Pepsi 2009 Annual Report Download - page 53

41PepsiCo, Inc. 2009 Annual Report
marketing and promotional activity, and the ability to identify
and satisfy consumer preferences. If we are unable to compete
effectively, we may be unable to gain or maintain share of sales
or gross margins in the global market or in various local markets.
This may have a material adverse impact on our revenues and
profit margins.
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 various raw materials and
other supplies in our business, including apple and pineapple
juice and other juice concentrates, aspartame, corn, corn sweeten-
ers, flavorings, flour, grapefruits and other fruits, oats, oranges,
potatoes, rice, seasonings, sucralose, sugar, vegetable and essential
oils, and wheat. Our key packaging materials include plastic resins
including polyethylene terephthalate (PET) and polypropylene
resin used for plastic beverage bottles, film packaging used for
snack foods, aluminum used for cans, glass bottles 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
from adverse changes in commodity prices, affecting the cost of
our raw materials and energy. The raw materials and energy which
we use for the production of our products are largely commodities
that are subject to price volatility and fluctuations in availability
caused by changes in global supply and demand, weather
conditions, agricultural uncertainty or governmental controls. We
purchase these materials and energy mainly in the open market.
If commodity price changes result in unexpected increases in raw
materials and energy costs we may not be able to increase our
prices to offset these increased costs without suffering reduced
volume, revenue and operating income. In addition, we use
derivatives to hedge price risk associated with forecasted purchases
of raw materials. Certain of these derivatives that do not qualify for
hedge accounting treatment can result in increased volatility in our
net earnings in any given period due to changes in the spot prices
of the underlying commodities. See also the discussion under
“The global economic downturn has resulted in unfavorable
economic conditions and increased volatility in foreign exchange
rates and may have an adverse impact on our business results or
financial condition.,” “Market Risks” and Note 1 to our consolidated
financial statements.
Disruption of our supply chain could have an adverse
impact on our business, financial condition and results
of operations.
Our ability and that of our suppliers, business partners, including
bottlers, contract manufacturers, independent distributors and
retailers, to make, move and sell products is critical to our success.
Damage or disruption to our or their manufacturing or distribution
capabilities due to adverse weather conditions, natural disaster, fire,
terrorism, the outbreak or escalation of armed hostilities, pandemic,
strikes and other labor disputes or other reasons beyond our or
their control, could impair our ability to manufacture or sell our
products. Failure to take adequate steps to mitigate the likelihood
or potential impact of such events, or to effectively manage such
events if they occur, could adversely affect our business, financial
condition and results of operations, as well as require additional
resources to restore our supply chain.
Climate change, or legal, regulatory or market measures
to address climate change, may negatively affect our
business and operations.
There is growing concern that carbon dioxide and other green-
house gases in the atmosphere may have an adverse impact on
global temperatures, weather patterns and the frequency and
severity of extreme weather and natural disasters. In the event that
such climate change has a negative effect on agricultural produc-
tivity, we may be subject to decreased availability or less favorable
pricing for certain commodities that are necessary for our products,
such as sugar cane, corn, wheat, rice, oats, potatoes and various
fruits. We may also be subjected to decreased availability or less
favorable pricing for water as a result of such change, which could
impact our manufacturing and distribution operations. In addition,
natural disasters and extreme weather conditions may disrupt the
productivity of our facilities or the operation of our supply chain.
The increasing concern over climate change also may result in more
regional, federal and/or global legal and regulatory requirements to
reduce or mitigate the effects of greenhouse gases. In the event
that such regulation is enacted and is more aggressive than the
sustainability measures that currently we are undertaking to monitor
our emissions and improve our energy efficiency, we and our
bottling partners may experience significant increases in our costs
of operation and delivery. In particular, increasing regulation of fuel
emissions could substantially increase the distribution and supply
chain costs associated with our products. As a result, climate change
could negatively affect our business and operations. See also
“Disruption of our supply chain could have an adverse impact on
our business, financial condition and results of operations.”
88045_pepsico-09ar_33-59_R3.indd 41 3/6/10 8:54 PM