Discuss whether Pepsi should continue in the restaurant business (corporate-level strategy).
The Carts of Colorado company is in a highly profitable business with relatively low cost. Acquiring CoC would cause a large increment to PepsiCo revenue with a small increment in cost. In addition, PepsiCo would be able to expand to a new market (equipment manufacturing) as CoC owns the technology for manufacturing carts. However, the expansion may also be a drawback to PepsiCo because equipment manufacturing is a very different business compared to PepsiCo’s core business. As learned in class, an unrelated diversification would rarely improve a company’s performance. Another drawback of CoC is that the CoC’s product is easily to imitate. An 18-month advanced engineering would not likely to create a substantial competitive advantage. Also, PepsiCo’s competitors will not continue to buy from CoC, which will drag down its sales and profitability. Overall, many issues arises considering the vertical integration and the benefits of acquiring CoC is not very clear. Thus, I do not recommend acquire CoC. Short-term or long-term contracts with CoC are good options to PepsiCo.
California Pizza Kitchen’s business, on the other hand, is within the core business of PepsiCo. It is reasonable to expect a better performance as there are many sources that could create value in a related diversification. Acquiring CPK also offers PepsiCo an opportunity to expand to casual dining market as the market has a lot of growth potential. PepsiCo needs the opportunity to learned how to run business in the casual dining market because it failed to develop casual dining internally. Compared to casual dining restaurant’s table turnover rate, CPK’s table turnover rate is nearly doubled, which indicates that CPK has a better ability to generate revenue. One potential issue of acquiring CPK is that the concept of CPK is slightly different from Pizza Hut, which may cause problem when merging CPK with Pizza Hut. If the merge fails, CPK will become an internal competitor of Pizza Hut. Another issue is that the management team of CPK does not want to leave. This situation may bring management issues if PepsiCo acquires CPK. Overall, CPK is a great company to acquire. The potential benefits (especially knowledge of casual dining chain) by the acquisition exceeds the downside risks. I would recommend PepsiCo acquire CPK.
As mentioned in the case, “US foodservice industry had sales of about $250 billion in 1991, and industry experts expected sales to double in the following 10 years”. In addition, the profitability of the industry was substantial. “In 1991, PepsiCo’s restaurant segment attained the highest revenue of the company’s three segments, surpassing soft drinks”. Thus, foodservice industry was of high profitability and had a great growth potential. It was the right industry to be in. PepsiCo also identified the major foodservice segments, which are quick service restaurant, family, and institutional. This analysis supported PepsiCo’s acquisition of KFC, Pizza Hut, and Taco Bell because all of the three were considered quick service restaurants. Because food service industry was of a high profitability and growth potential and PepsiCo was a leader in the industry’s largest segment, I recommend PepsiCo continue in its restaurant business. It also creates a channel for PepsiCo to compete with Coca-Cola. I suggest PepsiCo’s further development in the foodservice industry could include an expansion to other large restaurant segments such as family, institutional, and casual restaurant.