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Systemic Management #18

FOCUS mistake of PepsiCo brand

PepsiCo illustrate the mistake of a focus in relation with Coca-Cola brand.

PepsiCo is a company driven by growth at all costs. "We're not at all backing off our commitment to 15 percent long-term growth," said PepsiCo's CEO Wayne Calloway recently.

In addition to Frito-Lay, the world's largest snack food company, PepsiCo owns three of the seven largest fast-food chains in the United States: Pizza Hut, the world's largest pizza chain. Taco Bell, the world's largest Mexican food chain. And KFC, formerly Kentucky Fried Chicken, the world's largest chicken chain.

The sun never sets on a PepsiCo restaurant. In addition to the three big chains, PepsiCo also owns Hot'n Now, Chevys, California Pizza Kitchen, D'Angelo Sandwich Shop, and East Side Mario's. Together, PepsiCo's 24,000 restaurant units make up the world's largest restaurant system. (By comparison, McDonald's has only 14,000 restaurant units worldwide.)

To drink in all these restaurants, PepsiCo has a full line of beverage brands including Pepsi-Cola, Diet Pepsi, Pepsi Max, Pepsi XL, Slice, Mountain Dew, Lipton teas, All Sport, and 7UP (outside the United States). Just for kicks, the company also imports Stolichnaya vodka from Russia. It should come as no surprise that PepsiCo is a much larger company than The Coca-Cola Company, which has pretty much stuck to its beverage heritage. In a recent year PepsiCo had sales of $28.5 billion versus $16.2 billion for Coca-Cola.

What might come as a surprise is the relative "value" or worth of the two companies. Using one measure of value, the stock market, PepsiCo, the larger company, is worth $44 billion, and Coca-Cola, the smaller company, is worth $93 billion, or more than twice as much. Per dollar of sales, Coca-Cola is worth almost four times as much as PepsiCo. That's the power of a focus. Well, you might be thinking, that's not fair. PepsiCo is bogged down by its relatively low-profit fast-food chains.

Let's try another comparison. McDonald's Corporation versus PepsiCo.

McDonald's has some fourteen thousand restaurant units, which do $7.4 billion in sales compared to PepsiCo's more than twenty-four thousand units, which do $9.4 billion in sales. If given a choice, why wouldn't an investor want to own the PepsiCo fast-food chains rather than McDonald's?

One reason is profits. On its $7.4 billion in sales, McDonald's keeps a hefty $1.1 billion in net income, or 15 percent. On its $9.4 billion in sales, PepsiCo manages to keep only some $400 million in net income, or 4 percent.

The stock market tells the same story. McDonald's is a much smaller company than PepsiCo's restaurant chains, yet the market values McDonald's Corporation at $31 billion. How much the KFC, Taco Bell, Pizza Hut combination is worth is a matter of conjecture.

One way to estimate their market value is to take their net income as a percentage of PepsiCo's total net income and then calculate what that would represent as a percentage of PepsiCo's total market value. On this basis, the PepsiCo restaurant chains would be worth $10 billion.

Note again the power of a focus. McDonald's, with $7.4 billion in sales, is worth $31 billion. PepsiCo's restaurant chains, with $9.4 billion in sales, are worth $10 billion. The smaller, more focused company is worth three times as much as the larger, less focused operation.

Maybe even more. Market valuations are just numbers that represent the price at which investors are willing to buy or sell an individual company's stock. If they truly understood the power of a focus, they might be willing to pay even more for the more focused company's stock.

In PepsiCo's case, its fast-food units are doubly unfocused. First of all, they are a collection of competing brands versus the singularity of the McDonald's operation. Second, the fast-food brands are buried in a beverage company, a disadvantage McDonald's doesn't have.


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