New Product Launch - PepsiCo

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BRAND EXTENSION STUDY ALCOHOLIC BEVERAGE MARKET January 8, 2010 Michael Kochan James Thomson Trey Packard Nidhi Raj

description

Fictional project about PepsiCo launching an alcoholic beverage in the US and international markets. Done as part of curriculum in Jan 2010

Transcript of New Product Launch - PepsiCo

Page 1: New Product Launch - PepsiCo

BRAND EXTENSION STUDYALCOHOLIC BEVERAGE MARKET

January 8, 2010

Michael KochanJames Thomson

Trey PackardNidhi Raj

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AgendaObjectives of Today’s Discussion 2

Framework for Analysis 4

Hypothesis Testing: Assumptions, Findings, and Conclusions 5

Scalability – Can market demand support a new entrant? 8

Inimitability/Defensibility – Is there a first-mover advantage? 10

Execution – Can Pepsi leverage existing capabilities? 13

Value Proposition – Will customers pay a premium for the product? 17

Conclusions & Recommendations 19

Next Steps & General Work Plan 21

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Objectives of Today’s Discussion

• Provide an analysis of the alcoholic beverage industry (and associated sub-markets, including beer, wine, liquor, and the nascent pre-mixed & energy segment)

• Analyze PepsiCo’s operational and strategic advantages as they relate to potential entry into those markets

• Identify, test, and address prerequisitesfor successful market entry

• Provide strategic recommendations onwhether, and how, PepsiCo shouldpursue a new product launch in thealcoholic beverage space

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Should PepsiCo Launch an Alcoholic Beverage?Hypothesis:

Current conditions are favorable for PepsiCo to launch a alcoholic beverage.

Sub-Hypotheses:1. Scalability: Growing demand in the alcoholic-beverage market supports a new entrant. 2. Inimitability / Defensibility: There a first-mover advantage in this market. 3. Execution test:

– PepsiCo’s existing manufacturing, bottling, and distribution infrastructure can be leveraged to minimize costs through economies of scale vis-à-vis its competitors.

– Adding an alcoholic beverage to PepsiCo’s portfolio would not negatively impact brand equity and is compatible with core corporate values.

4. Value Proposition: Customers perceive an added value and are willing to pay a price premium for a Pepsi-branded alcoholic beverage.

Necessary Assumptions to be Tested 4. There is sufficient space in the alcoholic beverage market for another entrant.5. There is a significant first-mover advantage in being the first major soft drink brand to enter the alcoholic

space6. The infrastructure for production and distribution of soft drinks is not materially different then for alcoholic

beverages (and there is significant overlap between alcoholic and nonalcoholic channels) 7. Adding alcohol to PepsiCo's product portfolio does not conflict with its core corporate values8. Pepsi's brand equity can be successfully extended to the alcoholic beverage market 9. Pepsi's brand yields a price premium that extends to alcoholic-beverage customers

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AgendaObjectives of Today’s Discussion 2

Framework for Analysis 4

Hypothesis Testing: Assumptions, Findings, and Conclusions 5

Scalability – Can market demand support a new entrant? 8

Inimitability/Defensibility – Is there a first-mover advantage? 10

Execution – Can Pepsi leverage existing capabilities? 13

Value Proposition – Will customers pay a premium for the product? 17

Conclusions & Recommendations 19

Next Steps & General Work Plan 21

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Recommendation:

Summary of Findings: • The alcoholic beverage market (and the pre-mixed and energy segment, in particular)

are expected to grow at an accelerating rate, and• PepsiCo’s manufacturing and distribution capabilities can be extended to the alcoholic

beverage space.• Nevertheless, the proposal should be rejected for two primary reasons:

• Incompatibility with PepsiCo’s core corporate values and the company’s 5-year strategic vision, and

• Lack of defensibility of the move due to a lack of transferability of the Pepsi brand into the alcoholic beverage space

PepsiCo should NOT pursue the launch of a branded product in the alcoholic beverage space, although the launch or

acquisition of a non-branded mixed- or energy-drink line merits consideration.

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Assumption Testing

ScalabilityGrowing demand supports a new market entrant

DefensibilityA first-mover

advantage exists

ExecutionInfrastructure can be

leveraged without eroding the Pepsi

brand

Value PropCustomers value the

Pepsi brand in the alcoholic space, and

will pay a premium for it

• There is sufficient space in the alcoholic beverage market for another entrant

• There is significant first-mover advantage in being the first major soft drink maker to enter the alcoholic beverage space

• The infrastructure for production and distribution of soft drinks is not materially different then for alcoholic beverages

• Adding alcohol to PepsiCo's product portfolio does not conflict with its core corporate values

• Pepsi's brand equity can be successfully extended to the alcoholic beverage market

• Pepsi's brand yields a price premium that extends to alcoholic-beverage customers

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SCALABILITY: Growing Demand in the Alcoholic Beverage Market will be sufficient to support a new entrant

Market Cost (unit) Market Price (unit) Break-Even Volume ($B)

Market Share (2012)

Pre-Mixed $2 $4 7 8%

Liquor $11 $20 21 23%

Wine $6 $12 113 36%

Beer $1.5 $3 74 27%

2005 2006 2007 2008 2009 2010 (E) 2011 (E) 2012 (E)0

100

200

300

400

500

600

700

800

Pre-MixedLiquorWineBeer

CAGR = 4%

CAGR = 3%

CAGR = 31%

CAGR = 1%

Source: Goldman Sachs Consumer Goods Forecasting Group

Source: Survey data from 100 companies across the 4 markets

Dol

lars

($B)

Attractive Opportunity

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SCALABILITY: New Entrants in 2009 were able to Gain Share and Achieve Profit in Certain Markets

Conclusion: The alcoholic beverage market is growing sufficiently to support a new entrant. The Pre-mixed beverage market has the most opportunity for a entrant to gain share and achieve profitability.

