PepsiCo restaurants

Topics: PepsiCo, Pizza Hut, Fast food Pages: 7 (2000 words) Published: September 8, 2008
I. IntroductionThe key question is whether PepsiCo should expand its restaurant business by pursuing the purchase of CARTS OF COLORADO, a $7 million manufacturer and merchandiser of mobile food carts and kiosks, and CALIFORNIA PIZZA KITCHEN, a $34 million restaurant chain in the casual dining segment.

II. Analysis of the main problemPepsiCo has 3 main segments: soft drinks (35% of PepsiCo's sales and 39% of its operating profits in 1991), snack foods (29% of PepsiCo's sales and 35% of its operating profits) and restaurants (36% of PepsiCo's sales and 26% of its operating profits). In the early 1990's PepsiCo's three restaurant chains (KFC, Taco Bell and Pizza Hut) were the leaders in their respective segment. PepsiCo's senior management believes its ability to move people within and across divisions gives PepsiCo a competitive advantage in the restaurant segment. PepsiCo believes their restaurants perform due to their strong management teams; which are developed within the corporation. PepsiCo would like to utilize their competitive advantage in running restaurants with PepsiCo managers by adding California Pizza Kitchen and CARTS OF COLORADO to the PepsiCo portfolio.

Despite PepsiCo's success with KFC, Taco Bell and Pizza Hut it had difficulty expanding La Petite Boulangerie, a three-unit bakery chain it purchased in 1982. The large overhead for La Petite Boulangerie made the company unprofitable and Pepsi sold it in 1987 for a $13 million loss. The unsuccessful venture into La Petite Boulangerie suggested that although PepsiCo managers were gifted and could be easily moved across divisions; the moves would not always guarantees a successful business expansion.

Therefore, the main problem for PepsiCo management is to decide whether it can successfully purchase and administer CALIFORNIA PIZZA KITCHEN and CARTS OF COLORADO. This is in light of the fact that PepsiCo believes it has a competitive advantage in the skillfulness of its managers that was not borne out in the unsuccessful La Petite Boulangerie bakery endeavor.

III. RecommendationsPepsiCo can be categorized as a related diversifier. Approximately 30% of its revenue is split between its 3 main industrial categories. PepsiCo's business units share common resources and skills. Historically companies that take a corporate strategy of related diversification perform the best (GBS_634M lecture notes). Therefore on the surface it would appear that diversification by acquiring CALIFORNIA PIZZA KITCHEN and CARTS OF COLORADO would be an excellent strategic decision.

However, in arguments described below; the evidence does not support a recommendation for PepsiCo to purchase Carts of Colorado or CALIFORNIA PIZZA KITCHEN.

IV. Justification for recommendationsPepsiCo is a lucrative company and therefore does not need to diversify into CALIFORNIA PIZZA KITCHEN and CARTS OF COLORADO to maintain it profitability. From 1987-1991 PepsiCo's sales doubled, income from continuing operations grew at a compound rate of more than 20%, and the company's value on the stock market tripled (PepsiCo restaurant Case, pg. 4, and Exhibit 3).

Eight key reasons NOT to diversify into CALIFORNIA PIZZA KITCHEN and CARTS OF COLORADO.

It is poor rationale for PepsiCo to diversify into CALIFORNIA PIZZA KITCHEN and CARTS OF COLORADO simply to reduce risk. The restaurant business is cyclical. Some restaurants will be profitable, while some will not be profitable. PepsiCo's shareholders can diversify risk by purchasing shares in CALIFORNIA PIZZA KITCHEN and CARTS OF COLORADO themselves. Furthermore, it is not an appropriate strategy for PepsiCo management to over-diversify to protect their personal wealth.

Maintaining growth is not a good basis to diversify into CALIFORNIA PIZZA KITCHEN or CARTS OF COLORADO. Most shareholders would rather hold shares in a small profitable company, not a big unprofitable company. As a shareholder, there is only a benefit if PepsiCo makes a profit....
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