PepsiCo faces S&OP Challenges in a Soda Slump

PepsiCo is always battling its archrival in the beverage industry, the Coca-Cola Company. PepsiCo has not reached sales forecast in each of the last few quarters and are finding ways to cut costs while maintaining current sales. In a recent effort to combat the slide in soda sales, PepsiCo announced on February 8 that they are launching a colorful new seltzer product called Bubly. PepsiCo CFO revealed in an earnings call earlier this year that Pepsi wished that it got Bubly to market sooner in order to capitalize on the fast-growing seltzer beverage market. PepsiCo will need Bubly to reinvigorate its North American beverage unit, whose profit dropped 10% last quarter. The sales on its new product, Bubly were below projections which lead to excessive holding costs, which further ate into North American profit numbers. The company blamed disappointing results on cooler summer weather and too much marketing focus on healthier brands.

In regards to Pepsi’s cost cutting program they are eliminating up to 1% of corporate positions in North America and giving bonuses to sales and operations managers who successfully sell product and get it into customer’s hands. They are also looking into closing more manufacturing facilities and investing in automation in its current factories. Pepsi also plans on hiring up to 20,000 front-line workers, which is does annually.

Pepsi is having a difficult time with its own sales and operations planning (S&OP) because it is trying to expand its product line in a growing market while the remainder of its business units are underperforming projections and have had declining revenues in each of the last two quarters. They are using savings and debt to finance its new operations, but with interest rate hikes on the horizon, it is putting pressure on these new units to perform. For a mature company like PepsiCo, it is unusual for the company to have problems forecasting demand/sales for its product. Part of the reason for the failure in Pepsi’s S&OP could be from the increased volatility in levels of demand and adjustment to supply levels by Pepsi. PepsiCo might need to more efficiently market its products according to an ABC classification system that prioritizes its main products while giving products in growth markets a different level of priority, and its other products another level of priority. Pepsi will need more agility, strategic focus, and control in order to be proactive versus reactive in its S&OP.

https://www.wsj.com/articles/coca-cola-pepsico-try-new-ways-to-combat-soda-slump-1518273099

https://www.wsj.com/articles/pepsico-soda-sales-slide-but-cost-cuts-bolster-bottom-line-1518521661

How do you think demand for PepsiCo beverages will change in the future and how could PepsiCo more accurately forecast the changing demand?

What ideas do you think PepsiCo should use in it S&OP to get ahead of the market (i.e. ABC classification, etc.?

7 thoughts on “PepsiCo faces S&OP Challenges in a Soda Slump

  • March 28, 2018 at 12:50 pm
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    I think it is a very good idea for PepsiCo to get into the seltzer industry with the Bubly product. I see a large amount of kids my age and a little older that frequently drink seltzer water as opposed to soda for health reasons. Many of these seltzer waters are lightly flavored but are much better for your body then the sugary sodas. My intuition is that this market has been growing and there is a exploitable opportunity to enter this market. Upon doing some research, my intuition was confirmed. Bloomberg posted an article articulating the growth in the water seltzer market (https://www.bloomberg.com/news/articles/2017-10-25/lacroix-topo-chico-and-other-seltzer-brands-are-showing-strong-growth). The article states that in America, over 1.9million liters of these beverages were sold for over $2 billion in 2016. This article states the market has grown around 30% since 2011. All of these statistics show that it is a very good time for Pepsi to try to enter this market. However, the main issue is whether or not Pepsi can efficiently create this business unit and maintain a highly efficient supply chain as their business spreads thinner. I will be very curious to see how Bubly does and will be on the lookout for this product in stores.

    • March 28, 2018 at 4:13 pm
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      I agree with Zach that it makes sense for Pepsi to transition away from sodas and into seltzers. I think it’s very interesting that they decided to create a whole different name and look for their product, which consumers would likely not realize is owned by Pepsi at all. This Washington Post article https://www.washingtonpost.com/news/voraciously/wp/2018/03/07/is-pepsis-bubly-the-new-lacroix-or-just-another-cute-can/?utm_term=.1116299608c9 outlines how Bubly is actually giving LaCroix, a very popular seltzer beverage, a run for it’s money. When I first saw Dasani seltzer, I wasn’t too intrigued by it, mostly because of the similarities to the normal bottled water. I think the bright colors of the Bubly are much more appealing and are more likely to catch consumers’ eye. As mentioned in the article, many consumers can’t actually taste the difference between seltzers, so packaging does actually matter. Also worth noting is the packaging’s similarity to sodas. When I first saw the picture of their cans, I thought it was an all-natural soda, not a seltzer. I’m interested to see how Bubly performs in an increasingly competitive market.