2009 New Entrants

Beer (125)

Wine (2

34)

Liquor (3

8)

Pre-mixe

d (16)-2%

0%2%4%6%8%

10%12%14%16%18%

Profit MarginMarket Share

Market (# New Entrants)

Source: Analysis of financial data from selected companies

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DEFENSIBILITY: Pent-up demand and a large underserved market means that there is a significant first-mover advantage in being the first major soft drink brand to enter the alcoholic space

2010 20140

5

10

15

20

Pepsi HybridABC2Xyz1AbcdSmirnoff iceWKD

Underserved Market

• An underserved market in the pre-mixed alcoholic beverage area exists• Current competitors in the market are small, regionalized, and unable to

capitalize on the demand gap• Should Pepsi enter the space, it should be able to immediately capture a

significant proportion of the underserved market• Additionally, through targeted advertising Pepsi should be able to accelerate

overall market growth beyond what is currently possible

Source: Alcoholic Beverage Industry Association, 2010

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DEFENSIBILITY: Moreover, comparable launches have indicated that a time lag before competing entry will enable Pepsi to solidify its first-mover position

Who will respond?

• Existing regional competitors

• Coke, others• New Entrants

How have they responded earlier?

• 6 Months – 1 Year• Aggressive marketing

What are their capabilities?

• Brand equity• Supply chain parity• Exclusive third-party

tie-ups

Anticipated Competitive Response

• Analysis of previous new market entries by PepsiCo (including entry into the energy drink, diet cola, and sports drink spaces) indicates that:• The number of competitive entrants will be minimal (primarily Coca-Cola),• A significant time lag will exist before any competitive response,• Price wars are not a probable outcome, and• Overall market growth can be sufficient to sustain multiple entries

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DEFENSIBILITY: In the period before competitive response, Pepsi can strengthen its first-mover position through several defensive strategies

• Retail Exclusivi

ty•

• Loyal Customer Base

• Marketing leadership

• Distribution Channel

Potential Defensive Strategies to Minimize Competitive Response

Leverage strong distribution network to ensure access to all underserved markets (in the US and globally)

Strong national marketing campaign to ensure uptake and strengthen brand in advance of competitive response

Lock up key retail locations and points-of-sale through exclusive,

multi-year and multi-geography contracts

Pursue key sponsorship

opportunities, launch viral

campaigns, and ensure distinctive

product design

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EXECUTION: The infrastructure for production and distribution of soft drinks is not materially different than for alcoholic beverages

2003 2004 2005 2006 2007 20086.8%

7.0%

7.2%

7.4%

7.6%

7.8%

8.0%

Bottlers Operating MarginsSoft Drink Only Alcohol Only Both

Conclusion: Operating margins are essentially the same for the alcoholic and non-alcoholic beverage industries. Existing bottlers and distributors of both soft drinks and alcoholic beverages cross-utilize PP&E. Significant competitive advantage should be

realizable over small or regionalized competitors.

2003 2004 2005 2006 2007 20087.0%

7.5%

8.0%

8.5%

9.0%

Distributor Operating MarginsSoft Drink Only Alcohol Only Both

Source: SEC Filings, International public filings, PepsiCo internal bottling & distribution data

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EXECUTION : Pepsi's brand equity will not be damaged by entering the alcoholic beverage market

Survey: Please rate how this product affects your perception of the Pepsi brand where -5 means “negative affect on brand perception”, 0 means “no impact”, and 5 means “positive impact on

brand perception”

Conclusion: Overall, the Pepsi brand is not damaged by introducing an alcoholic beverage, although there are slight negative brand impacts

among older loyal customers. Younger loyal and non-loyal Pepsi customers’ perception of the brand should actually improve.

