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Pepsi Bottling Group (PBG)Stock (Manufacturing Industry, Beverages - Soft Drinks Industry, Food & Beverage Industry, Consumer Products Industry, Soft Drinks Industry)
 Pepsi Bottling Group has been facing several challenges in recent years. PBG's largest operations are in its North American and Western European markets, which have recently been hit by declining consumption of carbonated soft drinks. Consumer preferences have been shifting away from carbonated soft drinks, which accounted for around two-thirds of PBG's 2006 units, to healthier alternatives. The prices of production inputs, especially aluminum and corn, have been rising as well, putting additional pressure on PBG's profits. Despite these difficulties, PBG has performed relatively well. The Pepsi brands are very well known and enjoy significant brand loyalty. PBG's international markets have seen steady growth, helping to offset the sluggish domestic market. Also, PBG's performance is inherently tied to that of PEP, providing PBG with a certain degree of security in the highly competitive non-alcoholic beverage market.
[edit] History and Corporate OverviewPepsi Bottling Group was originally a division of PepsiCo but was spun off in 1999 to separate PEP's high-margin concentrate business from the capital-intensive bottling operations. Although they are two separate corporations, Pepsi still maintains a 41% ownership stake in PBG, ensuring a close business relationship. PBG bottles, markets, and distributes non-alcoholic beverages, primarily the Pepsi trademark and other PEP brands. As a bottler, PBG purchases concentrated forms of its beverages from concentrate manufacturers. PBG then uses these concentrates to produce the finished beverages, which it then packages and distributes directly to retailers. PBG's largest concentrate provider by far is PepsiCo, and PBG is also the largest bottler of Pepsi products in the world, accounting for 60% of PepsiCo's domestic volume and about 40% of its global volume in 2006. As a result of this extremely close relationship, the two companies' performance is often highly correlated. The Pepsi Bottling Group's operations are concentrated in the U.S. and Canada, with these two markets accounting for 78% of PBG's 2006 net revenues. PBG is also present in the European and Mexican non-alcoholic beverage markets, which accounted for 12% and 10% of 2006 revenues, respectively.
[edit] Products Pepsi Bottling Group's 2006 revenues by product segment As a bottling company, the Pepsi Bottling Group’s product line is determined by the offerings of its concentrate manufacturers. Currently, PBG’s portfolio is composed primarily of PepsiCo’s products, though 6% of its 2006 revenues came from the sale of non-Pepsi beverages. Although PBG’s products vary somewhat by region, many of its brands are similar across markets. The drinks produced by PBG fall into one of three general categories: carbonated soft drinks (CSD), non-carbonated soft drinks (non-CSD), and water. [edit] Carbonated Soft DrinksCarbonated soft drinks are the most common of the Pepsi Bottling Group’s offerings, accounting for 66% of the company’s total sales in 2006. Some of PBG’s notable brands of CSD include:
[edit] Non-carbonated Soft DrinksSales for all non-carbonated soft drinks totaled 15% of Pepsi Bottling Group’s revenues in 2006. Some of PBG’s prominent non-CSD offerings are:
[edit] WaterWater is usually placed in its own category due to its clear distinction from other non-carbonated soft drinks. PBG produces two brands of water, Aquafina and Propel fitness water, which accounted for around a combined 13% of the company's 2006 revenues. Aquafina is the top-selling brand of bottled water in the U.S. and has seen significant growth since its introduction in 2007. [edit] Relationship with PepsiCoPepsi Bottling Group and PepsiCo have a very close professional relationship. PEP owns 41% of PBG's common stock and maintains around 47% of PBG's voting power. This close relationship with PepsiCo affects PBG in both positive and negative ways. [edit] Master AgreementPepsi Bottling Group and PepsiCo are bound by a master bottling agreement that governs the conditions of their business relationship. In the agreement, PepsiCo grants exclusive rights to PBG to market, produce, and sell PepsiCo products in certain geographic regions. PepsiCo also acts as PBG's agent for purchasing the raw materials needed for manufacturing. In exchange, PBG is obligated to purchase all of its concentrates from PEP at a non-negotiable price. PBG must also purchase all packaging and labeling materials from certain PEP-approved manufacturers. [edit] Change of Control ProvisionThe master agreement also includes a provision that discourages any individual or company from obtaining a significant percentage of PBG’s stock. If one entity comes to own 15% or more of PBG’s shares, PEP can cancel the master agreement. This clause effectively prevents hostile takeover attempts, but it also helps ensure PBG’s continued dependence on PEP. [edit] Benefits
[edit] Drawbacks
[edit] Consumer Preferences and DemandPepsi Bottling Group’s carbonated soft drinks account for around 66% of its revenues, making it susceptible to changes in demand for CSD.
[edit] Commodity Cost Inflation   Pepsi Bottling Group's profits are vulnerable to rising costs of production inputs. PBG uses several raw materials to produce and package its beverages, all of which can impact production costs and profit margins. Some of the most significant production inputs are: Aluminum is used to make cans for packaging and represents around 15% of PBG's total cost of goods sold. In 2006, average aluminum prices were up nearly 40% for the year. PBG uses high-fructose corn syrup, a corn derivative, to sweeten its non-diet, full-calorie drinks. High-fructose corn syrup accounts for 10% of PBG's cost of goods sold. In 2006, corn prices were up 79% over 2005. PBG, however, acquires its high-fructose corn syrup through PepsiCo's global procurement division, which can help negotiate lower prices. PBG makes all of its plastic bottles from PET resin. Recently, plastic bottles have been more popular than aluminum cans, with PET representing 20% of PBG's cost of goods sold. In 2006, PET prices rose to a high of around 88 cents per pound but have since been declining.
Concentrates and syrups form the base of all PBG's beverage products. PepsiCo has maintained a low concentrate cost increase of around 2% annually, helping to mitigate the impact of inflated commodity prices on PBG's production costs. In 2007, however, PEP plans to increase concentrate costs by 3.7%. [edit] Competitors U.S. non-alcoholic beverage market, by % share of volume Pepsi Bottling Group’s main competitors are the Coca-Cola Company (NYSE:KO) and its bottling affiliates. The most important are KO’s top three bottling companies: Coca-Cola Enterprises (NYSE:CCE), Coca Cola Femsa S.A.B. de C.V. (KOF), and Coca-Cola Hellenic Bottling Company S.A. (NYSE:CCH). In 2006, Pepsi had a 31.2% share by volume of the U.S. non-alcoholic beverage market, second to Coca-Cola's 42.9%. The third-largest company in the domestic market is London-based Cadbury Schweppes (NYSE:CSG), which accounted for 17.6% of the 2006 U.S. market share. Declining demand and high cost pressures have taken their toll on the domestic non-alcoholic beverage market in recent years. Compared to KO's largest bottler CCE, however, PBG's operating margins have remained relatively high.
 Pepsi Bottling Group2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available [edit] References |
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