Term Paper on "Pepsi What Went Wrong With Pepsico's Mexican"

Term Paper 5 pages (1598 words) Sources: 1

[EXCERPT] . . . .

Pepsi

What went wrong with PepsiCo's Mexican strategy?

After U.S., Mexico -- the second largest soft drinks market in the world was a crucial battleground to be fought in the Latin Cola wars. While Coke commanded a market share of 61% in Mexico, Pepsi played second fiddle with just 21% in the year 1996, down from 26% in 1995. In a bid to improve situations and grab market share, Pepsi understood that the key to success and wresting market share lies in taking more control of the bottling operations within Mexico and simultaneously making major capital investment into their operations. Pepsi had a chance to gain a larger pie of the world's most potential market, at the cost of remaining content with lower margins albeit making huge spending in the form of new investment. But, this gamble failed which affected the ROCE --Return on Capital Employed.

To make matters worse, the fall of the Mexican Peso severely impacted the company operations. In keeping with its strategy, Pepsi attempted to achieve added management control over its Latin American markets through a selected super bottler in these nations but the mode of control was not proper in the sense that it was through a wholly-owned or majority controlled by Pepsi. Besides, they also had plans to make more investments into its bottlers operations. But this strategy was not implemented with success in Mexico as the joint ventures were not equity joint ventures, but cooperative ones. Pepsi failed to take equity interest from Gemex during 1993 at the time when Gemex commanded a market share of 50.8% for Pepsi as against Coke's 49.2%. Pepsi did not accord due importance to the role of Mr. Molina's family relationship who had a strong position during 1993 and which was also growing in the soft drinks market in Mexico. As his business position was very strong, he did not prefer to give Pepsi room to have a look in the family business rejecting Pepsi's proposals. Pepsi's objective to gain control over a great super bottler in Mexico's market did not succeed in 1993. (PepsiCo in Mexico: Anatomy of an Affiliate's Exposure)

2) What role did capital play, and what role did business relationships play, in the process of building and expanding PepsiCo's presence in Latin America

Both capital as well as relationships played a contributing role in expansion of Pepsi's presence in Latin America. Capital definitely contributed a major part, since Pepsi was required to venture in a completely uncharted turf that was not so mature and developed market compared to the U.S. However in the initial stages, business relationship even contributed significantly. Mr. Molina's family was economically strong and in almost all of these nations, they owned the bottling facilities. They possessed the best business relationships within their territories and therefore the best option before Pepsi was to contract them. Pepsi abided by its earlier strategy to open new market with forging Joint Ventures -- JVs.

Regardless of the situation this was the cost effective alternative, Pepsi had still had to make substantial investment in fixed assets. Subsequently, it was observed that business relationship acquired less significance. The Cisneros Group which was the primary bottling operator in Venezuela had friendly relationship with Pepsi President Roger Enrico. And Venezuela was a major market for Pepsi where it fared better compared to Coke. The Cisneros group was an affluent group having diversified business interests. Pepsi could have capitalized the existence of the friendly relationship between and Enrico and Cisneros to the advantage of the company that would have improved the bottom-line of Pepsi. Besides, Pepsi refrained from investing substantial money in the JVs in the initial stages and when they took a decision to invest, it was too delayed. Hence following of the outbreak of the Latin Cola war, it was capital that mattered. (PepsiCo in Mexico: Anatomy of an Affiliate's Exposure)

How did peso interact with the structure of Gemex's operations to impact Gemex's competitiveness in Mexican marketplace?

On Jan 1, 1993 following the replacement of the Peso with the New Peso - NP, the NP was revalued with one New Peso equivalent to 1,000 Pesos. A number of reasons were attributed to the crisis of the value of NP. The Mexican current account deficit went up to 8% of the GDP of the country. Concurrently, U.S. dollar dictated interest rates started to rise because of the implementation of a comparatively stringent monetary policy by the U.S. Federal Reserve, rendering it to be better off to move out of NP into U.S. Dollars. Besides, political developments taking place within the nation, like armed conflict in the Southern Mexican state of Chiapas, resulted in the foreign investors to be concerned for the stability of the government. However, on Dec 22, 1994, the NP was permitted to float from about NP$3.45/U.S.$ to that of NP$4.65/U.S.$. The Mexican Government was in possession of sufficient funds to protect its currency. To top it, during 1995, a high inflationary situation prevailed. The falling Peso impacted the production cost in U.S. dollars. The converted value in Peso saw a steep rise from 1993 to 1985 translating into an 850% rise.

However, since just 9% of the total cost of Gemex was came in U.S. dollars, growth in prices failed to put any substantial impact on the cost structure of Gemex. In spite of the steep inflation in the starting period of 1995, the prices of Gemex did not go up in tandem with the rate of inflation. It signified a hammering in real terms. This can be evidenced from the records of 1995. Net sales in 1995 had decreased by New Pesos 400 m respectively; while the operating income came down by nearly NP 300 m. The competitive advantage of Gemex was adversely impacted by the slide of the Peso as Gemex had several of the cost of sales in U.S. dollars and they went up following the devaluation of the NP. During 1995, the market share of Gemex had gone down by 1%. In case the functioning of Gemex is gauged from its ability to generate adequate Cash flow, in that case mention should be made of the long-term debts of Gemex. In case these debts were in U.S. dollars, following the slide of the NP, this debt comparatively went up. It resulted in increased losses for the company and they failed to repay their debts in U.S. dollars. (PepsiCo in Mexico: Anatomy of an Affiliate's Exposure)

What would you have done differently than Pepsi in the Mexican market?

I would not have underestimated the role of Molina's family. On the contrary, I would have leveraged this to my advantage. It was a failure on the part of Pepsi not to assess the importance of the 'family business' and business relationship that mattered in the Mexican market. Because of the Molina controlled or wholly owned, not just Gemex, but a lot of other companies too in this area, Pepsi must have taken this into account and regarded and considered the state of affairs prior to the outbreak of the crisis in Mexico, in a different manner. The analysis on this score must have also include an elaborate market consideration, in which Pepsi made an investment in returnable bottles of plastic, whereas there was considerable demand on low cost glass bottles.

Pepsi gave a blind eye to the takeover issue of Gemx Company until 1994. The decline of the Peso during the later part of 1994 made the Pepsi acquisition plan a reality. During this point of time i.e. In 1994, at the time when the catastrophe affected Gemex, time has passed and it was too late to salvage the damages caused in Gemex by the slide of Peso. Gemex took early decision and was advanced in its strategic decision until 1994.… READ MORE

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