PEPESI Project Chao-Hui Yin & Yu-Fan HuangACCT 6201 0W1. Introduction to Financial Accounting

Professor John BardenJuly 15, 2015

PEPESI PROJECT �1

(“Design” http://www.google.com/imgres?imgurl=http://mobileadvertisingwatch.com/wp-content/uploads/2015/03/Designed-to-Pop-The-Pepsi-Challenge-Gets-Social-Media-Update-for-2015.jpg&imgrefurl=http://mobileadvertisingwatch.com/designed-to-pop-the-pepsi-challenge-gets-social-media-update-for-2015-16355&h=804&w=1047&tbnid=uaLhHFqN6D_rDM:&zoom=1&docid=59wZEnI1Ti3D1M&hl=en&ei=fZamVbKSKciw-wG0j7_gCg&tbm=isch&ved=0CDUQMygEMARqFQoTCPLEvO7S3cYCFUjYPgodtMcPrA)

Category Executive Summary 3

Company Comparison 4

Financial Ratio 6

Financial Statement 9

Research & Development Issue 13

Recommendation and Conclusion 14

Reference 15

PEPESI PROJECT �2

Executive SummaryPepsiCo was a beverage company established in 1898. The main products of

PepsiCo are the soft drink and food. The principal office is located in North Carolina.PepsiCo sales their products worldwide and is the second position of the non-

alcohol beverage company. Coca-Cola is the biggest competitor of PepsiCo. To improve PepsiCo’s advantages, we choose Coca-Cola to be the target to analyze the pro and con of the two companies.

To figure out why PepsiCo cannot beat Coca-Cola, first, we compare the basic information of the two companies. They established in the nearly year, having similar products and selling to worldwide. Second, we analysis the financial reports from 2011 to 2014. The structure of these two companies does not change, but they changed on investments and debt policies. Third, we compared the significant financial ratios to interpret the profitability, liquidity, and debt-paying ability.

After generating those analyses, we found out some potential problems that PepsiCo would face and need to conquer to defeat Coca-cola, like advertising and marketing strategies. Last but not the least, providing some advice to PepsiCo to improve their sales and market share.

PEPESI PROJECT �3

Company Comparison

PEPESI PROJECT �4

(“PepsiCo” http://www.google.com/imgres?imgurl=https://photos.prnewswire.com/prnvar/20150316/181869LOGO&imgrefurl=http://www.prnewswire.com/news-releases/pepsico-beverages-become-official-soft-drink-of-live-nation-300050703.html&h=382&w=277&tbnid=fnxLehmJISYMqM:&zoom=1&docid=viuOehwrRoBr-M&hl=en&ei=fZamVbKSKciw-wG0j7_gCg&tbm=isch&ved=0CDoQMygJMAlqFQoTCPLEvO7S3cYCFUjYPgodtMcPrA)(“Student” http://www.google.com/imgres?imgurl=http://www.kpu.ca/sites/default/files/Student%252520Life%252520and%252520Development/coke%252520color%252520logo%2525202014.jpg&imgrefurl=http://www.kpu.ca/sld/student-orientation&h=1953&w=1953&tbnid=rDldvizGJJD40M:&docid=2jegBwMTElxqfM&hl=en&ei=2aCmVbuCIY_joASSl6BI&tbm=isch&ved=0CI0BEDMoVDBUahUKEwj70v3e3N3GAhWPMYgKHZILCAk)

Pepsi Coca-ColaLogo

Type Cola Cola

Country of Origin United States United States

Introduced 1898 1886

Geographic area served Worldwide Worldwide

Employees 274,000 130,600

Total Asset 70,509K 92,023K

Annual Advertising Spending $1,000M $2,000M

Social Media

!

Social Media

Dividend Payout

Pepsi Coca-Cola

33M likes 781K likes

2.87M 357K

158K 685K

200,783,502 views 994,784,960 views

!

!

!

!

Pepsi Coca-Cola2014 $2.46 $1.22

2013 $2.22 $1.12

2012 $2.12 $1.01

2011 $2 $0.91

PEPESI PROJECT �5

Financial RatioPepsi

A. When talk about the profit generated from the business, we can see the ROA, ROE and Gross Profit Margin Ratio. According to Pepsi’s ration, the profit gathered from the asset, equity and gross margin are good, especially from equity. The average ROE of nonalcoholic beverages industry is 26%-27%, it shows that the PEPSICO use well on money shareholders have invested. The gross margin of Pepsi is a little low, comparing with the average of nonalcoholic beverages industry, were 54.79% to 55.76% from 2013Q2 to 2014Q4, Pepsi’s gross margin were just located at 52.22% to 53.96%. The ROA of Pepsi is really amazing. The average ROA of whole industry is 8%, and Pepsi has a more than 3 times performance in return on investment than industry. The ROE is higher than ROA, shows that Pepsi manipulate well on financial leverage, they gained more money from operating than the interest expense using borrowed money.

