Expanding PepsiCo in Australia through FDI: Business Research Report

This report highlights the scope of PepsiCo to expand in Australia through foreign direct investment (FDI). It includes background information on PepsiCo, the business environment in Australia, and Porter's Five Forces analysis. Australia provides economic liberalism, transparency in the legal system, and stability and strengths of economic growth. PepsiCo is a multinational company and distributes products in more than 200 countries. The report analyzes the opportunity of PepsiCo in Australia through conducting external business environmental analysis.

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Business Research Report
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Table of Contents
1. Introduction..................................................................................................................................2
2. Background information of PepsiCo...........................................................................................2
3. Background information on the business environment in Australia...........................................5
4. Business Scenario........................................................................................................................9
5. Conclusions................................................................................................................................11
Reference List................................................................................................................................13

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1. Introduction
This report highlights the scope of PepsiCo to expand in Australia through foreign direct
investment (FDI). Australia is one of the open countries for the FDI among the OECD member
states which represents the FDI representing over the third of Australia’s GDP. Australia
provides the economic liberalism, transparency in the legal system and stability and strengths of
economic growth for the last 10 years that compensate for the narrowness of the market and its
geographic isolation. PepsiCo is a multinational company and it distributes the products in more
than 200 countries. This report is going to explore the opportunity of PepsiCo in Australia
through conducting the external business environmental analysis. In the next section, business
opportunity analysis is done conducting Porter's Five Forces. In the final section, a summary of
the main issues is discussed.
2. Background information of PepsiCo
PepsiCo is a multinational snack, food and beverage manufacturer and it is headquartered
in New York. PepsiCo was founded in the year 1989 and it serves on a worldwide basis. Indra
Nooyi is the CEO of PepsiCo and the product mix consists of 47% of the beverage and 53% of
the foods. The product line of PepsiCo is associated with Pepsi, Mountain Dew, Lay's potato
chips, Diet Pepsi, Tropicana beverage, Lipton Pepsi, Mirinda, Cheetos, Aquafina, Mist Twist and
Walkers Potato crisps. On the world basis, PepsiCo has more than 264,000 employees as of
2016. In the year 1965, Pepsi-Cola made its merge with Frito-Lay in order to become PepsiCo.
PepsiCo has its competition with Coca-Cola and in the year 2005, PepsiCo crossed Coca-Cola in
market value and in the year 2009, Coca-Cola became first in the carbonated soft drink sales
(Pepsico.com 2018). In the case of Asia, PepsiCo has created recently and this segment of

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PepsiCo's business markets is based on Kurkure, Mirinda and Red Rock Deli. PepsiCo owns its
distribution and manufacturing facilities in some of the regions and in some scenario; PepsiCo
holds licensing, joint venture and contract manufacturing for the production. From the Asian
section, PepsiCo gained 10% of the total revenue in 2016 (Pepsicom.com 2018). The Board of
Directors of PepsiCo is composed of 11 outside directors. PepsiCo has shifted the structure of the
business and in the year 2016; PepsiCo separated its business in six different domains; Frito-Lay
North America (FLNA), North America Beverage (NAB), Quacker Foods North America
(QFNA), Latin America (LA), Europe Sub-Saharan African (ESSA) and Asia, Middle East and
North America (AMENA). Maximum percentage of the business came from North America in
case of PepsiCo beverage.
Figure 1: Net revenue and contributions in six different segments
(Source: Pepsico.com 2018, Financial Statement of PepsiCo)
In the year 2017, PepsiCo returned $6.6 billion to its shareholders in the form of share
repurchases and dividends. PepsiCo got 22.9% of the core net return on invested capital.
Revenue of PepsiCo in the year 2017 was US$ 63.525 billion and operating income of PepsiCo
was US$ 10.509 billion (Pepsico.com 2018).

