Pepsi Restaurants Analysis
Pepsi Co
Discuss whether Pepsi should continue in the restaurant business (corporate-level strategy).
The Carts of Colorado company is in a highly profitable business with relatively low cost. Acquiring CoC would cause a large increment to PepsiCo revenue with a small increment in cost. In addition, PepsiCo would be able to expand to a new market (equipment manufacturing) as CoC owns the technology for manufacturing carts. However, the expansion may also be a drawback to PepsiCo because equipment manufacturing is a very different business compared to PepsiCo’s core business. As learned in class, an unrelated diversification would rarely improve a company’s performance. Another drawback of CoC is that the CoC’s product is easily to imitate. An 18-month advanced engineering would not likely to create a substantial competitive advantage. Also, PepsiCo’s competitors will not continue to buy from CoC, which will drag down its sales and profitability. Overall, many issues arises considering the vertical integration and the benefits of acquiring CoC is not very clear. Thus, I do not recommend acquire CoC. Short-term or long-term contracts with CoC are good options to PepsiCo.
California Pizza Kitchen’s business, on the other hand, is within the core business of PepsiCo. It is reasonable to expect a better performance as there are many sources that could create value in a related diversification. Acquiring CPK also offers PepsiCo an opportunity to expand to casual dining market as the market has a lot of growth potential. PepsiCo needs the opportunity to learned how to run business in the casual dining market because it failed to develop casual dining internally. Compared to casual dining restaurant’s table turnover rate, CPK’s table turnover rate is nearly doubled, which indicates that CPK has a better ability to generate revenue. One potential issue of acquiring CPK is that the concept of CPK is slightly different from Pizza Hut, which may cause problem when merging CPK with Pizza Hut. If the merge fails, CPK will become an internal competitor of Pizza Hut. Another issue is that the management team of CPK does not want to leave. This situation may bring management issues if PepsiCo acquires CPK. Overall, CPK is a great company to acquire. The potential benefits (especially knowledge of casual dining chain) by the acquisition exceeds the downside risks. I would recommend PepsiCo acquire CPK.
As mentioned in the case, “US foodservice industry had sales of about $250 billion in 1991, and industry experts expected sales to double in the following 10 years”. In addition, the profitability of the industry was substantial. “In 1991, PepsiCo’s restaurant segment attained the highest revenue of the company’s three segments, surpassing soft drinks”. Thus, foodservice industry was of high profitability and had a great growth potential. It was the right industry to be in. PepsiCo also identified the major foodservice segments, which are quick service restaurant, family, and institutional. This analysis supported PepsiCo’s acquisition of KFC, Pizza Hut, and Taco Bell because all of the three were considered quick service restaurants. Because food service industry was of a high profitability and growth potential and PepsiCo was a leader in the industry’s largest segment, I recommend PepsiCo continue in its restaurant business. It also creates a channel for PepsiCo to compete with Coca-Cola. I suggest PepsiCo’s further development in the foodservice industry could include an expansion to other large restaurant segments such as family, institutional, and casual restaurant.
LaTasha Smith
BADM 449
10/22/14
PepsiCo Restaurants
With many restaurants across the world, consumers want a variety in their food and purchasing opportunities. PepsiCo is considering acquiring Carts of Colorado (COC) and California Pizza Kitchen (CPK). Many consumers are also becoming more health conscious; therefore, people want more nutritional options. Less people are interested in going to KFC or Taco Bell, and fast-food establishments are becoming an occasional food option.
In 1980, Carts of Colorado is a designer, manufacturer, and merchandiser of mobile food carts and kiosks. COC’s overall strategy includes selling carts to companies and make profits without incurring high costs from physical infrastructure. Some of their customers that use the carts to sell their products include Burger King, Coca-Cola, and Dunkin Donuts. Pepsi is interested in COC because they have a low cost of returns of about 1.2 million on average.
Restaurants hold the most capital spending and partnering with Carts of Colorado may increase expenditures drastically. In addition, the manufacturing of the carts would increase the risk of sunk costs and depreciation. There have been many issues with the manufacturing and management restrictions with COC that may cause inconsistent growth. Since, the company has many management problems they almost went bankrupt. Carts of Colorado need to change from a central knowledge in restaurants to strictly manufacturing carts. In addition, there strategy should focus on changing their capacity to smaller growing companies. Pepsi is not in the business of manufacturing, so there is a major gap in each companies focus.
Today’s consumer desires California Pizza Kitchen because they are known as a healthy pizza option. CPK’s strategy includes producing moderately priced pizza that is high quality. They are typically located in upper scale shopping centers. CPK can afford to do limited advertising because their focus on great product quality and customer service. PepsiCo is interested in CPK because of the high table turnover, rapid expansion, and a growth rate of about 42% net income. Since California Pizza Kitchen is more established, there are better financial incentives for acquisition or partnering.
Overall, there are consistent sales growth in both COC and CPK. There are a larger total sales in California Pizza Kitchen which means PepsiCo will have less liability and revenue potential. In the past, Pepsi has made a few attempts at dine-in restaurants and has been fairly successful. I would recommend against the partnering or acquisition of Carts of Colorado, because they may lose customers. COC already supplies to many of PepsiCo’s competitors. In addition, PepsiCo doesn’t specialize in backwards integration, so no economies of scale would exist. Finally, Pepsi’s successful business ventures are always acquiring well-established business, which doesn’t apply to COC. On the other hand, I think PepsiCo should partner with CPK because they have experience in running food chain and the pizza industry. They also have the capacity to invest in California Pizza Kitchen and there is limited liability. PepsiCo needs to keep in the mind that the training and quality management need to be closely maintained.
In the 1890s, PepsiCo started after a combination of syrup production and carbonated water were combined. The CEO of PepsiCo took leadership and completely rebranding the image. When Donald Kendell recognized that certain products went great with the beverages, PepsiCo entered into the snack food industry. The company’s outstanding performance comes from the three P’s philosophy of “people, people, people.” PepsiCo effectively evaluates and rewards their employees to turn them into great leaders.
PepsiCo should continue to operate in the restaurant business because they add value to this industry. The company remains as a leading competitor because they always have a strategic plan before acquiring a new business or developing products. In the long run, quick service restaurants will remain the largest segment of the food service industry because of customer’s busy schedules. Overall, PepsiCo is in a very strong position to dominate in the beverage, snack food, and restaurant business. The acquiring and alliance with restaurants has helped the company to gain revenues and grow tremendously. PepsiCo does a great job at keeping up with the market trends and satisfying consumer needs.
By continuing to operate in the restaurant business, PepsiCo will take a completive advantage by penetrating new markets. Pepsi knows there products very well and what compliments are best for their business. In the past, the company has had extremely successful partnerships that increased their revenue and growth. Since PepsiCo has many established food service chains, they can acquire many new restaurant partnerships. PepsiCo’s’ diversification strategy of emphasizing entrepreneurial management encourages efficiency and high growth of their acquired restaurant chains. All in all, PepsiCo’s high quality business, products, and expertise explain why they should remain in the restaurant business.
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