B. When talk about the profit gathered from asset using, we can analysis asset turnover ratio and receivable turnover and collection period. The average AT of nonalcoholic beverages industry is 0.68, however, Pepsico has a really excellent rate, over 3 times of asset turnover. Moreover, the average receivable turnover of this industry is 8.37, and Pepsico has a better ability of collecting account receivable about 130% than whole industry.

2011 2012 2013 2014ROA 36.94% 33.00% 30.36% 31.52%

ROE 30.83% 27.58% 27.64% 37.12%

Asset Turnover 3.81 3.50 2.99 3.23

Gross Profit Margin Ratio 52.56% 52.22% 52.96% 53.69%

Receivable Turnover 11.31 10.81 11.01 11.74

Receivable Collection Period

32.27 33.76 33.16 31.09

Quick Ratio 57% 74% 88% 80%

Debt-to-Equity Ratio 1.11 1.18 1.09 1.59

EPS 1.88 2 1.94 1.62

P/E ratio 34.93 34.59 42.75 58.60

PEPESI PROJECT �6

C. The short-term debt-paying ability of Pepsi is getting better from 2011 to 2014. On 2011, Pepsi just match the average rate of industry average. It shows the liquidity of Pepsi is better than whole industry.

D. The P/E ratio of Pepsi was changed in 2014. It is because the Pepsico had a dramatic decrease in the account - Comprehensive Income And Other (the income of a business enterprise during a period from transactions and other events and circumstances from non-owners sources) and it affect the leverage of creditors and investors. It might be a temporary effect only happened on 2014. Other years, the leverage of creditors and investors was lower than industry, Pepsi has more fund from investors than creditor.

E. The P/E ratio of beverage industry is 30%, Pepsico has a higher valuation ratio of a company's current share price compared to its per-share earnings. Combining with the ROE, the stock of Pepsico is worth more than the NASDAQ exchange price.

Coca-Cola

2011 2012 2013 2014ROA 10.73% 10.47% 9.53% 7.71%

ROE 26.89% 27.19% 25.67% 23.23%

Asset Turnover 1.83 1.58 1.50 1.39

Gross Profit Margin Ratio

60.89% 60.32% 60.68% 61.11%

Receivable Turnover 9.46 10.09 9.62 10.30

Receivable Collection Period

38.58 36.18 37.96 35.44

Quick Ratio 78% 77% 90% 81%

Debt-to-Equity Ratio 0.49 0.49 0.60 0.74

EPS 4.08 3.96 4.37 4.31

P/E ratio 16.55 9.34 9.41 9.81

PEPESI PROJECT �7

A. When talk about profit generated from business, we can see the ROA, ROE and Gross Profit Margin Ratio. According to KO’s ration, the profit gathered from asset, equity and gross margin are good, especially from equity. The average ROE of nonalcoholic beverages industry is 26%-27%, it shows that the KO(Coca-cola) use will on money shareholders have invested. The gross margin of KO is fair, comparing with the average of nonalcoholic beverages industry, were 54.79% to 55.76% from 2013Q2 to 2014Q4, KO’s gross margin were located at 60% to 61%. The average ROA of whole industry is 8%, and KO’s performance of return on investment is just as the industry. The ROE is higher than ROA, shows that Pepsi manipulate well on financial leverage, they gained more money from operating than the interest expense using borrowed money.

B. When talk about the profit gathered from asset using, we can analysis asset turnover ratio and receivable turnover and collection period. The average AT of nonalcoholic beverages industry is 0.68, however, KO also has a really excellent rate, over 3 times of asset turnover, however, it is getting worse and keeping decrease sever from 2011 to 2014. Maybe it is a signal to mention. Moreover, the average receivable turnover of this industry is 8.37, and KO’s ability of collecting account receivable is just as the whole industry. As a biggest nonalcoholic beverages company, the collection period is not good, and it might refer that some of KO’s customer did not pay efficiency.

C. The short-term debt-paying ability of KO has mere change from 2011 to 2014. KO has little bit higher rate 0.78 than the average rate of industry average 0.6. It shows the liquidity of KO is better than whole industry.

