Review the General Macroeconomic Conditions of Relevant Geographies and Make Your Projections for the Relevant Variables

1. Review the general macroeconomic conditions of relevant geographies and make your projections for the relevant variables. [1]

Throughout the last decade, the United States has bolstered its position as the most relevant geography for PepsiCo, always accounting for more than half of its global revenue (57.5% in 2017, according to Bloomberg). All other countries where PepsiCo is present have a significantly lower share of its total revenue. Nonetheless, Mexico, the EU, Canada and Russia are also considered relatively important markets for the group.

The majority of PepsiCo products belong to the food & beverages sector, making it a less cyclical group than the overall market. One could argue that consumption level would change less compared to the overall economy since PepsiCo brands are seen as a cheap and “addictive” substitute of healthier food. Therefore, macroeconomic factors such as the GDP growth and the Consumer Price Index are considered the most relevant to project the macroeconomic condition of the group since they provide a benchmark to measure any changes in the food & beverages industry.

According to the OECD, the US GDP is expected to grow between 2 to 3% in 2018 and the fiscal policy includes the setting of a flat and effective corporate tax rate of 21% on all businesses which increases the profitability of the business in the US, ceteris paribus. The continued expansion of the economy shown by the forecasted GDP growth rate are also a sign that the consumption level is expected to be maintained or even slightly increase (theoretically, at a lower rate than the GDP given the products lower cyclicality). Moreover, the forecasted 0.3% rise in the Consumer Price index and the consequent adjust in prices is another factor of the expected increased revenue in the country.

With regards to the rest of the countries, a similar growth rate is expected in the EU (around 2.4%) while growth of the Canadian economy will slow from 3.1% to about 2.2% this year. In Russia, growth is expected to accelerate to 1.9%, thanks to more accommodative monetary policy and higher commodity prices.

1. Review the consumer goods sector of relevant geographies and make your projections for the sector. [1]

The increasing prevalence of on-the-go eating and snacking as a replacement for meals is having a positive effect on both the salty snacks and alternative snacks categories, leading convenience store operators to be optimistic that snack sales will maintain or grow in 2018. In a broader category, the revenue in the “food and Beverages” segment amounts to USD 16,557m in 2018 with an expectation of an annual growth rate of 11.8 % resulting in a market volume of USD 25,889m in 2022.

The increased trend regarding the on-the-go eating and snacking as a substitute for regular meals is having a positive effect in the snack category, leaving convenience store operators with an optimistic outlook for the year ahead. According to Statista, more than half of retailers in the US expect their salty snacks volume per store to increase, and 55.8% expect dollar sales per store to increase. Overall, retailers project volume will increase 2% and dollar sales will increase 2.3% this year.

New products and increased variety and higher in-store traffic are among the trends expected to have the biggest impact on the salty snacks category. When it comes to alternative snacks, c-store operators are even more enthusiastic.

However, there is a “sugar and salt threat” coming from regulators and governments. So far, much of the regulation has centred on restricting advertising of children’s sugary foods or imposing taxes on sugary drinks on the basis that these drinks carry no nutritional value, according to health officials, other than hydration, which can be better achieved by drinking water.

Overall, convenience store retailers’ projections for alternative snacks in 2018 are a volume increase of 2.6% and a dollar sales increase of 2.8%. Major trends in alternative snacks are similar to those of salty snacks, with sales being driven by healthy products, new items, and protein content.

1. Identify and analyze the relevant key value drivers of the business and past performance of PepsiCo. [3]

In 2013, PepsiCo has achieved USD 900 m in savings as part of its USD 3 bn productivity goal for 2012–2014. These improved margins are a result of several productivity measures that include manufacturing automation, the optimization of a global manufacturing footprint, and the reengineering/optimization of the distribution network.