1.0 Introduction to PepsiCo
PepsiCo, Inc. America Food and Beverages (PAB) is an American top consumer
product multinational company that is known for its variety of food and
beverage products. It is formed when the
Pepsi-Cola company merge with the Frito-Lay Inc. It is headquartered in
Purchase, New York, United States in 1965. The company is also known as the
world's 2nd largest carbonated soft drink maker. The former CEO of
Pepsi Cola is Donald M.Kendall who merged with Herman Lay’s Frito Lay, Inc. to
become PepsiCo and was the CEO from 1971 to 1986 of PepsiCo. Indra Nooyi is now the chairman and Chief Executive
Officer of PepsiCo. The products produced are carbonated soft drinks, energy
drinks, juice & juice drinks, sport drinks, teas, waters and fountain
beverages. The core
brands of PepsiCo includes Frito-Lay North America, Pepsi-Cola, Mountain Dew, Gatorade, Sierra Mist, Aquafina, Quaker Oats,
Tropicana Pure Premium, AMP Energy, Propel, Mug, SoBe, IZZE and Naked Juice. The
company operates over 200 countries across the globe and 50% of the sales is generated
in United States of America. Below shows images of the brands of PepsiCo by its
ranking.
2.0 Monopolistic Competition
The type
of market structure for PepsiCo is a monopolistic competition where there are
big amount of competitors that don’t sell the exact same products but sells
products that are differentiated. The products can be differentiated by style,
location, brand name and also quality. One of the main top competitors for
PepsiCo is The Coca-Cola Company, where the company produces soft drinks too
but it competes with PepsiCo by selling products with a different price range,
quality and marketing strategies.
PepsiCo has more control of the supply compared to demand
which will cause them to supply more to meet the demand. Therefore, a positive supply
curve is formed. When supply of the products increase, the demand for the
products increases too causing both the curves to shift to the right.
The graph
below shows the increase of supply and demand of PepsiCo:
Other
than that, the cost of production used to produce the products will make a
great impact on the supply of PepsiCo products. The higher the cost of
producing the product, the lesser products supplied. So, the rise in price of a
factor of production decreases supply and shifts the supply curve leftwards. Finally, changes in the interest rate, stock
prices and also the foreign exchange rates affected the supply chain of PepsiCo
products.
Below is a graph showing a decrease in supply of PepsiCo
products:
4.0 Demand trend of PepsiCo.
The price in which consumers are willing to buy
is the demand for PepsiCo brands at a given price. If the price of PepsiCo
product increases while other factors are constant, the quantity demanded for
the products will fall and there will be movement along the demand curve, vice
versa.
As a consumer product company, PepsiCo operates
in largely competitive markets. In order to increase the demand for its
products, the company is continuing to improve the products and produce
products that satisfy the customers. PepsiCo monitors the market and respond to
changes in consumer wants quickly before their competitors respond first taking
away some of the demand for PepsiCo’s products. The sales
of the product can be affected by the consumer’s taste and preferences.
Different consumer has different taste. PepsiCo has several brands that it produces
including Pepsi-Cola, Frito-Lay, Tropicana, Quaker, and Gatorade. These brands
offer quick snacks and convenience, which has historically been a preference
for consumers. When consumers prefer PepsiCo product, the demand for it will
increase and the demand curve shifts to the rightward. This will cause a
shortage at the original price. There will then be movement up along the supply
curve. Therefore, the equilibrium price rises and the equilibrium quantity
increases. The PepsiCo is innovating ways to keep foods and snacks convenient
while making them healthier. This is in response to consumers wanting healthier
options. All of these actions coupled with marketing strategies keep the
consumer demand rising for PepsiCo brands (PepsiCo, 2011).
Below is a graph showing an increase in Demand
of PepsiCo:
Next, the location
where the product is being sold affects the sales of the product. The sales of
PepsiCo products are greater in United States followed by Mexico because of its
large population. The larger the population, the greater is the demand for all
the goods.
In
addition, festive season and sports events the demand for these beverages and
snacks is affected. As a matter of fact, the consumer demand will be more
during these seasons. Therefore, the demand increases cause the demand curve to
shift rightwards.
Besides
that, is the income of consumer is a factor. The PepsiCo products are
considered as luxury. So, when income increases, consumers buy more of most
goods and the demand curve shifts rightward. In a clearer picture, the more
money a customer has, the more products he/she buys.
On the other hand, if the
competitors of PepsiCo sell their products in a lower price and with a low cost
of production, customers will tend to consume the products from the competitors
as substitutes. (Case, Fair, & Oster, 2009). This will cause a drop in the demand for
PepsiCo products. When the demand falls, the demand curve shifts leftward. At a
original price, there is now a surplus which leads to a movement down along the
supply curve. The equilibrium price falls and the equilibrium quantity
increases.
Below is graph showing the demand for PepsiCo products decreases:
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5.0 Elasticity
of demand and price for product.
The
product prices of PepsiCo have a higher elasticity of demand. There are higher
chances of fluctuation of prices. The demand will increase as the income of the
consumer increases. This will cause the products to receive positive feedback
for its quality. There are more chances of substitute for the products produce
by PepsiCo due to its huge variety of homogenous products.