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Figure 2: PepsiCo net revenue worldwide from 2007 to 2017 in billion US dollars
(Source: Statista.com 2018)

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Figure 3: Summary of the reclassification from accumulated other comprehensive loss to
the income statement
(Source: Pepsico.com 2018, Financial Statement of PepsiCo)
3. Background information on the business environment in Australia
Australia is a politically stable country and it has a transparent regulatory system which
underpins the economic resilience. Australia ranks top five on the Index of the Economic

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Freedom and Australia’s effective governance gives large multinational companies a secure and
safe business environment. Australia is ranked 15th in ‘ease of doing business’. Australia gives
robust institutional frameworks and strong finance and regulation of banking system. According
to the report of Austrade, more than 22,000 foreign companies are registered in Australia and the
reasons possibly are the robust economy, innovations and kills, dynamic industries, global ties
and strong foundations and Australia's credential (Bloomberg.com 2018).
Political: Recent report published by the Economic Intelligence Unit, Australia gained
highest ranking in political stability. Australia is significant for the ease of doing business, high
governmental support and low corruption. Australia is independent nation that belongs to the
commonwealth and Prime Minister runs state business. Australia follows federal parliamentary
democracy along with the commonwealth realm and Australia is famous for following
democratic values and tolerance. Australia provides freedom of speech along with rule of law.
Australian government consists of two Houses, The Senate and the House of Representatives.
Economic: In recent time; Australia is one of the best performing economies in the
industrialized world. The economic success reflects the rich natural resources, good
management, political stability and strong trade with other countries. GDP (PPP) of Australia
was 1.76- trillion in 2016 and GDP per capita in Australia was AU$ 70,400 in 2016 (Rees et al.
2016). In recent time, the unemployment rate in Australia was 6.3% in 2017. Australia is located
in one of the fastest growing regions that are the Asia-Pacific and the Australian economy is
proved to be resilient as this economy has a good relationship with the emerging markets.
Australia has two-way trades in service and goods and it was worth $700 billion in 2016
(Bloomberg.com 2018). Australia is a transparent, competitive and open business market which
is supported by the educated, multilingual and skilled workforce. The positive global

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environment may support exports of resources and Australia provides favourable business
conditions and it may support monetary policy.
After the economic slowdown and the international financial crisis; FDI flows in
Australia has been getting strong since 2011. In the year 2017, FDI inflow was 60 billion and
FDI flows increased from Malaysia, China and Hong Kong.
FDI 2014 2015 2016
FDI inward flow
(million USD)
40,327 19,400 48,200
FDI stock (million
USD)
561,899 535,900 576,980
FDI inwards (% of
GFCF)
10.4 6.0 15.4
FDI stock (% of GDP) 38.9 43.5 45.7
Table 1: Foreign direct investment in Australia
(Source: Santandertrade.com 2018)
Social and cultural scenario: The business organisations can face the risk of market
developments as the people can sweep away by the digital disruptions. In Australia, average
household net-adjusted disposable income per capita is USD 33,400 and there is a gap between
the rich and poor section (Courvisanos et al. 2016). In addition, all the people will not afford a
soft carbonated drink and beverage drink; almost two million Australians live below the poverty
line. Top 20% of Australian population earn 5 times more than as much as bottom 20%,
therefore, the preferences of the customers can easily change. In Australia, people mainly follow

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the Western culture and it is mainly derived from the U.K and cultural input may come from
Australian aboriginal people from Torres Strait Island. When a multinational company comes to
visit in Australia, the principles appreciated in businesses are formal relations, courtesy, mutual
confidence and respect. PepsiCo needs to set up a network of business acquaintance and
Australians are less formal in nature.
Legal: When an organisation enters Australia for business, the organisation needs to
comply with the privacy act as well as intellectual property rights. The multinational
organisations need to register the business name and there are many other taxes which the
businesses may need. The companies need to register an Australian Business Number, Goods
and Services Tax, Tax File Number and Pay as you Go (PAYG) (Penrose 2017). Australia
follows constitutional state and foreign nationals can take advantage of the same treatment as
citizenship in judgemental maters. In the case of accounting regulations, the organisations can
follow the Corporation Act 2001 and Corporations Regulations 2001. Australia based
organisations need to follow consumer law which is mainly the Trade Practice Act 1974 and
labour law is associated with the Fair Work Act 2009.
Financial systems: In Australia, regulation of the financial system is split between
Australian Prudential Regulation Authority (APRA) and the Australian Securities and
Investment Commission (ASIC) (Seid 2018). The financial system in Australia is comprised of
the arrangement of the lending and borrowing of the funds. In Australia, the financial system is
comprised of the insurance, superannuation, authorised deposit-taking institutions and financial
markets. The business can make the payment through the cheques, cash, RTGS, EFTPOS and
other high-value payment systems. In addition, as stated by Findlay and Garnaut (2017), large
stock exchange in Australian financial market is Australian Securities Exchange (ASX) and

