Pepsi: Dealing With Continued Decline In Soft Drink Consumption

Executive Summary

Pepsi is one of the few multinational companies in the food and beverage industry. The company has been in the business for a long time and has huge market base and a renowned brand internationally. However, there are external factors that affect the profitability of entities in any given business. A continued reduction in soft drink uptake is a concern for any entity in food and beverage production. Equally, Pepsi has been financially affected by this challenge. Michael Porter’s five forces analysis model provides an avenue for Pepsi to gauge and find solutions to the social and economic challenges facing the industry. Additionally, Ansoff’s matrix of corporate strategy options will be applied and evaluated to eventually realize the best strategies to be applied. Out of these strategies, recommendations will be put forward as means of turning around the woes of Pepsi.

Five Force Analysis

Table 1

Force	Nature of force (choose whichever applicable as per the situation)	Key points (Mention as many as relevant – show the situation using relevant concepts and related data)
Rivalry of competition in industry	High	Aggressiveness of firms in the food and beverage sector There is low switching costs for consumers from one brand to another The number of entities engaged in similar business is high Intensive marketing and advertisement
Threat of new entrants	Medium	Brand development involve high costs There is low switching of costs Very few and direct competitors Moderate customer loyalty
Threat of buyer power	High	Low switching costs Extensive access to product information There is ready available substitute products from other firms
Threat of substitutes	High	Good performance of substitute products Substitutes are highly available to consumers Switching costs are low for customers
Threat of supplier power	Low	High overall supply hence more options Fragmented suppliers Low switching costs for Pepsi Low forward integration of suppliers Moderate size of individual suppliers

Supporting discussion

Rivalry of competition

Pepsi has Coca-Cola as a major competitor in the business of production and distribution of food and beverages. Moreover, firms like Coca-Cola have become increasingly aggressive in their marketing, advertisement and product innovation strategies (MacFayden et al., 2012). As such, it triggers Pepsi to marshal more resources to counter or maintain their customer base. When there are low switching costs from one brand to the other, it means that consumers can easily migrate to another product away from Pepsi (Bhasin, 2019).

Threat of new entrants

As it is, food and beverage sector does not have many new companies coming in and the few brave enough to gain entry are not as competitive as the traditional ones. Despite low switching costs, Pepsi has an established brand and customer loyalty that gives it a competitive advantage over the new entrants (Bhasin, 2019). Therefore, this merely presents a moderate force to be dealt with as concerning rectification of the decline in soft drinks uptake.

Threat of buyer power

Access to information on products, existence of numerous alternative products and low switching costs presents a strong force for Pepsi to deal with. Hence, Pepsi has to put more effort in ensuring increased customer satisfaction. This way it will be able to maximize its revenues by preventing the loss of existing customers (Bhasin, 2019).

Threat of substitutes

Based on consumer preferences, it may become easy for them to switch to products from other competitors as a result of certain external factors. Where the substitute products are readily available to the consumers, exude high performance by their standards and there is no additional cost to acquire the same, Pepsi will lose some customers (Forbes, 2019). Therefore, there is a strong threat to Pepsi’s market share.

Threat of supplier

The bargaining power of the various suppliers is of a low threat to the firm. This is attributed to the fact that there is high overall supply, the number of suppliers, fragmented suppliers and low forward integration (Johnson et al., 2010). The above factors give rise to a higher bargaining power on the part of Pepsi. Essentially, the firm has several options with regards to suppliers and there is no real threat of suppliers integrating to compete against it.

Corporate strategy options using Ansoff’s matrix

Table 2

Corporate Strategy options	Benefits to the firm (Mention any relevant key points –using relevant concepts and any related data)	Disadvantages for the firm (Mention any relevant key points –using relevant concepts and any related data)
Market Penetration	Safest strategy Increased market share Increased sales Increased product demand	Market saturation Increased promotional costs Lack of results Poor firm image where focus is not decentralized
Market Development	Attracts more consumers Loyal client base	Inability to fully control external resources Product failure Challenge of building a new product brand
Product Development	Branding as an industry leader Loyal client base Creates higher value proposition Promotes a culture of innovation	Challenge of building a new product brand Product test failure Inability to fully control external resources Unrealistic expectations of a product
Related Diversification	Back-up plan/cushion Spreading risks	Reduced innovation Increased costs Overstretching of company resources Lack of or inadequate expertise
Unrelated Diversification	Protects against financial problems of the main venture Capital allocation efficacies Company builds stability	Lack of synergy Confusion as to quality and brand Spreading costs Increased management responsibilities

Supporting discussion

Market penetration

In this strategy of growth, the firm will undertake aggressive promotional campaign to endear the traditional products to more people. The strategy carries less risk considering that the firm will be dealing with a product that is known and a market whose reaction is similarly documented (Forbes, 2019).

