Cost Analysis of Coca Cola
History The origin of PepsiCo Inc. began with its namesake beverage, Pepsi-Cola, invented by a pharmacist named Caleb Bradham in 1898 in New Bern, North Carolina. With its main ingredients pepsin and kola nuts, Pepsi-Cola offered a refreshing drink that was healthy and capable of aiding in digestion brought about by the pepsin enzyme found in the soda. Well received by the public, Pepsi Cola was soon patented in 1902 and was readily available throughout 24 states in America by 1910.
In 1935, the Pepsi-Cola Company founded by Caleb Bradham went bankrupt and was bought out by Charles Guth. During this time another company by the name of Frito-Lay started building a business relationship with Pepsi-Cola in hopes to diversify Pepsi-Cola’s products. By 1945, the two companies began working together and in 1965, PepsiCo Inc. was formed with the merger of the two companies: Pepsi-Cola and Frito-Lay. Headquartered in Purchase, New York, United States, PepsiCo Inc. pecializes in the manufacturing, marketing and distribution of grain-based snacks and carbonated beverages. It is a global company that offers its products in North America, South America, Europe, Middle East, Asia and Africa. Over the past years, PepsiCo Inc. has grown to be distributed throughout 200 countries around the globe and has since expanded from its namesake product, Pepsi, to a wide range of food and beverage brands, acquiring Tropicana in 1998, and a merger with Quaker Oats in 2001 – adding Gatorade as its products.
Most of PepsiCo’s market share is derived from the Americas with Asia and Europe offering 13% and 16% market share, respectively. Today, PepsiCo Inc. ‘s products offered include packaged goods and beverages with its product mix consisting of 52% beverage and 48% foods. Beverages include 76 flavors of Pepsi-Cola, varieties of Tropicana, and Gatorade. Package foods include a Doritos, Ruffles, Cheetos, Lays, Tostitos, Cracker Jacks, etc. (Pepsi beverage brand holding a significant market offering). Over the past 5 decades, PepsiCo Inc. s market share has grown steadily to become and remain the top major snacks and beverage provider worldwide. From its incorporation, the company has grown itself by acquiring and divesting many large businesses including but not short of Pizza Hut, Taco Bell, KFC, and Wilson Sporting Goods. Its long standing battle between the Coca-Cola Company has always fueled the decisions the macro-snack company has made over the course of its business and in 2005, PepsiCo Inc. had surpassed the Coca-Cola Company in net revenues. Its most recent net revenues reported were $43. billion globally (2011) and it remains the largest food/beverage business in North America and second largest food and beverage business in the world. Looking to 2012, Indra K. Nooyi, Chairman and Chief Executive Officer of PepsiCo Inc. , stated, “The greatest challenge in the business [PepsiCo Inc. ] today is to renew a successful company – positioning it for long-term growth and profitability while performing in the current marketplace. ” Within the past several years, PepsiCo. Inc. has been partnering with healthy-choice snacks to expand their portfolio with little focus on their core capability, Pepsi Cola beverage.
With a vigorous 5 year project started in 2007 and implemented in the beginning of 2012, the Pepsi Cola will be focused on marketing its core product, the Pepsi Cola beverage, during 2012 and the years to come by increasing advertising expenditure to $500-600 million in 2012 and efficiently managing their revenues and costs in the macro-snack business. As required, PepsiCo Inc. publicly discloses its financial data to the SEC (Security and Exchange Commission) via the EDGAR (Electronic Data Gathering, Analysis, and Retrieval) system.
This system automates the filing process for PepsiCo and allows present and future investors to contemplate on its financial position. Investors can look up PepsiCo by their Ticker Symbol, PEP, and view all sorts of disclosed information; from the Quarterly Report (Q-10), to the Annual Report (K-10), it is all there. PepsiCo also publishes its filing on their official website, under the Investor tab. Data and Analysis Based on PepsiCo’s 2011 Annual Report, “Unfavorable economic conditions may have an adverse impact on our business results or financial conditions. In times of higher interest rates, consumers are limited with disposable income which resulted in spending cut. In addition with high interest rates, banks are less likely to provide lenders money due to the need for capital. The tighter lending standards mean that consumers will cut back on spending, and in turn, directly affects macro-snack and beverage consumption and businesses’, such as PepsiCo Inc. , sales and profits. Using the simplest form of quantitative analysis to “fit” a line to data points, High-Low Method, observed values of unemployment rates, within the relevant range, at ts highs and lows are calculated on its affect of PepsiCo’s Net Revenue. Next we will use the simple linear regression to get a deeper understanding of the company’s financial data. With a simple regression analysis, the amount of change of the dependent variable (Net Revenue) is shown, within a relevant rage, with every unit of change of the independent variable (interest rate). In relation to Linear Regression Models, the Multiple Linear Regressions will allow us use two or more independent variables to project a dependent variabel (Net Revenue).