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smaller one is National Stock Exchange of Australia (ANX). Some of the large financial
institutions in Australia are the National Australia Bank, Australia and New Zealand Banking
Group, Westpac Banking Corporations and Commonwealth Bank of Australia.
4. Business Scenario
Porter’s Five Forces of food and beverage industry in Australia
The threat of new entrants: (Medium)
The threat of new entrant is relatively medium in the snacks and beverage industry as a
capital requirement in this industry is not much. In addition, consumer switching cost is also
medium as there are many new brands appearing in Australia with soft drink and snacks. In order
to manufacture soft carbonated drink and snacks; the new firm can come up with a new concept.
PepsiCo is a multinational brand and it has a good market share in the world market. Therefore,
it would not be difficult for PepsiCo to start the business in Australia. With the advancement of
time, PepsiCo will definitely come up with the loyal customer base and market share.
The threat of substitute products: (High)
In Australia, energy drink, soft drink, juice, soda and milk-based drinks are large in
numbers and the customers have multiple options in hand to choose from. PepsiCo offers
Mirinda, Pepsi and 7-Up. PepsiCo does not have large numbers of unique flavour and its snacks
(Lays and Cheetos) are not unique in offering. Coca-Cola Amatil has 43% of the market share in
soda and carbonated soft drink in Australia. Some of the other brands in Australia that sell soft
drinks are the Nudie Foods, Kirks, Saxbys, Heinz, Bundaberg and Golden Circle. Lays, Frito

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Lays, Cheetos will be competing with Snack Brands Australia. PepsiCo needs to understand the
core needs of the customers rather than what the customers are purchasing.
Bargaining power of buyers: (Medium)
The individual buyers have many options in the market from where the customers can
choose their soft carbonated drinks and soda. Large retailers in Australia like Woolworths, K-
Mart and Coles have bargaining power because of the large order quantity; however, bargaining
power is lessened because if the end consumer brand loyalty (Ointo and Zhu 2016). Buyers can
switch their products if their preferred brand is not available in retail stores and local open shops.
PepsiCo aims to build a large customer base as it will help PepsiCo in two ways; it may reduce
the bargaining power and it will give the opportunity to streamline its sale. New products in the
market of Australia will decrease the defection of existing customers of PepsiCo to its customers.
Bargaining power of suppliers: (Low)
The ingredients of making a carbonated soft drink, soda and juice are mainly water,
sweetener, phosphoric acid and caffeine. The suppliers of raw materials in Australia for a soft
drink and carbonated drinks are mainly local and the suppliers deliver the products in the
manufacturing plants (Tran 2016). The suppliers in the market of Australia are concentrated and
they are not differentiated. PepsiCo is a large multinational company and it is the second largest
soft drink seller in the world. The suppliers in Australia are chemical, agricultural products, food
processing and the water (Bajada 2017). Therefore, most of the soft drink owners of Australia
have their own efficient supply chain by experimenting with product designs. Developing the
dedicated suppliers is very important for PepsiCo in Australia as it will take help of the third
party suppliers with less bargaining power.