  • March 28, 2018 at 8:14 pm
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    Pepsi’s problem with Bubly is interesting because you would think that by now, Pepsi would be good at anticipating inventory levels and consumer demand. Maybe with Bubly, it’s a little harder because it is a new product that is different from Pepsi’s usual product and also is relatively new in the market as a whole. Pepsi’s struggles prove how difficult S&OP can be in practice since the market is always changing and there really is no sure way to predict how consumers will react, especially to a new product. This article (https://www.cnbc.com/2016/07/07/new-products-help-pepsico-inch-past-revenue-estimates.html) from 2016 talks about how Pepsi’s successful roll-out of then-new products increased the annual revenue, keeping Pepsi above Coca-Cola. Since Pepsi has been successful with anticipating new demand in the past, it’ll probably be able to turn things around with Bubly and do a better job going forward. That’s part of S&OP as well-not just anticipating demand/inventory in the beginning, but managing it throughout the entire process.

  • March 28, 2018 at 8:43 pm
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    With soda consumption at almost an all time low I agree that it is a strong move for PepsiCo to enter the seltzer water area. A potential reason for the slower, than expected, growth that Bubly is experiencing could be the significant presence that LaCroix has in the market, currently at 36%. As mentioned previously PepsiCo must also be sure to handle the decline in soda sales well. In both the growing and declining industry I feel that proper forecasting takes on extra significance. The changing nature of both markets makes this task especially difficult, but accurate forecasting can help the company in its transition towards a range of healthier products.

    http://www.businessinsider.com/bubly-pepsi-lacroix-knockoff-2018-2
    https://www.cnbc.com/2018/03/20/oracle-orcl-stock-tanks-on-q3-earnings-results-cloud-skepticism.html

  • March 28, 2018 at 10:05 pm
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    I agree with you Dalton. PepsiCo should consider administering an ABC classification system that would order the items based on dollar usage (annual usage * value). Once PepsiCo receives more statistical data on how successful the new product, Bubly, will be, it should be added to the ABC Classification chart to determine how well it compares to the others. Because previous markets are underperforming maybe it means that it is time to turnover a new leaf and try something completely different. Bubly definitely would be new for PepsiCo. With its bright and playful new home page, it is clear that Bubly is directed towards a younger audience, with a healthy twist to it including no sweeteners, no calories, and natural flavors. With an accurate target audience, and much experience in inventory management of some of its most popular drink, PepsiCo should soon see increased success.

    https://www.bubly.com/?utm_source=google&utm_medium=cpc&utm_term=bubly_sparkling_water&utm_content=Brand-HighVolume-bubly&utm_campaign=bubly_2018#/

  • March 28, 2018 at 10:55 pm
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    I definitely think Pepsi dropped the ball on the marketing end of this initiative. I have not seen one advertisement, social media post, commercial, etc. promoting Bubly. I have though seen advertisements for Coke’s new seltzer line as well as the physical product in stores. I think one reason Pepsi fell behind Is because they released the product right after Coke and not only did they follow them they also copied the exact same flavors!!! Talk about boring and overdone. Consumers want to see unique options and fresh ideas, not more of the same thing. Pepsi needs to work on something innovative and new if they want to distinguish themselves in the market. I applaud their efforts to venture into the health sector but with every company following suit maybe they should think about branching into the alcohol industry? It is something unexpected and personally I would find it very interesting and think it would increase sales.

    https://www.bizjournals.com/atlanta/news/2018/02/09/pepsi-sees-opportunity-to-innovate-with-new.html

  • March 29, 2018 at 9:11 am
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    The soft beverage industry is undoubtedly a tough place to be currently. A large amount of consumers are becoming more health conscious, and cutting soda from their pellets. While Pepsi is now starting to diversify their range of products, Coca-Cola is well ahead of the trend. Coca-Cola’s subsidiaries include iced tea brands, juices, sports drinks, and smart water. This multi-faceted platform essentially creates a hedge for Coca-Cola’s sales. For those who tend to take healthier options, they can remain in Coca-Cola’s revenue stream. For those who prefer soda or opt for it once in awhile, they are remaining in the Coca-Cola line of products. For Coke, their greatest issue might not be forecasting their overall sales, but rather forecasting consumer behavior in regard to what type of beverages they will purchase. The soft drink industry seems to be particularly predictable, with lowered sales following negative press.

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