Comprehensive Analysis of PepsiCo - Example

• Abstract

Corporate reports such as Form 10-K, annual reports and proxy statements act as vital pieces of evidences regarding a firms operations. Stakeholders, external institutions and individuals verify such reports to take the necessary decisions regarding investing in a firm. The following report evaluates the various strategies and competitive advantage position of PepsiCo through a comprehensive study of their corporate filings. Such an evaluation is expected to provide an in depth understanding regarding the firm’s policies and profitability. The study gives particular importance to management discussions revealed in the corporate reports and also upon the financial information provided thereby. The report also considers analyses how PepsiCo manages their stakeholders.

Table of Contents

Abstract2

Introduction4

Industry Conditions and Market Position4

SEC Form10-K5

Disclosure of Information5

Competitors6

Management Discussion and Analysis on Financial Matters6

Financial Evaluation as per Form 10-K and Annual Report7

Financial Strengths and Weakness12

Shareholder Engagement: Form DEF14A and Proxy statement evaluation13

Stakeholder Analysis14

SWOT Analysis15

Conclusion15

• Introduction

PepsiCo Inc. is considered to be one of the largest food and beverage industries in the whole world. It not only holds a wide portfolio of products and services, but also operates in approximately 200 countries all over the globe (PepsiCo Inc., 2014 a). The objective of the organization is to deliver a sustained value by offering superior quality products. It manufactures products using innovative techniques so as to minimize the impact upon the environment. The superior performance and responsible actions of the firm have secured it with a wide number of stakeholders and a strong market image (PepsiCo Inc., 2014 a). The following report is a brief analysis of the company’s competitive strategies based on its corporate filings. The study facilitates an understanding of how such stock exchange (SEC) filings facilitate gauging the strengths and weaknesses of an organization.

• Industry Conditions and Market Position

The food and beverage industry is considered to be one of the biggest segments all over the globe. The segment generates massive revenue and offers numerous opportunities for growth and expansion. The food and beverage segment is also laden with stiff competition. Intellectual property rights are therefore acquired by PepsiCo, so as to protect their business success and important food and beverage manufacturing processes and recipes (PepsiCo Inc., 2014 a). The segment is mainly affected by the changing lifestyle patterns of consumers as well as their eating and drinking habits. Companies operating in this segment are therefore required to adapt themselves with such changes. The market share and position held by PepsiCo can be understood from the following figure (PepsiCo Inc., 2014 a).

Figure 1: Market share and position held by PepsiCo till the year ended 2014

(Source: PepsiCo Inc., 2014 a)

PepsiCo is seen to have a dominant position in the market. The company was seen to hold approximately 24% of the market share in the U.S alone. PepsiCo is one of the most powerful food and beverage companies in the world (PepsiCo Inc., 2014 a).

• SEC Form10-K
  • Disclosure of Information

Form 10-K of the SEC filings provides a comprehensive understanding of an organization’s financial performance; along with any information regarding the business and the risk involved. It also states matters which are required to be disclosed to shareholders and other stakeholders regarding crucial financial decisions and market risks (Boubaker, Hamrouni & Liang, 2015). Corporate governance related aspects are also included in the form. The PepsiCo filing of Form 10-K for the financial year 2014, reveals a number of crucial aspects associated with the group’s business (Manetti, 2011).

• • Competitors

The analysis of the 10-K Form reveals that, the prime competitors of the firm are seen to be Coca-Cola Company, Kraft Foods Group, Kellogg Company, Mondelēz International and Nestlé S.A, amongst many others (PepsiCo Inc., 2014 a).

• • Management Discussion and Analysis on Financial Matters

The Form 10-K includes the discussion and analysis carried out by the management that is oriented with the organization’s financial condition. In this respect, greater attention is paid to the consolidated and divisional review of the financial performance of PepsiCo’s segments. The section elaborates upon the various techniques used by PepsiCo in their accounting process and the assumptions made for the same. These include aspects related to the expected life, risk free rate, volatility etc. The weighted average Black-Scholes fair value model had been used to reach such assumptions (PepsiCo Inc., 2014 a).

The form states that some of the major risks which the business faces are seen to be fluctuations in commodity prices, foreign exchange rates and interest’s rates. Additionally, the strategies undertaken by competitors that impact the market growth potency of PepsiCo, is also identified to be a major risk. Therefore, in order to manage such risks, the company has developed a Risk Committee which thoroughly oversees the responsibilities and actions of the firm. Division Risk Committees are also developed, so as to manage specific operational risks pertaining to each of the business divisions. Additionally, a Corporate Audit Department and Compliance and Ethics department has also been developed, so as to ensure transparency and ethical functioning in the company (PepsiCo Inc., 2014 a).

Management discussions and analysis had also been carried out in respect to accounting policies oriented with revenue recognition, intangible assets, income tax expenses and pension etc. The discussions and analysis presented by the management also highlight that the company’s profits were seen to be mainly affected by mark-to-market net impact, merger and integration charges, restructuring and impairment charges and lump sum pension settlement charges. The report also reveals that derivates are primarily used for mitigating the risks associated with financial transactions (PepsiCo Inc., 2014 a).