Finally, we will look att the Time-Series Anlaysis of how the overall Net Revenue changes throughout the course of 2007-2011 for PepsiCo Inc. Below in detail are the four methods mentioned above used to froecast the Net Revenue for future periods. Forecasting Sales Revenue: High-Low Method The highest and lowest quarterly revenue for PepsiCo Inc. is $20158 and $7350, respectively. The relative quarterly interest rate at the highest and lowest net revenue is 4. 25% and 4. 84%. The equation derived from the High-Low Method is as follows: Quarterly Net Revenue = 112419. 02 – (21708. 7* Avg. Interest of Prev. Quarter) Therefore, in correlation to PepsiCo’s Risk Assessment, the lower the interest rate, the higher the net revenue. Forecasting Sales Revenue: Simple Linear Regression Under the simple linear regression analysis, the quarterly revenue equation is as follows: Quarterly Net Revenue = 63021. 36 – (11093. 40* Avg. Interest Rate of Prev. Quarter) The signifiance of the equation intercepts is given by the P-value, in green above. Being less than . 05 (Y-intercept (. 000032) and Slope Intercept (. 0003)), the intercept calculated are significantly accurate.
Regarding the goodness of fit of this model, the Coefficient of Determination (R2 of . 519 Quarterly and . 965* Annually), shows a moderately accurate prediciton of future outcomes using this regression model. The possibility of the R2 value being relatively weak can be due to lower Q1 revenues regardless of decreases in interest through time. The simpleregression model shows that as quarterly interest increases 1%, the revenue will drop by $11,093,400,00. Forecasting Sales Revenue: Multiple Linear Regression Under the multiple linear regression analysis, the annual revenue equation is as follows:
Quarterly Net Revenue = 219345. 66 + (. 02*GDP)-(4583104*interest Rate) +(1473067* Infllation Rate) The signifiance of the equation intercepts is given by the P-value, in green above. Being less than . 05 for interest Rate and Y-intercept and more than . 05 significance for inflation and GDP, the tesst of significance based on the p-value is not substantial evidence Regarding the goodness of fit of this model, the Coefficient of Determination (R2 of . 999), shows a very strong correlation of the combination of these three independent variables in relation to Net Revenue.
Forecasting Sales Revenue: Time-Series Analysis Another method to forecast sales revenue is with the Time-Series Analysis. This simple method projects future target based on past outcomes. As visible, the trend for PepsiCo is steadily increasing from year-to-year. Note that after the cyclical year, from Quarter 4 to Quarter 1, revenues drop back down; however, time have shown that Quarter 1 of the present year is still higher than that of the previous years. From 2007 to 2008, there was a 13% change in revenue for Quarter 1 alone. Likewise, from 2010 to 2011, a 27% change was shown.
In the 2011 Annual Report, PepsiCo Inc has stated that commodity rates has been increasing which has in turn increased the cost of goods sold. In addition, their recent organization of quaker oats and partner companies have seen an increase in spending due to inefficiencies in their work force. Forecasting PepsiCo 2012 Q3 Net Revenue Looking forward, PepsiCo has been refocusing their campaign to sell their core product as well as issuing a major work-force cut in the beginning of 2012. If all goes smoothly, PepsiCo may be able to achieve their goal in Q3 of 2012.
Using the simmple linear regression equation to forecast 2012 Q3 Net Revenue, PepsiCo Inc. Q3 goal for net revenue is $19,424 (in millions) Cost of Goods Sold and Selling and Administration Expense Under Simple Linear Regression model, the Proj. Cost of Goods Sold for Q3 2012 is as follows: 2012 Q3 COGS = 2590. 4+(. 3131*Q2 2012 Net Revenue) 2012 Q3 COGS = 2590. 4+(. 3131*18204. 3) Proj. 2012 Q3 COGS = $8290. 16 Under Simple Linear Regression model, the Proj. Sell and Admin. Expense for Q3 2012 is as follows: 2012 Q3 S&A Expense = 1021. 1+(. 3019*Q2 2012 Net Revenue) 012 Q3 S&A Expense = 1021. 1+(. 3019*18204. 3) Proj. 2012 Q3 S&A Expense = $6516. 98 Break-Even Point The Break-Even Point is calculated by the Fixed Cost/ Gross Margin. Since PepsiCo Inc. selling and administration expense is not greatly affected by volume, we use this as our fixed cost. Break-Even Point = Fixed Cost/Gross Margin %| Fixed Cost (S&A Expense)| 6516. 98| Gross Margin %| | 54. 46%| Breakeven Point (in millions)| 11,966. 54| | | | 5. Z-Score| | | z-score = (break-even point – mean of revenue) / (standard deviation of revenue)| Break even point:| 11,966. 5443| | ean of revenue:| 12,514. 9500| | Standard deviation:| 3595. 833854| | z sore:| -0. 152511426| | The z-score of -. 15 show that the results are very much in the 95% confidence level range. Statisical Analysis with Sales Revenue The table and graph below shows the frequency of PepsiCo falling within specific brackets involving quarterly Sales Revenue from 2007 to 2011. As shown, PepsiCo hit the $9,001-$11,000 and $11,001-$13,000 mark 5 times each, resulting in 50% of all 25 quarters’ earning to fall within those markers. Their highest sales, $20,158, only hit the $19,001-$21,000 bracket once.
