Signature Assignment: Challenges of Expansion to a Foreign Location

Research Analysis of Pepsi Company

Emma Trevino

ECO/561

Professor: Caryn Callahan

October 12, 2018

Pepsi Company

PepsiCo is an American multinational company that deals in food, beverages, and snacks. Its headquarters are located in New York. The company performs the manufacturing of products, markets them and distributes them to different stores. The market structure of the company is oligopoly structure meaning that it’s likely to change the price when the competitors change their price. PepsiCo operates in an extremely competitive environment with largest competitors such as Coca-Cola Company, Red Bull, Nestle, Kraft Food Group and Monster Beverage Corporation. The market share by segment, Frito-Lay North America, of PepsiCo is 13.67%. High barriers to entry mean that it is difficult for a company to enter the industry. The entry barriers for PepsiCo are extremely high as it has an established a high level of brand awareness. The difficulty to enter the beverage and food industry means that the profits of PepsiCo will remain extremely high and the only threat is the already established competitors (Gregory, 2018).

Graph of PepsiCo market value in billion dollars from 15th Nov to 16th Sep

Image obtained from (Springer et al., 2015).

Trends in Current Macroeconomic Indicators

The business cycle comprises of four phases which are; growth, boom, recession, and trough. Since June 2014, the United States economy has been on the expansion phase. For the expansion phase, the economy is growing at a healthy rate of two to three prices indicated by the rise in the investment prices. The Gross Domestic Price (GDP) has only improved by 2.2% over the last three years which is slower compared to other expansions where the growth rose up to three percent. The slow growth rate is significant as it has prevented inflation and stabilized the company but this means a loss to the investors who are not happy by the fewer returns. This means that the company has a potential for growth due to the rising growth and controlled inflation which is best for investment. The current Consumer Price Index of the ended month of August 2018 is at 252.146. The CPI has been increasing over the last twelve months and this translates to a 2.7 percent inflation rate.

The current unemployment rate in the United States over the last six months has been identified to be below five percent. With full employment means that the companies will struggle to get qualified employees. Also, a higher unemployment rate will mean that people will have little money to spend on goods thus decreased sales for the company.

The current Federal funds rate is at two percent. The federal fund's rates are in charge of the short-term rate which is credit card rates, bank's prime rates, adjustable rates, and interest –only loans. The prime rate for the United States is at 1.75% to 2 % (McGee, 2015).

Demand for Pepsi

The net revenue of PepsiCo globally

Image obtained from (Venkataraman, Summers & Venkataraman, 2017)

Graph of Quarterly Revenue of PepsiCo in billion dollars

Image obtained from (Springer et al., 2015).

Generally, the demand for Pepsi products has decreased over the years and this can be associated with the health risks posed by drinking high-level sugars sodas of which customers have become aware of. People are becoming increasingly cautious about what ingredients they consume from a certain product making them shun the high fructose and artificial sweeteners found in most of the PepsiCo products. Conversely, the demand in Pepsi zero sugar drinks increased greatly. The company ought to cut down on fructose levels and choose other alternatives to replace the artificial sweeteners. Also, since the brand is already established in the market, coming up with healthier beverages is easier as it already has a market base (Springer et al., 2015).

Price Elasticity of Demand of PepsiCo Products

Price elasticity is the change in demand of a product due to the change in price. Some products tend to raise demand when the price is reduced but other due to stiff competition reducing prices is not always an option to increase demand since the company is already operating price determined by the forces of the market and below that the company would make a loss. This is the case of PepsiCo as its major competitor Coca-Cola has a larger market share compared to the company thus for Pepsi to penetrate the market fully it has to consider lowering the price of their products but still invest in the quality of the products. It is not wholly practical for Pepsi to consider reducing the price having in mind that the cost of transportation, ingredients, and workforce is inconsistent and keeps on rising. Thus the best method to consider and maintaining quality is the reduction in operational cost and adapting by adapting to cheaper processes of transportation and production (Venkataraman, Summers & Venkataraman, 2017). The pricing decision of the company depends on the flavor and the product. The company should, therefore, consider selling the products which are smaller sized.

Effects of Variable and Fixed Costs on PepsiCo Level of Output

It is imperative for a company to utilize the economies of scale to reduce the cost of production. For PepsiCo, this has been a priority and it’s heavily focusing on ways that it can reduce the cost due to many reasons that make it costly in the market and hinders accessibility of the product. Firstly the company has embarked on division and specialization of labor to rift useful departmentalization of the company. This includes the departments of finance, marketing, and board of directors. Another way that the level of output is determined is through the utilization of machines. Having a larger international corporation will help the company make better use of its machines and at a lower cost where they can use solar energy. Lastly, the container principle is important to help decrease the cost of Pepsi by lowering the cost of raw materials and also the cost of shipping is lowered (McGee, 2015).

In conclusion, PepsiCo is a large multinational company that is operating in the market with other large beverage firms making competition to be so stiff. The company has a potential to continue rising in the market due to its already established market base but it has to look at the decreasing sales and revamp on its pricing, products and production strategies. Currently, people are aware of their health and are very cautious about what products they take into their body. This has made many people refrain from artificial sweeteners and high fructose level as they pose health risks to their body and shift to healthier drinks. The company should continue establishing its base by building more stores so that their products can be available and this will cut on the cost of transportation. Focusing on healthier beverages will improve the sales of the company. The microeconomics indicators should determine the growth of the company’s potential and as long as there is no inflation the company will continue thriving. The position of the company in the market is influential and as all beverages companies are focusing on price and healthier drinks it’s imperative to take the recommended action and implement for the growth of the company. the business cycle at the phase of expansion means that the company will continue expanding and ought to focus on this potential.

References

Gregory, J. R. (2018). The performance with a purpose: PepsiCo challenge. Journal of Brand Strategy, 6(4), 328-355.

McGee, L. W. (2015). Standardizing Marketing Strategies Internationally: A Model of the Issues and a Look at the Future. In Proceedings of the 1987 Academy of Marketing Science (AMS) Annual Conference (pp. 171-175).

Springer, Cham. Coibion, O., & Gorodnichenko, Y. (2015). Information rigidity and the expectations formation process: A simple framework and new facts. American Economic Review, 105(8), 2644-78.

Venkataraman, S., Summers, M., & Venkataraman, S. (2017). PepsiCo: The Challenge of Growth through Innovation. Darden Business Publishing Cases, 1-22.