6.0 Economies of Scale
Economies of
scale are used by producers to reduce their cost by producing the next unit of
output at lower costs. PepsiCo
applied the economies of scale to lower the cost by focusing on:
6.1 Specialization
and Division of Labour
The specialization and division of
labour is applied into the activities of PepsiCo to build a scale of company
and due to the large number of workers. For the market report, each unit will
be run by a manager. The workers work in different department with different
skills. The reports will be passed to one of two chief executive officers in
the national business unit, who in turn report to the CEO of the PepsiCo.
6.2 Organizational
Economies
A large firm usually has many factories that located in several
locations and may produce different productions but under control of just one
centralised administration in order to do business more efficiently (John
Sloman, 2007). The headquarter of PepsiCo makes the product of another factory
of its own to gain more profit when there is increase in demand of products
produced in one of their factory. Not only that, the production of other
products may be switched to another to which are more profitable if the cost of
production tend to get higher.
6.3 Financial
Economies
In the long run, the financial economies of scale
is important and needed if a firm wants to expand its business bigger by
building up more factories, buy hightech machineries for the production and
hire more employees.
6.4 Economies
of Scope.
Economies of scale states if a firm can produce
various product lines at a given output level lower than a combination of
separate firms each producing a single at the same output level. Economies of scope are proven in PepsiCo where multiple products are produced to
increase profit instead of just producing one type of product. From being a
leader in only soft drinks market, PepsiCo expanded their sales by
manufacturing and producing multiple types of products such as crackers,
cookies and other snack food. PepsiCo is not considered a soft drink
manufacturer anymore. One half of the total current profit of the company comes
from the non-soft drink line. The snack food and soft drinks of PepsiCo is an
accurate example of how a firm can take up the skills of producing only one
type of product which is the soft drinks and later use it to develop another
type of product, the snack food.
7.0 Advertising
When
a firm produces and sells products which are differentiated, the consumer needs
to know the differences between these products with the competitors.
Advertising is one major factor used by PepsiCo to attain their goal. The
advertising cost is covered by the huge portion of the price of the product
sold. By advertising, PepsiCo signals the high quality if their products. The
profit of PepsiCo is affected with the expenditure of advertising. Advertising
expenditures affect the firm’s profit in two ways: They increase costs, and
they change demand.
In 2010, PepsiCo declared a
science-based rule that says only the nutritious products such as Quaker Oats
is applicable to be advertised to children under the age of 12. 99 percent of
consent is achieved by the end of 2012 in the globally representative markets
such as China, Saudi Arabia, Russia, Saudi Arabia and six other countries which
were monitored to the consent with the Advertising Children Policy. While 100
percent consent were achieved by the U.S. and Canada markets.
Moreover, “ PepsiCo skipped soda ads on the 2010
Super Bowl for the first time in 24 years, putting the millions of dollars it
might have spent on those ads toward a $20 million online charity competition
called the Refresh Project.” (Mike & Valarie, 2011) 80 million of online
votes were collected as a result from this project. On 2011, PepsiCo’s
advertising expenditure raised by 30%.
Below shows an image resulting from the advertising of PepsiCo competing
with its main competitor The Coca Cola Company.
8.0 Conclusion
PepsiCo has grown to be the 2nd
largest company selling beverages and snacks with high quality products which are demanded by many.
The market structure is a monopolistic competition which has big competitors
but manufacture and sell differentiated products. The company has more control
of the supply compared to the demand of the products.Besides, the demand of the
products are affected by many determinants such as consumer preferences,
location, price of substitutes and many more. The price elasticity is very high
due to the large number of competitors selling almost the similar type of
products. Moreover, the cooperation and
collaboration with other companies became easier for Pepsi due to its economies
of scope and financial economies. PepsiCo uses economies of scale as the main
strategy to increase its sales of production. Finally, advertising is another concept implement by PepsiCo
in order to attract more consumer to
purchase their product while their profit can be increased.
(Mike Esterl and Valerie
Bauerlein,2011) - PepsiCo
Wakes Up and Smells the Cola. Available at :
Reference
(Paula,2011) –
Pepsico Proposal. Available at:
http://www.docstoc.com/docs/119524006/PepsiCo-proposal
http://www.docstoc.com/docs/119524006/PepsiCo-proposal
PepsiCo Official
Website (2010) PepsiCo Annual Reports. Available at:
http://www.pepsico.com/annual10/financials/mda/our-business-risks.html
http://www.pepsico.com/annual10/financials/mda/our-business-risks.html
(Awatter,2012) –
Supply and Demand of PepsiCo. Available at:
http://www.studymode.com/essays/Supply-And-Demand-Of-Pepsico-901626.html
http://www.studymode.com/essays/Supply-And-Demand-Of-Pepsico-901626.html
(UKessays,2013)
– Economies of Scales of PepsiCo. Available at: (http://www.ukessays.com/essays/business/pepsico-applied-economies-of-scale-to-reduce-cost-