D. The P/E ratio of KO is lower than whole industry. KO use more money from investors than creditors comparing with beverage industry.

E. The P/E ratio of beverage industry is 30%, KO has a far low valuation ratio of a company's current share price compared to its per-share earnings. Some investors will not choice KO’s stock if they have intention on beverage industrial stock.

PEPESI PROJECT �8

Financial StatementPepsiCo:

From Income statement, we can see that the nearest four years, 2011-2014, the Gross Profit are consistently flat and do not have any recession. The attack from 2009 economic depression has recovered. Also, PepsiCo was trying to decrease the cost of good sold every year to make a higher gross profit. The gross profit from 2012 to 2014 increase 1.4% per year.

The increasing in sales also lead the operating expenses to increase. However, the percentage of cost were higher than sales, and it made the operation margin increase slightly.

PEPESI PROJECT �9

% Change

Currency in Millions of US Dollars 2011 2012 2013 2014 2012 2013 2014

Revenues 66,504.00 65,492.00 66,415.00 66,683.00 -1.5% 1.4% 0.4%

TOTAL REVENUES 66,504.00 65,492.00 66,415.00 66,683.00

Cost Of Goods Sold 31,547.00 31,291.00 31,243.00 30,884.00 -0.8% -0.2% -1.1%

GROSS PROFIT 34,957.00 34,201.00 35,172.00 35,799.00

GROSS PROFIT% 52.56% 52.22% 52.96% 53.69% -0.7% 1.4% 1.4%

% Change

Currency in Millions of US Dollars 2011 2012 2013 2014 2012 2013 2014

Revenues 66,504 65,492 66,415 66,683 -1.5% 1.4% 0.4%

Selling General & Admin Expenses, Total 24,449 24,691 25,194 25,708 1.0% 2.0% 2.0%

Depreciation & Amortization, Total 133 119 110 92 -10.5% -7.6% -16.4%

OTHER OPERATING EXPENSES, TOTAL 24,582 24,810 25,304 25,800 0.9% 2.0% 2.0%

OPERATING INCOME 10,375 9,391 9,868 9,999 -9.5% 5.1% 1.3%

OPERATING INCOME% 15.60% 14.34% 14.86% 14.99%

In Balance sheet, the most eye-catching item is long-term debt. The long-term debt was over 30% percentage of liability and higher than the current liability. It revealed that the long-term debt have significant inference on PepsiCo’s statement. According to the note of PepsiCo’s financial statement, PepsiCo raised 6.5 billion long-term debt to acquire two

subsidiary corporation-PBG(Pepsi Bottling Group, Inc.)and PAS(PepsiAmericas, Inc.).In the balance sheet, we also found out that the cash 2014 was rapid decrease. And sooner, we figure out that they use these fond to buy a short-term investment. They bought short-term debt security $3,167 million.

PEPESI PROJECT �10

Common Size

Currency in Millions of US Dollars 2011 2012 2013 2014 2011 2012 2013 2014

Long-Term Debt 20,568 23,544 24,333 23,821 28.22% 31.54% 31.41% 33.78%

% Change

Currency in Millions of US Dollars 2011 2012 2013 2014 2012 2013 2014

Cash And Equivalents 4,067 6,297 9,375 6,134 54.83% 48.88% -34.57%

Short-Term Investments 358 322 303 2,592 -10.06% -5.90% 755.45%

TOTAL CASH AND SHORT TERM INVESTMENTS 4,425 6,619 9,678 8,726 49.58% 46.22% -9.84%

Coca-cola:

Form income statement, we can see that Coca-Cola has good performance on gross profit margin, and 10% higher than PepsiCo. In 2013-2014, the sales slightly decreased. According to Coca-Cola's internal research, the consumer thought the sugared beverages are not healthy to their health. Coca-Cola still worked on their cost of good sold to make the cost lower and keep the gross profit margin flat.

The operating expense has same regression as revenue. Coca-Cola’s income and expenditures do not have too much change in this four year. We might say that the company’s profitability is steady, but also could say that they need some creative idea to break the wall or they would depression in the future.

