Vertical integration refers to the degree to which two or more consecutive stages of the supply chain are performed within the same company. If a firm expands into activities downstream, it is integrating forward, while upstream expansion is considered as a backward integration.
PepsiCo is a company that has been using vertical integration quite extensively in its business strategy. Originally, the company has been engaged in producing and selling solely their "Pepsi-Cola" drink, however, later PepsiCo expanded its business into other snacks and beverages. One of the most significant attempts to integrate forward for PepsiCo was the acquisition of KFC, Pizza Hut and Taco Bell fast food restaurant chains. This integration of the downstream distribution channels allowed the company to control and enhance the delivery of their core products, such as Pepsi soda drink, directly to their customers. Thus, PepsiCo managed to create a monopoly in the own restaurant chains, to improve brand awareness and to expand its customer base. Even though the three fast food brands were later spun off into Yum! Brands.Inc., the lifetime contract with PepsiCo guarantees Pepsi monopoly in these restaurants in the future.
PepsiCo has also initiated its backward integration by acquiring the largest American bottlers Pepsi Bottling Group and PepsiAmericas in order to create an own subsidiary Pepsi Beverages Company. This strategic move allowed PepsiCo to boost its revenues and share prices as well as to gain control over the physical distribution of the products, in particular Mountain Dew and Gatorade. It also helped to eliminate intermediate warehousing by delivering products directly from the bottlers to the points of sale, thus decreasing lead time, improving process efficiency, reducing inventory levels and enhancing customer service. Moreover, synergies and economies of scope across the supply chain can reduce costs and increase profits. The two strategies of upstream and downstream expansion for PepsiCo have clearly demonstrated the benefits of vertical integration for the company.
References
Stanford , D. D. (2010, July 20). PepsiCo profit declines on expenses to integrate bottlers.
Bloomberg L. P., Retrieved from http://www.bloomberg.com/news/2010-07-
20/pepsico-s-second-quarter-profit-declines-on-expenses-to-integrate-bottlers.html
