Pepsico’s Cost Of Capital Case Solution & Answer

Pepsico’s Cost Of Capital Case Solution

Question 1

Pepsi Co., the world’s largest beverage company, was started in Grove Village, California by Richard K. Farr, a carpenter in 1893 (ARCGIS, 2021). He began selling soda from a small peddler’s stand at the Loma Park Shopping Center in San Diego, California. Mr. Farr decided to build a store that would offer more choices than what the market had in the beverage industry. The resulting chain, Pepsi Max, is now located in over 35 countries worldwide. Through its various marketing campaigns, the company has evolved into one of the world’s top beverage companies. This is evident with the fact that Pepsi Max, the second most popular beverage in the world, now has seven restaurants in the United States alone.

Over the past seventy years, Pepsi has also been involved in sponsoring many sports events. For example, they have sponsored many Olympic Games and golf tournaments. Through this affiliation; the company has gained enormous loyalists worldwide. This brand and its history are some of the reasons why Pepsi has grown at such an amazing rate, over the past few years. This is also part of why the company’s stock price has soared over the past years.

Pepsi has a rich history that traces its beginnings all the way back over one hundred and fifty years. The brand first became famous during World War II for their soft drink and for their tea. During this time period; the brand was a huge success in the United States and Europe. However, this success was not without struggles. In light of the current financial situation of the company, inequity was again discovered and equity holders lost substantial amounts of money.

In recent years, Pepsi has experienced a growth spurt in its sales and market shares. It has also developed successful products like Mountain Dew, Fanta, and Pepsi Max. As a result of its solid growth and market share gains; Pepsi is the fourth largest company in the soda industry. How did Pepsi accomplish this? What were some of the factors that helped it in gaining the market dominance?

First, by establishing its own distinct place in the market. At first, the competitors would produce low-cost, low quality products that undercut the quality of Pepsi’s beverages. As a result of which, Pepsi launched Pepsi Max, a product that was priced higher than its competitors but built a bigger brand presence. As time passed, other competitors would face similar difficulties. In order to protect its share of the market, Pepsi made sure that it keeps improving its product offerings – it introduced the dieter’s soda Pepsi Max and launched a direct marketing program,” Pepsi Direct” – which made it easier for consumers to buy directly from the company.

Second, Pepsi recognized that in a growing economy; the market shares will become increasingly valuable. By creating a healthy lifestyle trend, by targeting an increasing population segment with its wide array of beverages and snacks and by consistently producing innovative products, it was able to secure its place in the American market. In fact, competition within the beverage sector itself. In an effort to maintain its market shares and to keep pace with its competitors; some of the America’s largest beverage companies have launched energy drinks which are aimed at the market segment that is solely comprised of college students. This strategy has backfired, however, as dieters have replaced them with sugary drinks; thus, despite of the higher price per volume; the industry’s revenues have actually declined.

Third, Pepsi’s business was able to weather many economic storms before its competitors were able to weather these storms. In recent years, the company has faced decreased gross profit margins, declining sales and declining gross and net profit margins, while its competitors have enjoyed profitable growth. The company has also faced an increased price competition from soda manufacturers as well as organic beverage manufacturers. As a result of which, Pepsi’s market shares have continued to decline, whereas its competitors’ market shares have significantly grown.

Fourth, despite of the innovation in the Pepsi’s marketing strategy, they remained similar to the earlier marketing strategies. It still advertises its beverages in highly visible locations, such as: university campuses, major streets and intersections and at business complexes. While its competitors continue to promote their beverages through multiple media outlets, including: television, radio, and other advertising venues, and their products are available in various store locations. Pepsi’s market shares have remained largely stable…………………………

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