several major competititors.

Carts of Colorado is a low cost leader, but

not a market leader and

California Pizza Kitchen has a bit of trouble findng its identity and

has major competition in

both quick service and

casual dining. In addition to this Pepsi already

own Pizza Hut which could

create disinterest or anger among employees of

both sections of the corporation.

Appendix 4Financial Analyses-Pepsi’s Current Share of Fast food Market

Potential Profit to be earned by Pepsi in Casual Dining and “Other”