• Financial Evaluation as per Form 10-K and Annual Report

An in depth discussion regarding the cash activities of the firm were carried out by the management. The management states that liquidity is essential for the firm for meeting their day to day operations. Hence, analyzing the cash flows from different category of activities is considered to be vital (De Franco, Wong & Zhou, 2011). Based on the information gathered from the SEC filings of PepsiCo, the following cash flow analysis has been carried out:

Figure 2: Analysis of cash flows

(Source: Spreadsheet; PepsiCo Inc, 2014 c)

The carried out evaluation in respect of cash flows, reveal that during the financial years 2014, 2013 and 2012, the company was seen to incur negative cash flows. This indicates that the company had been undertaking a number of investments and financial activities in the recent times. Due to such undertakings, the operating expenses of the firm had also risen considerably, leading to negative operating cash flows (Malíková & Brabec, 2012).

Figure 3: Analysis of income statement figures

(Source: Spreadsheet; PepsiCo Inc, 2014 c)

The analysis of income statement elements reveal that the firm had been successful at generating an adequate net income from their operations. However, during the financial year 2014, the company’s operating income had declined owing to a reduced growth in revenue as well as lack of control over operating costs (PepsiCo Inc, 2014 c). Since the firm had undertaken a number of expansion and investment activities, there had been a decline in the profits and cash reserves. Nevertheless, individual evaluation of the financial results for each year reveals that, the firm was able to generate adequate levels of profits. This indicates that the firm’s efficiency, profitability and liquidity positions are quite strong (Malíková & Brabec, 2012).

Figure 4: Analysis of the balance sheet elements

(Source: Spreadsheet; PepsiCo Inc, 2014 c)

Due to expansion of activities and greater degree of investments in resources and assets, it is seen that the overall size of operations have declined. Nevertheless the overall company’s performance is assessed to be more or less stable without any losses. To further understand the financial position of the organization, a brief ratio analysis has been undertaken (Samiloglu & Akgün, 2016).

Current ratio

Figure 5: current ratio evaluation of PepsiCo

(Source: Spreadsheet; PepsiCo Inc, 2014 c)

The current ratio essentially evaluates the position of a firm’s liquidity by drawing a comparison between the company’s current assets to that of its current liabilities. A current ratio of more than 1is considered as most suitable for the organization (Samiloglu & Akgün, 2016). From the evaluation of the information gained from the audited financial statements of PepsiCo, it can be assessed that the company has sufficient liquidity (PepsiCo Inc, 2014 c).

Net profit margin

Figure 6: Net profit ratio evaluation of PepsiCo

(Source: Spreadsheet; PepsiCo Inc, 2014 c)

The net profit margin indicates the degree of profitability of a company by drawing a comparison between the net profits and sales. Higher net profits indicate that the organization would be able to pay higher returns to shareholders and also increase shareholder net worth, by enhancing retained earnings (Martani & Khairurizka, 2009).

The net profit margin for PepsiCo is seen to be adequately low as compared to the degree of revenue earned (PepsiCo Inc, 2014 c). Hence, a large amount of revenue is lost in operational activities. The company would therefore be required to control expenditure and enhance profits, so that liquidity does not get impacted in the upcoming financial years (Martani & Khairurizka, 2009).

Asset turnover ratio

Asset turnover is essentially an efficiency ratio that measures whether the management of a company can generate substantial returns on the basis of utilizing assets. It thereby tests the efficiency of assets and the management’s capability to generate revenues (Samiloglu & Akgün, 2016).

Figure 7: Asset turnover ratio for PepsiCo

(Source: Spreadsheet; PepsiCo Inc, 2014 c)

Asset turnover ratios are usually seen to be less than 1, since the value to total assets is always higher than the value of net sales. It can be seen that the asset turnover ratio for PepsiCo is adequate high. This indicates that the assets in which the company invests finance are adequately efficient (Kirkham, 2012).

Debt equity ratio

The debt equity ratio measures the degree of debt capital existing in the overall capital structure. It essentially reveals whether a company has greater dependency on debt or on equity. Generally, it is assumed that when the proportion of debt is higher in the capital structure, risks are greater (Kirkham, 2012).

Figure 8: Debt to equity ratio for PepsiCo

(Source: Spreadsheet; PepsiCo Inc, 2014 c)

The debt to equity ratio of PepsiCo was seen to reveal that, the capital structure of the company had more debt as compared to equity. However, being a large MNC, operating in the food and beverages segment, the existence of greater debt is quite natural as per the market conditions and the general trend of the industry. Moreover, PepsiCo has a superior strength in profits and liquidity so as to support such debts (PepsiCo Inc, 2014 c).