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Competitive Rivalry: (High)
Rivalry in the market for a soft drink in Australia is intense and high rivalry in the market
can decrease the profitability (Hollenbeck et al. 2018). Existing market players in Australia are
Coca-Cola Amatil, Golden Circle, Heinz, Bundaberg, Kirks and Saxbys. PepsiCo needs to build
the sustainable differentiation and it builds the scale in order to compete better. The main rival in
the market of PepsiCo in Australia will be Coca-Cola Amatil with a wide range of beverage
products. Both PepsiCo and Coca-Cola Amatil are famous for the carbonated beverage and they
are both committed heavily to sponsor outdoor activities and events. PepsiCo will do FDI and it
will help the multinational brand to collaborate with competitors in order to increase the market
size to compete in the Australian market.
5. Conclusions
Australia belongs to the OECD high-income group and Australia is ranked 7th in ‘starting
the business’. Australia is ranked 6th for the ‘getting credit' opportunity for the business.
Australia provides a good opportunity through political stability; however, it is difficult for the
Australian businesses to cover a large distance in business between three large capital cities.
However, Australia is known for the poor technological development, relationship with
European countries and facing issues regarding the instability in the Asia Pacific Regions. In
Australia, a large percentage of people belong to middle-aged and PepsiCo may face an issue if
they target the young generation.
PepsiCo can get the benefit of doing FDI as the capital goes to the business with growth
prospect and it reduces the effects of cronyism and politics. PepsiCo can opt to take Foreign
Direct Investment in Australia which will enable the organisation to make a manufacturing unit

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in Australia and to make a supply chain to distribute the product. PepsiCo may take the product
line strategy where they may offer different types of snacks, beverage, soft drink, carbonated
drink and juice to the customers. The pricing strategy must be competitive pricing which will
give a competitive advantage to PepsiCo.

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Reference List
Bajada, C., 2017. Australia's Cash Economy: A Troubling Issue for Policymakers: A Troubling
Issue for Policymakers. Abingdon: Routledge.
Bloomberg.com. 2018. [online] Available at: https://www.bloomberg.com/news/articles/2018-
06-06/australian-economy-expands-faster-than-forecast-currency-gains [Accessed 24 Jul. 2018].
Courvisanos, J., Jain, A. and K. Mardaneh, K., 2016. Economic resilience of regions under
crises: A study of the Australian economy. Regional Studies, 50(4), pp.629-643.
Findlay, C. and Garnaut, R., 2017. The political economy of manufacturing protection:
Experiences of ASEAN and Australia. Abingdon: Routledge.
Gray, S., Harymawan, I. and Nowland, J., 2016. Political and government connections on
corporate boards in Australia: Good for business?. Australian Journal of Management, 41(1),
pp.3-26.
Hollenbeck, J.R., Noe, R.A. and Gerhart, B.A., 2018. Human resource management: Gaining a
competitive advantage. McGraw-Hill Education.
Hua, Y., Oliphant, M. and Hu, E.J., 2016. Development of renewable energy in Australia and
China: A comparison of policies and status. Renewable Energy, 85, pp.1044-1051.
Penrose, E.T., 2017. Foreign Investment and the Growth of the Firm 1. In International
Business (pp. 33-48). Abingdon: Routledge.

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Pepsico.com. 2018. [online] Available at:
https://www.pepsico.com/docs/album/investor/pepsico-inc-2017-annual-report.pdf [Accessed 24
Jul. 2018].
Pinto, P.M. and Zhu, B., 2016. Fortune or Evil? The Effect of Inward Foreign Direct Investment
in Corruption. International Studies Quarterly, 60(4), pp.693-705.
Rees, D.M., Smith, P. and Hall, J., 2016. A Multi‐sector Model of the Australian
Economy. Economic Record, 92(298), pp.374-408.
Santandertrade.com. 2018. [online] Available at: https://en.portal.santandertrade.com/establish-
overseas/australia/foreign-investment [Accessed 24 Jul. 2018].
Seid, S.H., 2018. Global regulation of foreign direct investment. Abingdon: Routledge.
Statista.com. 2018. [online] Available at: https://www.statista.com/statistics/242288/global-net-
income-of-pepsico/ [Accessed 24 Jul. 2018].
Tran, B., 2016. Ethos, Pathos, and Logos of Doing Business Abroad: Geert Hofstede's Five
Dimensions of National Culture on Transcultural Marketing. In International Business:
Concepts, Methodologies, Tools, and Applications (pp. 1601-1626). IGI Global.