PepsiCo’s Restaurant Case Study
PepsiCo’s management is considering expansion of the company’s restaurant business by purchasing Carts of Colorado and California Pizza. Carts of Colorado manufactures and merchandises mobile food carts and kiosks and has an estimated value of $7 million. On the other hand, California Pizza is a $34 million establishment that focuses in casual dining. The purpose of this paper is to investigate the viability of purchasing these establishments and whether the new purchases can be aligned to the parent company’s organizational culture and relationships.
It is important to analyze the viability of a business decision of this magnitude as well as to evaluate if the additional businesses can merged into the parent company without any issues developing. The analysis is also essential, as it will help the parent company understand how to structure the new business relationships to ensure growing profitability and the satisfaction of all stakeholders. Based on this assessment, the question is, should PepsiCo purchase Carts of Colorado or California Pizza Kitchens or both?
PepsiCo began as a soft-drink manufacturer under the brand name Pepsi-Cola. Before long, the company had diversified into other segments in the food and drinks sector. It broadened its business to snack foods and restaurants while still maintaining its core function of manufacturing and selling soft drinks. By the early 1990s, PepsiCo had purchased several contemporary restaurants under its restaurant wing. The restaurants included KFC, Taco Bell, and Pizza Hut. From the foregoing, it is clear that PepsiCo has a lot of experience in managing the restaurants it has acquired. It is also worth noting that it has been able to successfully integrate the new entities that had their own cultures, into its organizational setup without causing any friction in how the businesses are run. The reason behind this is the fact that PepsiCo gives the establishments autonomy making it easier for them to continue with business as usual even after the purchase. Thus, it will not be a stretch for the parent company if it decides to purchase the two businesses in question.
Due Diligence on the Purchase of California Pizza Kitchen and Carts of Colorado
a). Economies of Scale
PepsiCo has been quite successful in the quick service food industry with the way it has managed some of the biggest quick food restaurants in the country such as KFC and Taco Bell. California Pizza Kitchen does not possess the same business structure like the other fast food restaurants in PepsiCo’s portfolio. However, it is still a fast food chain because the food is affordable, the offerings are not upscale, and the time spent in the establishment is minimal.
Thus, the acquisition of CPK will be a form of related diversification because PepsiCo is already in the fast-food business. Purchasing the restaurant can lead to an increase in economies of scale because PepsiCo has other fast food restaurants under its fold. Costs of manufacturing would decrease in this instance thanks to similar production processes and equipment. Duplicate operations and departments are removed decreasing the cost of production. However, there would be no economies of scale with the purchase of Carts of Colorado because it is an entirely different business compared to the other establishments that PepsiCo has. Production costs will remain high because there are no repetitive tasks or duplicated departments.
b). Economies of Scope
The California Pizza Kitchen is a casual dining establishment that sells special pizza products. Pizza Hut does the same but at less exclusivity. Therefore, selling products from both restaurants in one store may lower their sales and the overall revenues of PepsiCo.
c). Increased market share
The purchase of both California Pizza Kitchen and Carts of Colorado can exponentially increase PepsiCo’s market share and revenue. CPK is in the casual dining business while CoC is in the fast-food cart business. Both these markets are new to PepsiCo and entering them can lead to an overall market share and potential growth in revenues.
The cross-selling potential will be significantly higher if the company purchases CoC. The fast food restaurants could offer their franchise products while bundling CoC products.
e). Resource Transfer
Cart production is not the core business of PepsiCo making it impossible for resource transfers to have any merit in the acquisition of CoC. On the other hand, if PepsiCo purchases CPK, it could transfer some of its human resources expertise into the venture and ensure the success of the merger.
If managed effectively, CPK can develop strong synergies with Pizza Hut because they are in the same business. The acquisition of CoC may have backward integration benefits but is risky because the technology used is not used in any other PepsiCo restaurant. The subsidiary may end up losing its competitive advantage as a result.
Therefore, it is recommended that PepsiCo purchase CPK because it is less risk averse compared to CoC. CPK also has the potential of helping the parent company penetrate into international casual dining markets significantly increasing its income. PepsiCo should not risk running a business like CoC because it lacks the expertise of cart manufacturing and cart business.