• • Financial Strengths and Weakness

The carried out evaluation reveals that PepsiCo enjoys adequate competitive advantages in the area of financial strength. The evaluation carried out on the basis of the company’s SEC filings, including the annual report and Form 10-K, reveals that the working capital position of PepsiCo is quite stable. The firm has been able to successfully expand their operations to a number of nations and have suitably expanded their product base with the help of their strong financial base. New, as well as many existing firms in the industry, find it hard to compete with PepsiCo’s enormous financial strength. However, there has been a decline in the organization’s net profits and asset value. The increased investments in product diversification and promotional ventures, along with acquisitions, have caused a slight fall in the asset values. Operational cost have also increased, which has led to a fall in the company’s overall net income position. Nevertheless the strong financial position and retained earnings provides more than the required support for the company.

• Shareholder Engagement: Form DEF14A and Proxy statement evaluation

The proxy statement essentially lists out all the important businesses which need to be discussed and accomplished in an annual general meeting. The proxy statement released by PepsiCo during the year 2015, included information regarding the following important aspects (PepsiCo Inc., 2014 b):

1) Election of directors.

2) Evaluation of the appointment of KPMG as the independent registered accountant.

3) Advisory approval of the executive compensation.

4) Actions to be taken upon the new shareholder proposals.

The proxy statement provides valuable information regarding the administrative matters which need to be disclosed to the shareholders. They provide a brief summary, regarding the matters which are to be discussed in the annual general meeting (Al-Najjar & Abed, 2014). The proxy statement of PepsiCo is also an effort towards shareholder engagement, whereby the company solicits the inputs provided by their valuable stakeholders. Shareholders are encouraged to discuss matters such as the following (PepsiCo Inc., 2014 b):

• Portfolio strategy
• Capital allocation
• Corporate governance
• Transparent public disclosure
• Executive compensation
• Sustainability and CSR (Corporate Social Responsibility) related decisions
• Stakeholder Analysis

Employees are considered to be one of the most important stakeholders for PepsiCo. The company ensures that their remuneration and compensation remains ethical and are justified as per the performance capabilities of employees. Additionally, all efforts are taken by the firm to provide additional benefits and perquisites to the workers. Employees are encouraged to act as brand ambassadors and ensure that image of the company is not tarnished. Retention of key employees is also an important aspect consider by the organization (PepsiCo Inc., 2014 a; PepsiCo Inc., 2014 c).

Relationship of the company with its suppliers is also considered to be valuable. PepsiCo has tie ups with some of the most renowned and efficient suppliers of the industry. If such relationships are tarnished, the continuation of the company’s operations might get effected. The company enters into long-term price agreements with its suppliers, so as to mitigate the risks of changing market conditions (PepsiCo Inc., 2014 a).

Customers are also one of the chief external stakeholders for the company. The firm produces various kinds of food and beverage items, as according to the tastes and preferences of customers. The company is also required to keep in mind the health needs of consumers while manufacturing the products. Prices for different products are also set as per the basis of the income and preferences of the targeted segments. Policies of operation are therefore, seen to vary from nation to nation for the company (PepsiCo Inc., 2014 a; PepsiCo Inc., 2014 c).

PepsiCo also takes radical efforts to maintain a strong relationship with the government authorities. The company forms tie ups with the government authorities for a number of social causes and takes radical measures towards ensuring the fulfillment of different government initiatives. Taxes are also duly paid by the company to avoid legal issues. Changing government policies may at times however, impact the operations of the company (PepsiCo Inc., 2014 a).

• SWOT Analysis

One of the prime strength of the company is seen to be its strong financial, resource base and a well established supply chain network. The firm owns a number of automated production centers where the food and beverage items are manufactured. Strategic partners then undertake the labeling and packaging responsibilities and distribute the products to different regions across the globe. PepsiCo is backed by a highly efficient team of workers and management who invest only in the most profitable ventures. The strong brand image coupled with a high financial strength facilitates the company to operate successfully. Influential marketing and branding strategies are also seen to positively impact the organization. The strengths of the firm provide it an opportunity to expand to new territories and develop greater strategic partnerships with other food and beverage firms (PepsiCo Inc., 2014 a)

One of the major weaknesses of PepsiCo is the lack of consumer awareness regarding their products. Many of its products are popular by its own name and not under the flagship of PepsiCo. This has led the organization to lose much competitive advantages to firms such as, Coca-Cola. The entrance of new firms in the industry and the lack of development of healthy food and beverage products pose as potential threats for the organization (PepsiCo Inc., 2014 a; PepsiCo Inc., 2014 c).

• Conclusion

It is essential that the stakeholders are provided with adequate information regarding the organization’s internal strategies and operational results. Form 10-K, proxy statements and annual reports play a vital role in providing such a disclosure. Such reports filed by PepsiCo, reveals that the firm’s internal strategies, results of financial operations as well as information regarding corporate governance strategies are verified by investors and other stakeholders to take crucial decisions. They therefore, facilitate gauging the strengths and weaknesses of the firm. Such public disclosure of vital information is also a statutory requirement by the SEC as well as a number of commercial regulatory authorities. Such evaluation has facilitated an understanding about the strategic position of PepsiCo.