PLEASE ONLY USE INFO FROM THE CASE READING ATTACHED: and answer the following questions .. this is a pepsico case reading from Harvard ..

1. Identify and categorize two reason for diversification (i.e. shared resources or other incentives) that are applicable to the Beverage (NAB) and Snack (FLNA) divisions of PepsiCo. use with data from the case.

2. Based on your analysis, is maintaining these two divisions in one company justified? Use data from the case

Introduction In April 2018 on one of Indra Nooyi's last earnings calls before stepping down as CEO of PepsiCo, she faced a question that many analysts and investors had asked over her 12 years at the helm of the company: Why should PepsiCo keep its snack business and beverage business together?" PepsiCo's report for the quarter told a familiar story. Revenues for its snacks division, Frito- Lay North America, grew by 3%, while revenues for its North American Beverages division fell by 1%.1 With that trend in mind, an analyst asked Nooyi whether, in talks with retailers, " the poor performance in beverages maybe dilutes [your inuence] when you're having discussions about Frito and all the great innovation" on the snacks side of the company. \"Why do you really think that beverages . . . give you greater strength in terms of having a seat at the table?"2 PepsiCo was doing well in general. Its 2017 annualized dividend per share had increased by 50%, and it returned $38 billion to shareholders. \"These are impressive results,\" Nooyi wrote in the company's annual report, "particularly in light of all the global megatrends impacting our business,..." such as political volatility, shifting consumer preferences, disruption in the retail sphere,\" and "the emergence of niche brands capturing growth in many markets.\"3 But the performance gap between snacks and beveragesand the question of whether they belonged together had occupied Nooyi since the beginning of her tenure as CEO in 2006. She immediately began moving PepsiCo away from sugary drinks toward lowcalorie sodas and non-carbonated drinks, trying to improve revenue and profits on the beverage side, but that effort was not entirely successful. From 2015 to 2017, net revenue for the North American Beverages (NAB) segment increased only slightly, from $20.6 billion to $20.9 billion, and operating prot declined from $2.8 to $2.7 billion. In the same timefrarne, net revenue for Frito- Lay North America (FLNA) increased from $148 to $15.8 billion, and operating prot increased from $4.3 to $4.8 billion (see Exhibit 1).4 The tension between FLNA's strong performance and NAB's struggles inspired the activist investor Nelson Peltz, CEO of Trian Fund Management, to push for a spinoff of PepsiCo's snack business in 2013. Peltz argued that a focused beverage business could be more competitive with its archrival, Coca-Cola; and an independent FritoLay could increase its dominance as the leading snack maker in the United States. In the following years, Nooyi managed to quell these concerns, but the question of whether snacks and beverages should stay together was still top of mind during that morning earnings call in April 2018. Nooyi replied: "First of all, the investment bankers have been knocking on our door forever. They have lots of great ideas. But at the end of the day . . . the ideas have got to make sense. They've got to make business sense and shareholder value sense. And we've been thinking through all of this a lot."5 Were snacks and beverages better together, or would a separation allow each business to maximize its potential? Nooyi's comments reected the strong conviction among PepsiCo's leadership that keeping them together created synergies that made the company more valuable than the sum of its parts. As the analyst's question suggested, though, many investors were just as convinced that PepsiCo would be more efficient and protable as two pure play companies, and that only a split would meet Nooyi's criteria of making both \"business sense and shareholder value sense.\" PepsiCo's Beverage Business Based in Purchase, New York, PepsiCo's product portfolio consisted of multiple iconic brands, including Pepsi, Mountain Dew, Tropicana, Lipton, Gatorade, Fritos, Doritos, Tostitos, and Cheetos. Twentytwo of its brands each had more than $1 billion in sales in 2017 (see Exhibit 2).6 Its overall revenue was $63.5 billion. The company originated in 1893 in New Bern, North Carolina, where Caleb Bradham, a pharmacist, created the formula for "Brad's Drink,\" containing sugar, water, caramel, lemon oil, and nutmeg. He renamed it Pepsi-Cola in 1898 and marketed it as a digestive aid. informed that, like the majority of the people who took part in the test, they had chosen Pepsi over Coke. The campaign was so effective that, by the early 1980s, Pepsi outsold its rival in grocery stores, though Coke remained the overall leader due to sales in fast food chains and other restricted markets. Rattled by Pepsi's success with the campaign, Coke changed its syrup formula and introduced it as New Coke in April 1985, phasing out the original formula. An outcry by fans of the \"classic\" version forced the company to reintroduce original Coke just three months later. The double reversal was widely portrayed as a public relations asco, yet the result was a surge in Coke's sales, giving rise to a (now debunked) conspiracy