Loyal Pepsi Drinkers (21-39)

Non-Loyal Customers (21-39)

Loyal Pepsi Drinkers (40+)

Non-Loyal Customers (40+)

3.6

0.8

(0.3)(0.7)

Source: Focus Group, January 7, 2010

Consumer Reactions to Alcohol Proposal

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EXECUTION: Adding alcohol to PepsiCo's product portfolio may conflict with its core corporate values

Survey: A Pepsi-branded alcoholic beverage is not at odds with PepsiCo’s corporate strategy. 1 = Strongly Disagree, 3 = Neutral, 5 = Strongly Agree

Division/Team Rating ConclusionExecutive Management 4.1 Strongly Agree

Internal Marketing 1.3 Strongly Disagree

Corporate Strategy Group 0.5 Strongly Disagree

Select Key Shareholders 2.7 Neutral

Board of Directors 1.8 Disagree

Asia/Pacific Executive Management 2.2 Disagree

Latin American Executive Management 2.9 Neutral

EMEA Executive Management 0.9 Strongly Disagree

Source: Focus Group, 2009

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EXECUTION: Moreover, key stakeholders within the organization oppose the launch as being incompatible with the Company’s commitment to healthier products

• “The goal of PepsiCo’s human sustainability effort is to nourish consumers with a range of products, from treats to healthy eats. We are proud to give consumers choices across the spectrum. Our products deliver joy as well as nutrition.” – Member of Corporate strategy

Conclusion: Critical PepsiCo stakeholders believe an alcoholic beverage is not compatible with the Corporation’s core corporate values

• “We are committed to be a company that offers food and drinks that are ‘fun for you, better for you, and good for you.’ I do not believe adding an alcoholic beverage would be better or good for either our current or potential customers.” – Member of Internal M&A

• “I would be concerned about how an alcoholic beverage might cause backlash in my markets, particularly in the Middle East and Northern Africa.” – Division Head, EMEA

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VALUE PROPOSITION: While brand commands a price premium in the non-alcoholic segment, pricing power in the Alcoholic segment is driven primarily by Quality

Source: Income levels & purchase frequency by segment

Assumption: “Key drivers of consumer purchasing behavior in the alcoholic beverage market will parallel those in the non-alcoholic space.”

Conclusion: While some variation is seen across sub-segments, consumers in the alcoholic beverage space generally place more of a premium on

quality than on brand. Pepsi’s existing brand equity will not translate well to alcoholic drinks.

Impa

ct o

n Pr

ice

Tole

ranc

e

Impact on Freq of Purchase

Non-Alcoholic Bev Market

HL

HL

Size

Quality

BrandAvailability

Impa

ct o

n Pr

ice

Tole

ranc

eImpact on Freq of Purchase

Alcoholic Bev Market

HL

HL

Quality

Size

Availability

Brand

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VALUE PROPOSITION: Moreover, the Pepsi brand is unlikely to translate well to alcoholic markets, with the exception of the pre-mixed & energy segment

Source: Bain & Co Focus Group, 1/7/2010

Loyal CustomersNew Customers

Conclusion: While loyal Pepsi customers are very likely to try a Pepsi-branded alcoholic beverage in the pre-mixed and energy drink space, they are unlikely to do so in any other segment. Non-loyal customers are less likely in all cases.

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AgendaObjectives of Today’s Discussion 2

Framework for Analysis 4

Hypothesis Testing: Assumptions, Findings, and Conclusions 5

Scalability – Can market demand support a new entrant? 8

Inimitability/Defensibility – Is there a first-mover advantage? 10

Execution – Can Pepsi leverage existing capabilities? 13

Value Proposition – Will customers pay a premium for the product? 17

Conclusions & Recommendations 19

Next Steps & General Work Plan 21

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Conclusions & Recommendations

Sub-Hypothesis Findings Conclusion

ScalabilityGrowing demand in the alcoholic-beverage market supports a new

entrantSupports Hypothesis

Inimitability / Defensibility

PepsiCo commands a strategic position that could utilize the first-

mover advantage in this marketSupports Hypothesis

Execution

Though infrastructure capabilities are compelling, key stakeholders outside of executive management believe an alcoholic beverage in contradictory to

PepsiCo's values.

Does Not Support Hypothesis

Value PropositionBrand equity does not extend into the

alcoholic beverage market where quality is the key factor to achieve a

price premium.

Does Not Support Hypothesis

PepsiCo should NOT proceed with a branded alcoholic beverage.

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Summary of Work Performed To-Date

• Timeline– 12 week engagement beginning early January 2010

• 2 preliminary meetings after weeks 4 and 8• Final presentation at end of week 12 (early April) to CEO Indra Nooyi and executive team

• Resources & Assignment Responsibilities– 1 Partner to manage relationship with PepsiCo– 1 Manager to deal with upper management at PepsiCo and manage problems during engagement– 2 Consultants to manage workstreams and prepare proposals to PepsiCo– 3 Analysts to collect and analyze data

• Strategic Question– Should PepsiCo launch a Pepsi-branded alcoholic beverage?

• Hypothesis– Current conditions are favorable for PepsiCo to launch an alcoholic beverage

• Analyses– Does PepsiCo's brand yield a price premium that extends to alcoholic-beverage customers?– Is there is sufficient space in the alcoholic beverage market for another entrant?– Is there is a significant first-mover advantage in being the first major soft drink brand to enter the alcoholic space?– Is the infrastructure for production and distribution of soft drinks materially different than that for alcoholic

beverages (and there is significant overlap between alcoholic and nonalcoholic channels)?– Can PepsiCo's brand equity be successfully extended to the alcoholic beverage market?– Will adding an alcoholic beverage to PepsiCo's product portfolio conflict with its core corporate values?

• Data– PepsiCo Interviews– Surveys– Published Reports– Custom Reports– Market Data