Pepsi 2005 Annual Report Download - page 29

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PepsiCo International
PepsiCo International (PI) manufactures
through consolidated businesses as well as
through noncontrolled affiliates, a number
of leading salty and sweet snack brands
including Gamesa and Sabritas in Mexico,
Walkers in the United Kingdom, and
Smith’s in Australia. Further, PI manufac-
tures or uses contract manufacturers,
markets and sells many Quaker brand
snacks. PI also manufactures, markets and
sells beverage concentrates, fountain
syrups and finished goods under the
brands Pepsi, 7UP, Mirinda, Gatorade,
Mountain Dew and Tropicana. These
brands are sold to franchise bottlers,
independent distributors and retailers.
However, in certain markets, PI operates
its own bottling plants and distribution
facilities. PI also licenses the Aquafina
water brand to certain of its franchise
bottlers. PI reports two measures of volume.
Snack volume is reported on a system-wide
basis, which includes our own volume and
the volume sold by our noncontrolled
affiliates. Beverage volume reflects com-
pany-owned and franchise bottler sales of
beverages bearing our trademarks to
independent distributors and retailers.
Quaker Foods North America
Quaker Foods North America (QFNA) man-
ufactures or uses contract manufacturers,
markets and sells cereals, rice, pasta and
other branded products. QFNA’s products
include Quaker oatmeal, Aunt Jemima
mixes and syrups, Quaker grits, Cap’n
Crunch and Life ready-to-eat cereals,
Rice-A-Roni, Pasta Roni and Near East
side dishes. These branded products are sold
to independent distributors and retailers.
Our customers include franchise bottlers
and independent distributors and retailers.
We normally grant our bottlers exclusive
contracts to sell and manufacture certain
beverage products bearing our trademarks
within a specific geographic area. These
arrangements specify the amount to be
paid by our bottlers for concentrate and
full goods and for Aquafina royalties, as
well as the manufacturing process required
for product quality.
Since we do not sell directly to the
consumer, we rely on and provide financial
incentives to our customers to assist in the
distribution and promotion of our products.
For our independent distributors and retail-
ers, these incentives include volume-based
rebates, product placement fees, promo-
tions and displays. For our bottlers, these
incentives are referred to as bottler funding
and are negotiated annually with each
bottler to support a variety of trade and
consumer programs, such as consumer
incentives, advertising support, new
product support, and vending and cooler
equipment placement. Consumer incen-
tives include coupons, pricing discounts
and promotions, such as sweepstakes and
other promotional offers. Advertising
support is directed at advertising programs
and supporting bottler media. New product
support includes targeted consumer and
retailer incentives and direct marketplace
support, such as point-of-purchase materi-
als, product placement fees, media and
advertising. Vending and cooler equipment
placement programs support the acquisi-
tion and placement of vending machines
and cooler equipment. The nature and type
of programs vary annually. The level of
bottler funding is at our discretion because
these incentives are not required by the
terms of our bottling contracts.
Retail consolidation has increased the
importance of major customers and further
consolidation is expected. Sales to Wal-
Mart Stores, Inc. represent approximately
9% of our total worldwide net revenue; and
our top five retail customers currently
represent approximately 26% of our 2005
North American net revenue, with Wal-Mart
representing approximately 11%. These
percentages include concentrate sales to
our bottlers which are used in finished
goods sold by them to these retailers. In
addition, sales to The Pepsi Bottling Group
(PBG) represent approximately 10% of our
total net revenue. See “Our Related Party
Bottlers” and Note 8 for more information
on our anchor bottlers.
Our Related Party Bottlers
We have ownership interests in certain of
our bottlers. Our ownership is less than
50% and since we do not control these
bottlers, we do not consolidate their
results. We include our share of their net
income based on our percentage of eco-
nomic ownership in our income statement
as bottling equity income. We have
designated three related party bottlers,
PBG, PepsiAmericas, Inc. (PAS) and Pepsi
Bottling Ventures LLC (PBV), as our anchor
bottlers. Our anchor bottlers distribute
approximately 62% of our North American
beverage volume and approximately 19%
of our international beverage volume.
Our anchor bottlers participate in the
bottler funding programs described above.
Approximately 8% of our total 2005 sales
incentives are related to these bottlers.
See Note 8 for additional information on
these related parties and related party
commitments and guarantees.
Our customers include
franchise bottlers and
independent distributors
and retailers.
Our Customers