PEPESI PROJECT �11

% Change

Currency in Millions of US Dollars 2011 2012 2013 2014 2012 2013 2014

Revenues 46,542 48,017 46,854 45,998 3.2% -2.4% -1.8%

TOTAL REVENUES 46,542 48,017 46,854 45,998

Cost Of Goods Sold 18,204 19,053 18,421 17,889 4.7% -3.3% -2.9%

GROSS PROFIT 28,338 28,964 28,433 28,109

GROSS PROFIT% 60.89% 60.32% 60.68% 61.11% -0.9% 0.6% 0.7%

% Change

Currency in Millions of US Dollars 2011 2012 2013 2014 2012 2013 2014

Revenues 46,542 48,017 46,854 45,998 3.2% -2.4% -1.8%

Selling General & Admin Expenses, Total 17,422 17,738 17,310 17,218 1.8% -2.4% -0.5%

Other Operating Expenses 4 10 18 24 150.0% 80.0% 33.3%

OTHER OPERATING EXPENSES, TOTAL 17,426 17,748 17,328 17,242 1.8% -2.4% -0.5%

OPERATING INCOME 10,912 11,216 11,105 10,867 2.8% -1.0% -2.1%

OPERATING INCOME% 23.45% 23.36% 23.70% 23.62% -0.4% 1.5% -0.3%

From the balance sheet, started from 2012, Coca-Cola tried to invest in short-term investment and had a practical result. Combined with the interest and investment income, Coca-Cola consistently gained growth investment income.

PEPESI PROJECT �12

% Change

Currency in Millions of US Dollars 2011 2012 2013 2014 2012 2013 2014

Cash And Equivalents 12,803 8,442 10,414 8,958 -34.06% 23.36% -13.98%

Short-Term Investments 1,232 8,109 9,854 12,717 558.20% 21.52% 29.05%

Trading Asset Securities -- 7 -- 14 0.00% 0.00% 0.00%

TOTAL CASH AND SHORT TERM INVESTMENTS 14,035 16,558 20,268 21,689 17.98% 22.41% 7.01%

% Change

Currency in Millions of US Dollars

2011 2012 2013 2014 2012 2013 2014

Interest And Investment Income

483 515 604 645 6.6% 17.3% 6.8%

Research & Development Issue

A. EPS & P/E RatioPepsiCo’s average EPS is 1.86, and average P/E ratio is 42.7%. Compare with the Coca-Cola’s financial report, Coca-Cola’s average EPS is around four which is much higher than PepsiCo’s EPS. PepsiCo’s average sales revenue in recent years is higher than Coca-Cola’s, but its EPS is lower, which means that PepsiCo’s ability of profitability is not that well.

B. Short-term Investment-debt securityIn 2014, PepsiCo invested two billion to the debt security, which is an enormous transformation from funding equity security for 300 million dollars to add 2 billion for the debt security. It could be a risk for the company because the debt increased, and the investment risk could be higher. There are default risk and liquidity risk. Furthermore, the large amount of investing in debt security decreases the turnover rate of capital, which could be a crisis if the PepsiCo has cash flow problems. Coca-Cola also funded the short-term debt recently, but not as much as PepsiCo did. According to different targets and periods, the two company are not possible to get the same results or returns even though they are investing the same kind of investment products.

C. Advertising ExpensePepsiCo used only 1/66 of the sales revenue on advertising whereas Coca-Cola used 1/44 of the sales revenue on products promotion. Coca-Cola used much more advertising expense to construct its products positioning. Moreover, PepsiCo’s band imagination is too weak to break the representative individual that Coca-Cola built in everyone’s heart, and that could be the reason that PepsiCo is not able to beat Coca-Cola in the cola market.

PEPESI PROJECT �13

Recommendation and Conclusion

In general, there is not big problem about PepsiCo financial report, but compare with the most competitive competitor, Coca-Cola, several areas like marketing strategies, EPS and P/E ratio, and short-term investment can be better in order to keep up with Coca-Cola.

In order to strengthen the impression in consumers’ mind, PepsiCo should put more expense into marketing to build its brand identification, product positioning, and product imagine. For example, when coming out Coca-Cola, most of the customers will connect to the polar bear that is the product imagine for Coca-Cola. Therefore, if PepsiCo can construct its product imagine, it will increase the imagination in customers’ heart.

It could be better if PepsiCo used diversification or systematic investment plans to arrange its assets. It could be a big problem when investing an enormous amount of funds one time. Two billion is a large amount of money. If there are any problem with the investment targets, PepsiCo will fall into difficulty because of not enough turnover capital. So, one of the best way to reduce the possibility of the terrible situation is to decline extremely the risks and loss. Another way is to invest systematically with the smaller amount of the money. If the investment products break, PepsiCo will not lose too much money that was put in.Thus, Pepsi should change the investment strategies to decrease risks.