theory that the episode had been a marketing ploy all along. By 1986, Coke had regained its status as the undisputed sales leader in the carbonated beverages sector.8 By then, PepsiCo and CocaCola were also evolving into fundamentally different companies. Coke had established a much bigger and broader global presence. Among Coke's four \"geographic operating groups,\" North America generated the lowest unit case volume in 2017, at 20%. Latin America generated 27%; Asia Pacific generated 23%; and Europe, Middle East, and Aflica generated 30% (see Exhibit 3). PepsiCo was more concentrated in North America, generating 58% of its revenue there in 2017. Even so, Coke's share of the carbonated soft drink sector in North America was significantly larger than Pepsi's42.5% to 27% in 2015.9 Globally, Coca Cola's share of the soft-drink sector in 2015 was 48.5%, versus PepsiCo's 20.9%.\") In addition, Coke, which reported $35.4 billion in net operating revenues in 2017, earned all its revenues from beverages, while PepsiCo also sold snacks andfrom 1977 to 1997owned several restaurant chains. In 2015, carbonated beverages were just one-fourth of Pepsi's US sales, and non-carbonated beverages were about the same. Snacks accounted for the other half.11 PepsiCo and the Food Industry PepsiCo's foray into the snack foods market began in 1965, with the acquisition of the Frito- Lay company, which had $184 million in sales at the time, compared to PepsiCo's $450 million. Its brands included Fritos corn chips, Lay's and Rufes potato chips, and Rold Gold pretzels. PepsiCo also entered the restaurant business, beginning with the acquisition of Pizza Hut in 1977 and continuing with Taco Bell (1978), KFC (1986), and California Pizza Kitchen (1992), hoping that synergies with these fast-food chains would increase sales of Pepsi products. However, the strategy achieved mixed success, at best. Page 3 | PepsiCo and Frito-Lay: A Salty Columbia Combination? CaseWorks BY STEPHAN MEIER* AND DAN J. WANG+1ne rower or une uuuatlve was ae51gnec1 to break down me ungermg oarners oetween me two businesses, especially in the realm of marketing. AdAge observed that promotions featuring PepsiCo's snacks along with its beverages had typically been limited to holidays and special events, such as the Super Bowl. But the Power of One initiative \"will feature season- long executions.\" It might pair, for example, Rufes Max and Pepsi Max together in marketing targeting young males. 19 The executive tasked with leading the initiativeJohn Compton, CEO of PepsiCo North Americas Foods and Global Snacks Group observed that it was about \"not just how the two businesses can be complementary, but how they can demonstrate that one plus one equals three?\" (See Exhibit 4 for PepsiCo's executive leadership team.) Pepsi brands, according to Retail Leader, \"might be paired with Lay's potato chips in the Sunday circular and at instore di5plays. Convenience stores might convey Power of One with gas- pump toppers, cooler-door signs, and other in-store di5p1ays.\" 21 The CEO of the grocery retailer Kroger, Rodney McMullen, reected on the difference that the initiative made for PepsiCo's retail partners: \"You don't develop a snack plan or a beverage plan; you develop a promotion with all the Pepsi brands.\"22 Other analysts were more skeptical of the plan. One senior merchandising official at a large US retail chain believed that \"Pepsi is slow to act and cannot make decisions.\" In one circumstance, PepsiCo apparently failed to respond quickly enough when a retailer gave it the opportunity to showcase Pepsi and Frito-Lay together in a planned promotion. Instead, \"Coke swooped in,\" taking the opportunity to co-promote Coke with Wise potato chips.\" "That is what happens, \" Trian noted in a letter to PepsiCo's board in 2014, \"when a management team such as CocaCola is universally focused on one consumer segment and one corporate objective, not distracted balancing the interests of two business (snacks and beverages) with vastly different opportunity sets and challenges.\"24 In 2011, Goldman Sachs issued a report in which it observed that \"PepsiCo's track record so far has not been encouraging, and we question whether the 'Power of One' strategy is in many ways diluting the focus and resources that [PepsiCo's] soda products need to receive.\" It cast doubt on the effectiveness of joint promotions, for example, because retailers were more interested in maximizing their own prots than in selling particular brands. The report cited instances of retailers advertising Coke beverages alongside PepsiCo snacks, and PepsiCo beverages alongside non-PepsiCo snacks.25 An analyst with Credit Suisse noted in 2011 that a That trend was central to Nooyi's plans and priorities on assuming the role of CEO in 2006. One of her first moves was to implement a threepronged \"performance with purpose campaign\" designed to improve the company's longterm sustainability. These included a range of environmental initiatives and programs to invest in the health and economic development of disadvantaged communities, as well as a move toward developing and acquiring healthier snacks and beverages. For example, in 2006 PepsiCo acquired Izze (a maker of lowcalorie, carbonated fruit juice drinks) for $75 million; and Naked Juice (a maker of fruit Smoothies) for about $450 million. In 2012, it introduced Pepsi Next, a carbonated soda with 30% less sugar than the regular version. In 2016, it acquired KeVita (a maker of kombucha) for around $200 million. In 2017, it entered the sparkling water space with Bubly, and it launched a "premium\" bottled water brand, LIFEWTR, the same year. The trend continued in August 2018, when PepsiCo announced the acquisition of SodaStream, the producer of a popular appliance and packaged materials for making carbonated beverages at home. PepsiCo's move toward less sugary beverages was partly a response to changing consumer tastes and a sustained public-health campaign led by cities, government agencies at all levels, and academic research centersthat targeted sugar's role in the obesity epidemic in the United States.27 The evidence for the campaign's effectiveness was wideranging. In a 2014 poll, 63% of respondents said that they avoided sodaup from 41% in 2002. That made soda the most- avoided choice, ranking above fat (56%), sugar (52%), and salt (46%).23 One study found that, from 2003 to 2014, the percentage of adults who drank a sugary beverage on a given day fell from 61.5% to 50%. There was an even steeper decline among children, from 79.7% to 60.7%. Overall, children consumed about 313 calories from beverages each day in 2014, versus 474 in 2003, while adults consumed 341 per day in 2014, versus 425 in 2003.29 Some of the decline in calories had to do with the skyrocketing consumption of bottled water, which increased in sales volumefrom 8.76 billion gallons to 12.8 billion gallonsfrom 2010 to 2016.30 In 2015, the New York Times observed that the \"drop in soda consumption represents the single largest change in the American diet in the last decade," adding that that the decline was especially sharp among teenagers, who consumed 24% less soda from 2007 to 2013, and that \"public attitudes about soda and consumer tastes are shifting in ways that may be permanent.\" Beverages and Snacks: So Happy Together? In 2011, Kraft Foods announced that it would split into two companies, creating "a $32 billion international snacks business, including Cadbury, Oreo, and Trident brands, and a $16 billion North American grocery business" that included Kraft Macaroni and Cheese, Oscar Mayer, Philadelphia, Maxwell House, and Jell-O. The move came in response to activist investors, including Peltz, who had pressed for a split of Kraft's "high-growth global snack brands from its slower-growing, more mature grocery brands."33 A week after the split was announced, AdAge noted that analysts viewed PepsiCo as also "ripe for a breakup," given the growing consensus that "the company's fast-rising snacks unit is being held back by its underperforming beverage business." PepsiCo issued an unambiguous rejection of the idea.34 In early 2013, Peltz and Trian purchased a $1.3 billion stake in PepsiCo. Peltz was expected to push for a merger of PepsiCo with Mondelez, the snack company that spun off from Kraft in 2011.35 Peltz also owned a stake in Mondelez. Spokespeople from both companies immediately rejected the idea, but in July 2013, Trian proposed "one of two strategic alternatives" for PepsiCo's future. The first was a merger with Mondelez, "creating a global snacks powerhouse," followed by a spinoff of PepsiCo's beverages business. The second was a straightforward separation of PepsiCo into two pure play companies. 36 Trian offered a pointed critique of Pepsico's business model. It argued, for example, that the sugar- and salt-heavy brands like Pepsi, Mountain Dew, Doritos, and Lay's were "the heart of PepsiCo's business," and that the move toward more nutritious products had been a distraction.37 Moreover, PepsiCo's fast-growth snack business didn't harmonize well with its slow-growth beverage business. Furthermore, Trian noted that the recently formed Power of One-Americas Council consisted of six legacy snack executives and only two native beverage executives, creating an imbalance of power and decision-making at the corporate level.38 PepsiCo Responds PepsiCo responded to this challenge in various forums, always emphasizing its commitment to keeping snacks and beverages together. A company spokesperson noted:The Potential for Global Growth Leveraging and expanding its global presence was another potential source of increased prots and synergies for PepsiCo. The company generated about 58% of its revenue within the United States in 2017 and had six operating segments three focused on North America and three on other continents. In 2017, the three operating segments focused on North America brought in about $39 billion in revenue. The three globally focused segments brought in about $24 billion (see Exhibit 1). As part of its challenge to PepsiCo, Trian observed that the company's global footprint was broad but relatively shallow. \"Despite operating in more than 200 countries, PepsiCo generates the majority of its sales and prots from a handful of markets,\" it noted in a 2014 letter to the board' \"Within snacks, the company's top 10 countries represent 85% of total PepsiCo Snacks retail sales. Within beverages, the company' s top 10 countries represent 80% of total PepsiCo beverage retail sales.\" Trian was especially critical of PepsiCo's \"inability to turn Frito-Lay into a powerful global brand,\" calling it a \"lost opportunity.