Pepsi 2010 Annual Report Download - page 52

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and direct marketplace support, such as point-of-purchase mate-
rials, 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.
Retail consolidation and the current economic environment
continue to increase the importance of major customers. In 2010,
sales to Wal-Mart (including Sam’s) represented approximately
12% of our total net revenue. Our top five retail customers rep-
resented approximately 31% of our 2010 North American net
revenue, with Wal-Mart (including Sam’s) representing approxi-
mately 18%. These percentages include concentrate sales to our
independent bottlers (including concentrate sales to PBG and
PAS prior to the February 26, 2010 acquisition date) which were
used in finished goods sold by them to these retailers.
See Note 15 for additional information about our acquisitions
of PBG and PAS in 2010.
Our Related Party Bottlers
Prior to our acquisitions of PBG and PAS on February 26, 2010,
we had noncontrolling interests in these bottlers. Because our
ownership was less than 50%, and since we did not control
these bottlers, we did not consolidate their results. Instead, we
included our share of their net income based on our percentage of
economic ownership in our income statement as bottling equity
income. On February 26, 2010, in connection with our acquisi-
tions of PBG and PAS, we began to consolidate the results of these
bottlers. Our share of the net income of Pepsi Bottling Ventures
LLC (PBV) is reflected in bottling equity income. Our share of
income or loss from other noncontrolled aliates is recorded as
a component of selling, general and administrative expenses.
See Note 8 for additional information on these related parties
and related party commitments and guarantees.
Our Distribution Network
Our products are brought to market through DSD, customer
warehouse and foodservice and vending distribution networks.
The distribution system used depends on customer needs, prod-
uct characteristics and local trade practices.
Direct-Store-Delivery
We, our independent bottlers and our distributors operate DSD
systems that deliver snacks and beverages directly to retail
stores where the products are merchandised by our employees
or our bottlers. DSD enables us to merchandise with maximum
visibility and appeal. DSD is especially well-suited to products
that are restocked often and respond to in-store promotion and
merchandising.
Customer Warehouse
Some of our products are delivered from our manufacturing
plants and warehouses to customer warehouses and retail stores.
These less costly systems generally work best for products that
are less fragile and perishable, have lower turnover, and are less
likely to be impulse purchases.
Foodservice and Vending
Our foodservice and vending sales force distributes snacks, foods
and beverages to third-party foodservice and vending distribu-
tors and operators. Our foodservice and vending sales force also
distributes certain beverages through our independent bottlers.
This distribution system supplies our products to restaurants,
businesses, schools, stadiums and similar locations.
Our Competition
Our businesses operate in highly competitive markets. We
compete against global, regional, local and private label manu-
facturers on the basis of price, quality, product variety and
distribution. In U.S. measured channels, our chief beverage
competitor, The Coca-Cola Company, has a larger share of CSD
consumption, while we have a larger share of liquid refreshment
beverages consumption. In addition, The Coca-Cola Company
has a significant CSD share advantage in many markets outside
the United States. Further, our snack brands hold significant
leadership positions in the snack industry worldwide. Our snack
brands face local, regional and private label competitors, as well
as national and global snack competitors, and compete on the
basis of price, quality, product variety and distribution. Success
in this competitive environment is dependent on eective pro-
motion of existing products, the introduction of new products
and the eectiveness of our advertising campaigns, marketing
programs and product packaging. We believe that the strength of
our brands, innovation and marketing, coupled with the quality
of our products and flexibility of our distribution network, allow
us to compete eectively.
Other Relationships
Certain members of our Board of Directors also serve on the
boards of certain vendors and customers. Those Board members
do not participate in our vendor selection and negotiations nor in
our customer negotiations. Our transactions with these vendors
and customers are in the normal course of business and are con-
sistent with terms negotiated with other vendors and customers.
In addition, certain of our employees serve on the boards of PBV
and other aliated companies and do not receive incremental
compensation for their Board services.
Our Business Risks
Demand for our products may be adversely aected by
changes in consumer preferences and tastes or if we are
unable to innovate or market our products eectively.
We are a consumer products company operating in highly com-
petitive markets and rely on continued demand for our products.
To generate revenues and profits, we must sell products that
appeal to our customers and to consumers. Any significant
changes in consumer preferences or any inability on our part
to anticipate or react to such changes could result in reduced
demand for our products and erosion of our competitive and
financial position. Our success depends on our ability to respond
to consumer trends, including concerns of consumers regarding