Future trend as shown in the forecasting and actual data above suggests that PepsiCo will more than likely hit higher brackets in the upcoming years. Currently, the mean is $12,515 for all 5 years, which is well within the 50% marker. The standard deviation is $3,596 from year-to-year. Statisical Analysis with Cost of Goods Sold The table and graph below shows the frequency of PepsiCo falling within specific brackets involving quarterly Cost of Goods Sold from 2007 to 2011. About 25% of PepsiCo’s Cost of Goods Sold is at the $5,001-$6,000 range, which is well between the 20% of $4,001-$5,000 and the 15% of $6,001-$7,000 brackets.
This illustrates that the Cost of Goods Sold for Pepsico is not that stable – it fluctuates from quarters-to-quarters. The mean of $5,833 falls within that 25% range, with the standard deviation short of that range at $1,752. Taking this and the above data, it is visible that there is positive Gross Profit for PepsiCo. There are more Revenues per quarter to cover up the Cost of the Goods Sold. Statisical Analysis with Selling & Administrative Expense The table and graph below shows the frequency of PepsiCo falling within specific brackets involving quarterly Selling & Administrative Expense from 2007 to 2011.
About 30% of PepsiCo’s S&A Expense falls within the $3,001-$4,000 range, with the frequency of hitting it at 6 times. The mean falls outside that range at $4,655, with the standard deviation also outside at $1,534. Market Risks for PepsiCo Inc. There were some problems faced by management highlighted in Pepsi’s 2011 annual report. These issues were discussed as a means to evaluate future performance. First mentioned was that there was concern for consumers changing their preferences and tastes.
Pepsi is working on ways to anticipate consumer trends, for instance their “fun-for-you”, “good-for-you”, and “better-for-you” product lines were designed to be responsive to consumer preferences. Another issue highlighted in the report was the economic conditions for many of the countries in which Pepsi operates. Because of the poor economic conditions, consumer’s preferences may shift and Pepsi’s access to capital markets may be impaired. The geographical, political, legal, and regulatory environments could also have an adverse effect on the company’s operations and supply chain.
The financial report also discussed how damage to Pepsi’s reputation could have an adverse effect on their product’s demand. As a result Pepsi stressed the importance of maintaining high standards for product quality and for ethical business practices. In order to maintain efficient operations the report also stressed the importance of maintaining a good credit rating, implementing proper information technology infrastructure, maintaining a skilled and reliable workforce, and protecting intellectual property rights.
From Pepsi Co’s 2011 financial report we can see there are some items affecting comparability of financial results of company. In year 2011, the company had an additional week—the 53rd week. The additional week increase net revenue of the year by $623 million, and operating profit by $109 million. PepsiCo. Operating Data PepsiCo manage commodity derivatives on behalf of their divisions; include metals, energy, and agricultural products. In 2011, PepsiCo recognized $102 million of mark- to-market net losses on unallocated expenses.
In 2010, $91 million of mark- to- market net gains on commodity hedges in unallocated expenses. And in 2009, PepsiCo recognized $274 million of mark- to – market net gains on commodity hedges. These gains and losses recognized in corporate unallocated expenses are subsequently reflected in division results. Therefore, there has no any resulting mark-to – market volatility when divisions realizing the economic effects of the derivative. In 2011, PepsiCo also incurred restructuring charges of $383 million in conjunction with their productivity plan.
The plan includes multiple segments; every action in the productivity plan will strengthen the ability to complementary food, snack and beverage business. PepsiCo process operations and leveraging new technologies, heightening the focus on best practice sharing across the globe; consolidating manufacturing, implementing simplified organization structures, wider spans of control and fewer layers of management. The Productivity Plan will provide a source of funding for future buildings and innovation initiatives, and also serve as a financial cushion for potential macroeconomic uncertainty.
PepsiCo is expected to enhance their cost- competitiveness by this restructuring plan, the approximately charges will be $910 million. In 2011 results, $383 million was reflected, approximately $425 million will be reflected in 2012, and the balance will be reflected in the 2013 through 2015. These charges will be comprised of around $500 million of severance costs; $325 million of other costs; approximately $85 million for asset impairments costs. The Productivity Plan will be substantially completed by the end of 2012, with incremental productivity initiatives continuing to 2015. Conclusion