\"9 Increasing its global presence seemed to be a promising growth strategy for PepsiCo for a variety of reasons, including rising disposable incomes, growing populations, and relatively low rates of per capita non-alcoholic beverage consumption in many developing countries.\" When it formed the Power of OneAmericas Council in 2011, for example, it simultaneously created the Global Snacks Group to "focus on developing a coordinated approach to the company's global brand portfolio, creating and delivering breakthrough snacks innovation and promoting bestpractice sharing around the world.\" John Compton, the executive assigned to lead the Power of One, was also tapped to lead the Global Snacks Group.51 In 2014, Lay's announced its launch of the \"biggest global integrated marketing campaign\" in its history, with a series of commercials featuring the soCCer superstar Leo Messi. One of the spots was a prime example of both the synergies and the global presence that PepsiCo was trying to foster. It featured Messi taking \"center stage in a commercial for Pepsi and Lay's,\" as a PepsiCo press release noted. This commercial is the biggest global marketing initiative to feature both Pepsi and Lay's products, and with football as a driver of awareness for PepsiCo's food and beverage brands around the world, this campaign reects PepsiCo's broader strategy to combine the power of global brands, showcasing them better, together. The campaign was scheduled to appear in 60 countries.52 Global growth also presented a series of challenges, however, including political volatility and its effects on economic conditions and trade in PepsiCo's target marketssometimes even in markets that were traditionally stable. The company's 2017 annual report, for example, noted that a looming concern was "uncertainty surrounding the United Kingdom's pending withdrawal from the European Union\" in 2018, \"including how the United Kingdom will interact with other European Union countries following its departure."53 The report also cautioned that there was no guarantee PepsiCo's products would be successful in emerging markets, such as Mexico, Russia, the Middle East, Brazil, China, and India, because of \"product price, cultural differences, consumer preferences, or otherwise.\"5'1 One analyst underscored this is as a key challenge for both CocaCola and PepsiCoi.e., they were already dominant in markets where consumers had \"uniform preferences,\" or tastes similar to those of US consumers. Many of their potential growth regions were rural areas where consumers had local preferences that made it difficult for global brands to grow. In rural China, for example, a Chinese brand called Future Cola created packaging similar to Coke's but tailored the soda's taste to local preferences. By establishing local production facilities, Future Cola was able to make, distribute, and sell its soda cheaply, achieving 15% PepsiCo's Continuing Challenge In May 2016, Trian announced that it had liquidated its 18.3 million shares in PepsiCo. Peltz had by then backed away from his highly public critique of PepsiCo's business model, partly because, in 2015, the company had added an adviser to Trian to its board -Bill Johnson, former CEO of Heinz. Although his push for a spinoff failed, Peltz realized a profit of more than $500 million on his three-year investment. PepsiCo's stock, which traded at $70 when he began buying it, was at about $104 when he sold it. Peltz's rate of return was 49%, which beat the S&P's total return rate of 43% and Coca Cola's rate of 24%. In a statement regarding its exit, Trian said that PepsiCo had "addressed many operational issues" and had "increased productivity efforts, reduced overhead, increased advertising investment, and delivered consistent earnings growth on a constant currency basis."59 In the wake of Peltz's challenge, opinions about whether to keep PepsiCo's snacks and beverages together remained divided. In early 2018, in an article explaining "why Frito-Lay North America is PepsiCo's most valuable segment," Forbes noted -as other publications had frequently pointed out over the years-FLNA's overperformance relative to Pepsico's beverages. In FY 2017, FLNA had contributed a quarter of PepsiCo's operating revenues but, "according to our estimates, 38% of Pepsico's valuation comes from this division."60 (See Exhibit 9 for selected financials from PepsiCo and its competitors, 2008-17.) The article did not mention Trian's recent challenge and gave a positive spin on the performance gap that had inspired it. "The snacks business is almost twice as profitable as the beverage business for PepsiCo," Forbes observed. "For each $100 earned, FLNA generates $34 toward EBITDA, while [North America Beverages] generates only $18. Hence, an increase in revenues of Frito-Lay's business would have a significant impact on its valuation. This works tremendously in Pepsico's favor, as its profitable snacks business, of which Frito-Lay is a major component, is growing."61 In mid-April 2018, Goldman Sachs upgraded its estimate of Coke's stock and downgraded PepsiCo's to a "sell" rating, citing PepsiCo's "muted fundamentals," a lack of "clear catalysts" for growth, and the fact that its beverage business was losing market share. Coke's stock was down 2% for the year at the time, but PepsiCo's was down 9%. Goldman expected a 2 to 2.5%