In this case, Pepsi ventured into an existing market created by Diet Coke. Since Coca-Cola Company had already established a market in consumption of diet Coke, in line with the changing habits towards unhealthy foods and beverage. In response, Diet Pepsi was unleashed to take advantage of an existing market (Pepsico, 2012). As the decline in consumption of soft drinks continues, Pepsi must take advantage of its existing market to advertise aggressively to the younger generation.

Market development

A firm can undertake market development by creating new markets for existing products. There is no additional allocation of resources for products since existing products are maintained. Hence, the only task for a firm is finding a new market and developing it. A product may fail to pick up in the new market thus causing losses. Matters like control of external resources in the new market like transportation may cause challenges to the firm (Freeman, 2010). However, a company like Pepsi stands to gain and be cushioned by a loyal client base and also from being an established brand leader. Introduction of Pepsi blue was one such strategy though short-lived. It was a seasonal product introduced to take advantage of the cricket world cup fervor (Hatzijordanou et al., 2010).

Product development

In pursuit of growth, Pepsi has to come up with new innovative products that are attractive to the current customers. This will boost them against stiff competition from Coca-Cola which is has been consistently developing new products and new flavors of existing products. A new product will pick up quite well where the firm has a loyal client base and an established brand name (Janse, 2018). However, additional advertisement costs may be incurred to make the product popular. Further, products tests and products can fail unexpectedly resulting to heavy losses.

Related diversification

This involves the production of an entirely different class of goods that supplements the traditional line of products. It is a way of penetrating new albeit related market by venturing into a new kind of product (Janse, 2018). This can be beneficial to Pepsi since it will be spreading risks in the business and taking advantage of new markets whose potential has not been tapped. However, it may also lead to overstretching of resources, increased costs for the company and in some cases lack of expertise in the concerned field (Johnson et al., 2010).

Unrelated diversification

This is an extreme diversification because it involves venturing into a totally unrelated field of business. It is the riskiest strategy amongst Handoff’s model. The risk is association with inadequate expertise in the given sector, additional costs to set up, increased management responsibilities and confusion as to the core business of a firm (Janse, 2018). Nevertheless, Pepsi can benefit from additional diversified profits, increased stability, and spreading of costs.

Evaluation of corporate strategies

Table 3

Corporate Strategy options	Suitable	Acceptability	Feasibility
Market Penetration	Capability- established brand Expectation-customer loyalty base	Minimal financial risk Increased profits Environmentally friendly	Available funding
Market Development	opportunities in non-Americas market strength in brand recognition weakness in few flavours	profitability from new products product may fail	Established global production and distribution network
Product Development	Strong brand Increased revenue	Conform to environmental policies e.g. on water recycling	Established global production and distribution network
Related Diversification	Area not exploited –potential Make use of innovative expert knowledge	Familiarity with environmental policies Increased profits from diversification	Increase revenue growth Availability of funds and resources Coca-Cola and Nestle are already diversifying
Unrelated Diversification	Risky	Profitability not guaranteed Environmental concerns for new field	Not enough knowledge Competition is diversifying

Recommended strategy options and justification

Related diversification

In line with the principles of suitability, acceptability, and feasibility, Pepsi should continue diversifying into related fields. The firm is on the right track with diversified brands like Bubbly water, Tropicana, Naked juice and Izze. This has seen the company expand its portfolio and reach out to new markets never considered by the company earlier on. On one hand, the firm will be providing healthier products and on the other expanding its operations beyond the traditional beverages (PepsiCo, 2012).

Therefore, Pepsi should consider expanding by allocating more funds for diversification into production of healthier products. This will also be a way of dealing with its main competitors like Coca-Cola and Nestle. Diversification although risky, promises good returns (PepsiCo, 2012). There is enough capital to finance such an expansion and Pepsi have a strong brand to go with it. Again, diversification is a way of staying relevant in an industry where competitors are sensitive to the evolving consumer tastes (Oxford, 2019). In fact, the outgoing leader, Nooyi Nooyi has been instrumental in steering the company towards diversified brands targeting health-conscious consumers. Indeed this should be the appropriate direction for Pepsi.

Market penetration

Pepsi needs to further penetrate markets in developing countries to increase revenues. In light of the reduction in soft drinks consumption in North America and Europe, the next frontier is developing countries for similar products. Such a venture will only need a further expansion in countries where there is existing markets (Forbes, 2019). This is one way of dealing with a weakness in having limited penetration out of the Americas.

Armed with the well-established global production network and strong brand image, Pepsi can utilize the opportunity to expand and take its rightful place as a leading food and beverage company. In 2017, Pepsi earned $1 billion from 22 out of 100 brands (Forbes, 2019). With these many exiting brands, it can successfully penetrate the markets in developing countries at an additional cost, which will be recoverable from the resultant profits. Additionally, Pepsi is well placed in terms of funds, expertise in the industry, brand recognition and environmentally conscious. These and other factors inconsideration present the firm with an appropriate option to grow its revenue (Bhasin, 2019).

References

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