Pepsi 2007 Annual Report Download - page 39

and results of operations, as well as
require additional resources to restore our
supply chain.
Trade consolidation, the loss
of any key customer, or failure
to maintain good relationships
with our bottling partners could
adversely affect our fi nancial
performance.
We must maintain mutually benefi cial
relationships with our key customers,
including our retailers and bottling
partners, to effectively compete. There is
a greater concentration of our customer
base around the world generally due
to the continued consolidation of retail
trade. As retail ownership becomes more
concentrated, retailers demand lower pric-
ing and increased promotional programs.
Further, as larger retailers increase utiliza-
tion of their own distribution networks
and private label brands, the competitive
advantages we derive from our go-to-
market systems and brand equity may be
eroded. Failure to appropriately respond
to these trends or to offer effective sales
incentives and marketing programs to our
customers could reduce our ability
to secure adequate shelf space at our
retailers and adversely affect our
fi nancial performance.
Retail consolidation continues to
increase the importance of major custom-
ers. In 2007, sales to Wal-Mart (including
Sam’s) represented approximately 12% of
our total net revenue. Our top fi ve retail
customers represented approximately
31% of our 2007 North American net
revenue, with Wal-Mart (including Sam’s)
representing approximately 18%. These
percentages include concentrate sales to
our bottlers which are used in fi nished
goods sold by them to these retailers. Loss
of any of our key customers, including
Wal-Mart, could have an adverse effect
on our business, fi nancial condition and
results of operations.
Furthermore, if we are unable to
provide an appropriate mix of incentives
to our bottlers through a combination of
advertising and marketing support, they
may take actions that, while maximizing
their own short-term profi t, may be detri-
mental to us or our brands. Such actions
could have an adverse effect on our prof-
itability. In addition, any deterioration of
our relationships with our bottlers could
adversely affect our business or fi nancial
performance. See “Our Customers,”
“Our Related Party Bottlers” and Note 8
for more information on our customers,
including our anchor bottlers.
Changes in the legal and regula-
tory environment could limit
our business activities, increase
our operating costs, reduce
demand for our products or
result in litigation.
The conduct of our businesses, and the
production, distribution, sale, advertising,
labeling, safety, transportation and use
of many of our products, are subject to
various laws and regulations administered
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 deceptive marketing
practices, accounting standards, taxation
requirements, competition laws and
environmental laws, including laws relat-
ing to the regulation of water rights and
treatment. Changes in laws, regulations
or governmental policy and the related
interpretations may alter the environment
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 produc-
tion requirements, or other restrictions.
For example, we are one of several
companies that have been sued by the
State of California under Proposition 65 to
force warnings that certain potato-based
products contain acrylamide. Acrylamide
is a chemical compound naturally formed
in a wide variety of foods when they
are cooked (whether commercially or
at home), including french fries, potato
chips, cereal, bread and coffee. It is
believed that acrylamide may cause cancer
in laboratory animals when consumed in
signifi cant amounts. Studies are underway
by various regulatory authorities and oth-
ers to assess the effect on humans due to
acrylamide in the diet. If we were required
to label any of our products or place
warnings in locations where our products
are sold in California under Proposition
65, sales of those products could suffer
not only in California but elsewhere. In
addition, if consumer concerns about
acrylamide increase as a result of these
studies, other new scientifi c evidence,
or for any other reason, whether or not
valid, demand for our products could
decline and we could be subject to addi-
tional lawsuits or new regulations that
could affect sales of our products, any of
which could have an adverse effect on
our business, fi nancial condition or results
of operations.
In many jurisdictions, compliance with
competition laws is of special importance
to us due to our competitive position in
those jurisdictions. Regulatory authorities
under whose laws we operate may also
have enforcement powers that can sub-
ject 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, 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 operating results
could be adversely affected by increased
costs due to increased competition for
employees, higher employee turnover or
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