Case Study on PepsiCo’s Use of Financial Derivatives

1. Introduction
1.1 PepsiCo’s History
The Pepsi-Cola Company was incorporated in 1919 by Caleb Bradham, the inventor of the Pepsi-Cola soft drink. PepsiCo became a multinational beverage and snack food company in 1965 when Pepsi-Cola merged with Frito-Lay. Since the 1965 merger PepsiCo has expanded its operations by acquiring Quaker-Oats, Tropicana, and Gatorade brands. With sales of $66.86 billion in 2014 and with products sold in over 200 countries, PepsiCo is one of the leading food and beverage companies in the world (PepsiCo, 2014).
1.2 PepsiCo’s Industry
The beverage and snack food industries are both in the mature stage in their life cycles, and companies in these industries largely depend on product innovation, brand recognition, and low prices to remain competitive. Like all companies PepsiCo faces risk of increases in operating expenses and decreases in net income due to market risk. Companies in PepsiCo’s industry have been forced to expand its product offerings into healthy foods and drinks due to an insurgent health and wellness in American culture.
1.3 PepsiCo’s Competitors
PepsiCo’s top competitors consist of The Coca-Cola Company, Dr Pepper Snapple Group, and Nestle; additionally, because PepsiCo is a multinational company it must also compete with countless local snack and beverage companies across the globe. Coca-Cola has been viewed as PepsiCo’s main rival for around 100 years, and the competition between the two companies has had a cultural impact in the United States dubbed “The Cola Wars”. In 2014 the revenues from PepsiCo, Coca-Cola, and Dr Pepper Snapple Group were $66.68 billion, $45.99 billion, and $6.12 billion respectively.
Graph 1 – 2014 market shares in the U.S. soft drink industry

1.4 PepsiCo’s Risks
Some of the most common types of risks PepsiCo faces annually include