Pepsi 2006 Annual Report Download - page 35

Our business may be adversely
impacted by unfavorable economic
or environmental conditions or
political or other developments
and risks in the countries in which
we operate.
Unfavorable global economic or envi-
ronmental changes, political conditions
or other developments may result in
business disruption, supply constraints,
foreign currency devaluation, inflation,
deflation or decreased demand. Un-
stable economic and political conditions
or civil unrest in the countries in which
we operate could have adverse impacts
on our business results or financial con-
dition. Our operations outside of the
U.S. accounted for 41% and 36% of our
net revenue and operating profit,
respectively, for the year ended
December 30, 2006. Our continued suc-
cess depends on our ability to broaden
and strengthen our presence in emerg-
ing markets, such as Brazil, Russia, India
and China, and to create scale in key
international markets.
Regulatory decisions and changes in
the legal and regulatory environment
could increase our costs and liabilities
or limit our business activities.
The conduct of our businesses, and the
production, distribution, sale, advertis-
ing, labeling, safety, transportation and
use of many of our products, are subject
to various laws and regulations adminis-
tered by federal, state and local
governmental agencies in the United
States, as well as to foreign laws and
regulations administered by
government entities and agencies in
markets in which we operate. These
laws and regulations may change,
sometimes dramatically, as a result of
political, economic or social events.
Such regulatory environment changes
include changes in food and drug laws,
laws related to advertising and decep-
tive marketing practices, accounting
standards, taxation requirements, com-
petition laws and environmental laws,
including laws relating to the regula-
tion of water rights and treatment.
Changes in laws, regulations or govern-
mental policy and the related
interpretations may alter the environ-
ment in which we do business and,
therefore, may impact our results or
increase our costs or liabilities.
In particular, governmental bodies in
jurisdictions where we operate may
impose new labeling, product or pro-
duction requirements, or other
restrictions. For example, Proposition 65
in California requires that a warning be
given for any product that exposes con-
sumers to a substance listed by the state
as having been found to cause cancer or
birth defects. If we were required to
label any of our products or place warn-
ings in locations where our products are
sold in California under Proposition 65,
sales of those products could suffer not
only in California but elsewhere as a
result of the adverse publicity.
In many jurisdictions, compliance
with competition laws is of special
importance to us due to our competi-
tive position in those jurisdictions.
Regulatory authorities under whose
laws we operate may also have enforce-
ment powers that can subject us to
actions such as product recall, seizure of
products or other sanctions, which
could have an adverse effect on our
sales or damage our reputation.
If we are unable to hire or retain
key employees or outsource certain
functions effectively, it could have a
negative impact on our business.
Our continued growth requires us to
develop our leadership bench and to
implement programs, such as our long-
term incentive program, designed to
retain talent. However, there is no
assurance that we will continue to be
able to hire or retain key employees.
We compete to hire new employees,
and then must train them and develop
their skills and competencies. Our oper-
ating results could be adversely affected
by increased costs due to increased
competition for employees, higher
employee turnover or increased
employee benefit costs. Any unplanned
turnover could deplete our institutional
knowledge base and erode our compet-
itive advantage.
In addition, we have outsourced cer-
tain information technology support
services and administrative functions,
such as payroll processing and benefit
plan administration, to third-party ser-
vice providers and may outsource other
functions in the future to achieve cost
savings and efficiencies. If the service
providers that we outsource these func-
tions to do not perform
effectively we may not be able
to achieve the expected cost
savings and may have to incur
additional costs to correct
errors made by such service
providers. Depending on the
function involved, such errors
may also lead to business dis-
ruption, processing inefficiencies or the
loss of or damage to intellectual prop-
erty through security breach, or harm
employee morale.
Our operating results may be
adversely affected by increased
costs, disruption of supply or
shortages of raw materials and
other supplies.
We and our business partners use vari-
ous raw materials and other supplies in
our business, including aspartame,
cocoa, corn, corn sweeteners,
flavorings, flour, grapefruits and other
fruits, juice and juice concentrates, oats,
oranges, potatoes, rice, seasonings,
sucralose, sugar, vegetable and essential
oils, and wheat. Our key packaging
materials include aluminum used for
cans, PET resin used for plastic bottles,
film packaging used for snack foods,
and cardboard. Fuel and natural gas are
also important commodities due to
their use in our plants and in the trucks
delivering our products. Some of these
raw materials and supplies are available
from a limited number of suppliers. We
are exposed to the market risks arising
33
Our operations outside of the U.S.
accounted for 41% and 36% of our net
revenue and operating profit,
respectively, for the year ended
December 30, 2006.
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