In conclusion, using business diversification strategies could improve PepsiCo’s lack of sales revenue. Indeed, after multidimensional operations, PepsiCo mergers different industries like food, bottles, and juice and the sales revenue increases year by year. Although PepsiCo’ sales revenue cannot exceed Coca-Cola’s sales amount in the cola industry, the total sales in recent years are higher than Coca-Cola’s sales. The industries that are merged help PepsiCo to earn more and improve the financial ratio. What’s more, most people care more about health, and the soft drink could become sunsetting industries if there is not any new product that do not influence health. As a result, PepsiCo is a good company, and we are looking forward its improvement and development.

PEPESI PROJECT �14

Reference“Design” 2015 Web. 15 July 2015

http://www.google.com/imgres?imgurl=http://mobileadvertisingwatch.com/wp-content/uploads/2015/03/Designed-to-Pop-The-Pepsi-Challenge-Gets-Social-Media-Update-for-2015.jpg&imgrefurl=http://mobileadvertisingwatch.com/designed-to-pop-the-pepsi-challenge-gets-social-media-update-for-2015-16355&h=804&w=1047&tbnid=uaLhHFqN6D_rDM:&zoom=1&docid=59wZEnI1Ti3D1M&hl=en&ei=fZamVbKSKciw-wG0j7_gCg&tbm=isch&ved=0CDUQMygEMARqFQoTCPLEvO7S3cYCFUjYPgodtMcPrA

“PepsiCo” 2015 Web. 15 July 2015http://www.google.com/imgres?imgurl=https://photos.prnewswire.com/prnvar/20150316/181869LOGO&imgrefurl=http://www.prnewswire.com/news-releases/pepsico-beverages-become-official-soft-drink-of-live-nation-300050703.html&h=382&w=277&tbnid=fnxLehmJISYMqM:&zoom=1&docid=viuOehwrRoBr-M&hl=en&ei=fZamVbKSKciw-wG0j7_gCg&tbm=isch&ved=0CDoQMygJMAlqFQoTCPLEvO7S3cYCFUjYPgodtMcPrA

“Student” 2015 Web. 15 July 2015http://www.google.com/imgres?imgurl=http://www.kpu.ca/sites/default/files/Student%252520Life%252520and%252520Development/coke%252520color%252520logo%2525202014.jpg&imgrefurl=http://www.kpu.ca/sld/student-orientation&h=1953&w=1953&tbnid=rDldvizGJJD40M:&docid=2jegBwMTElxqfM&hl=en&ei=2aCmVbuCIY_joASSl6BI&tbm=isch&ved=0CI0BEDMoVDBUahUKEwj70v3e3N3GAhWPMYgKHZILCAk

O’Brien, Shauna Coca-Cola Vs. Pepsi 2015 Web. 15 July 2015http://www.dividend.com/how-to-invest/7-charts-that-compare-coca-cola-and-pepsico-ko-pep/

“Dividend” 2015 Web. 15 July 2015http://www.dividend.com/dividend-stocks/consumer-goods/beverages-soft-drinks/ko-coca-cola-co/

“Coca-Cola” 2015 Web. 15 July 2015http://www.coca-colacompany.com/press-center/press-releases/the-coca-cola-company-reports-full-year-and-fourth-quarter-2012-results

“Historical Price”Yahoo Finance. 2015 Web. 15 July 2015http://finance.yahoo.com/q/hp?s=PEP&a=00&b=31&c=2012&d=00&e=31&f=2015&g=m

PEPESI PROJECT �15

“PepsiCo” Market Watch 2015 Web. 15 July 2015http://www.marketwatch.com/investing/stock/PEP/financials

“Coca-Cola” Market Watch 2015 Web. 15 July 2015http://www.marketwatch.com/investing/stock/ko/financials

“Historical Price”Yahoo Finance. 2015 Web. 15 July 2015http://finance.yahoo.com/q/hp?s=PEP&a=00&b=31&c=2012&d=00&e=31&f=2015&g=m

“Historical Price”Yahoo Finance. 2015 Web. 15 July 2015http://finance.yahoo.com/q/hp?s=PEP&a=00&b=31&c=2012&d=00&e=31&f=2015&g=m

“Historical Price”Yahoo Finance. 2015 Web. 15 July 2015http://finance.yahoo.com/q/hp?s=PEP&a=00&b=31&c=2012&d=00&e=31&f=2015&g=m

PEPESI PROJECT �16