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Pepsico: Brand Extension Study

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Submitted By vikramiyer
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ALCOHOLIC PREMIX MARKET

BRAND EXTENSION STUDY

Project by: 1. Kunal Agarwal – B002 2. Anurag Choudhary – B014 3. Vikram Iyer – B022 4. Sneha Jha – B026 5. Ninad Karandikar – B030 6. Smriti Mahajan – B032 7. Varun Verma – B062

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 prerequisites for successful market entry • Provide strategic recommendations on whether, and how, PepsiCo should pursue a new product launch in the alcoholic pre-mix beverage space

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Should PepsiCo Launch an Alcoholic Pre-mix?
Hypothesis: Current conditions are favorable for PepsiCo to launch a alcoholic pre-mix beverage.

Sub-Hypotheses: 1. Scalability: Growing demand in the alcoholic pre-mix beverage market supports a new entrant. 2. Defensibility: There is 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 pre-mix to PepsiCo’s portfolio would not negatively impact brand equity. 4. Value Proposition: Customers perceive an added value and are willing to pay a price premium for a Pepsi-branded alcoholic pre-mix beverage.
Necessary Assumptions to be Tested 1. There is sufficient space in the alcoholic pre-mix market for another entrant. 2. There is a significant first-mover advantage in being the first major soft drink brand to enter the alcoholic space 3. The infrastructure for production and distribution of soft drinks is not materially different than for alcoholic beverages (and there is significant overlap between alcoholic and nonalcoholic channels) 4. Pepsi's brand equity can be successfully extended to the alcoholic beverage market 3 5. Pepsi's brand yields a price premium that extends to alcoholic-beverage customers

Recommendation:

PepsiCo should pursue the launch of a branded product in the alcoholic pre-mix beverage space.

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 modified to suit two primary concerns: • 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
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Assumption Testing

Scalability
Growing demand supports a new market entrant

Defensibility
A first-mover advantage exists

Execution
Infrastructure can be leveraged without eroding the Pepsi brand

Value Prop
Customers 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 pre-mix beverage space

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

• Pepsi's brand equity can be successfully extended to the alcoholic beverage market • Pepsi's brand yields a price premium that extends to alcoholic pre-mix beverage customers
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SCALABILITY: Growing Demand in the Alcoholic Beverage Market will be sufficient to support a new entrant into the alcoholic pre-mix beverage
800 700 Dollars ($B) 600 500 400 300 200
CAGR = 3% CAGR = 1% CAGR = 31% CAGR = 4%

Pre-Mixed Liquor Wine Beer

100 0 2005

Source: Goldman Sachs Consumer Goods Forecasting Group

2006

2007

2008

2009

2010 (E)

2011 (E)

2012 (E)

Market
Pre-Mixed Liquor Wine Beer

Cost (unit)
$2 $11 $6 $1.5

Market Price (unit)
$4 $20 $12 $3

Break-Even Volume ($B)
7 21 113 74

Market Share (2012)
8% 23% 36% 27%

Attractive Opportunity

6

Source: Survey data from 100 companies across the 4 markets

SCALABILITY: New Entrants in 2009 were able to Gain Share and Achieve Profit in Certain Markets 2009 New Entrants
18% 16% 14% 12% 10% 8% 6% 4% 2% 0% -2%

Profit Margin Market Share

Market (# New Entrants)

Source: Analysis of financial data from selected companies

Conclusion: The Pre-mixed beverage market has the most opportunity for a entrant to gain share and achieve profitability.
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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
20 15 10
Underserved Market

Pepsi Hybrid ABC2 Xyz1 Abcd Smirnoff ice

5
0 2010 2014

WKD
Source: Alcoholic Beverage Industry Association, 2010

• 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

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

• 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
Potential Defensive Strategies to Minimize Competitive Response

Leverage strong distribution network to ensure access to all underserved markets Strong national marketing campaign to ensure uptake and strengthen brand in advance of competitive response

Retail Exclusivity
Distribution Channel

Lock up key retail locations and points-ofsale through exclusive, multi-year and multigeography contracts

Loyal Customer Base

Marketing leadership

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
Bottlers Operating Margins
Soft Drink Only Alcohol Only Both

Distributor Operating Margins
Soft Drink Only Alcohol Only Both

8.0% 7.8%

9.0%

8.5% 7.6% 7.4% 7.2% 7.5% 8.0%

7.0%
6.8% 7.0%

2003 2004 2005 2006 2007 2008

2003 2004 2005 2006 2007 2008
Source: PepsiCo internal bottling & distribution data

Conclusion: Operating margins are essentially the same for the alcoholic and nonalcoholic beverage industries. Significant competitive advantage should be realizable over small or regionalized competitors.
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EXECUTION : Pepsi's brand equity will not be damaged by entering the alcoholic beverage market Consumer Reactions to Alcohol Proposal
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”

3.6

0.8

(0.3)
Loyal Pepsi Drinkers (25-39) Non-Loyal Customers (25-39) Loyal Pepsi Drinkers (40+)

Non-Loyal Customers (40+)

(0.7)

Source: Focus Group, January 7, 2010

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 12 customers’ perception of the brand should actually improve.

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 • “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

Conclusion: Critical PepsiCo stakeholders believe an alcoholic pre-mix beverage is not compatible with the Corporation’s core corporate values
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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
Assumption: “Key drivers of consumer purchasing behavior in the alcoholic beverage market will parallel those in the non-alcoholic space.”
Non-Alcoholic Bev Market
H Impact on Price Tolerance Impact on Price Tolerance Availability Size H Brand

Alcoholic Bev Market
Availability Quality

Brand Size L

Quality L L Impact on Freq of Purchase H

L

Impact on Freq of Purchase

H

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, but will translate well towards pre-mix segment.
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VALUE PROPOSITION: Moreover, the Pepsi brand is likely to translate well to the pre-mixed segment

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

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. 15

Conclusions & Recommendations
Sub-Hypothesis Scalability Findings
Growing demand in the alcoholicbeverage market supports a new entrant PepsiCo commands a strategic position that could utilize the firstmover advantage in this market Though infrastructure capabilities are compelling, key stakeholders outside of executive management believe an alcoholic beverage in contradictory to PepsiCo's values. Brand equity does extends into the alcoholic pre-mix beverage market where quality is the key factor to achieve a price premium.

Conclusion Supports Hypothesis

Defensibility

Supports Hypothesis

Execution

Does Not Support Hypothesis

Value Proposition

Supports Hypothesis

PepsiCo should proceed with a branded alcoholic pre-mix beverage.

16

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