Chairman's Letter

To Our Shareholders, Customers and Employees:

The Pepsi Bottling Group has, once again, demonstrated the power of our operating capabilities and unique assets in 2008. While facing unprecedented macroeconomic challenges throughout the world, PBG showed flexibility and discipline to advance our business priorities and become a stronger, more focused organization.

The Numbers — 2008

We achieved these results by adapting quickly to the economic environment and by focusing on several business drivers to grow our topline, improve cost and productivity, and strengthen our people and culture.

Topline Growth

Commodity headwinds, volatility in the financial markets and consumer confidence questions led to a decline in discretionary spending that impacted the Liquid Refreshment Beverage (LRB) category and PBG. Still, we were able to offset these headwinds in the marketplace, realizing worldwide net revenue per case growth of six percent and improving gross profit per case by four percent. Our strategy involved implementing effective revenue and margin management practices and developing new pricing and packaging strategies to meet changing consumer needs. In Russia, we achieved topline growth of 21 percent in 2008, led by our success in PBG’s non-carb business and specifically Lipton tea. We also leveraged PepsiCo’s powerful marketing initiatives and product innovations, driving local market participation in the Dewmocracy campaign in the United States and advancing our strong hydration brands with G2 by Gatorade and SoBe Lifewater.

Cost and Productivity Improvements

PBG exercised a high degree of capital discipline while also strengthening our infrastructure by focusing on operational effectiveness, and sales and service capabilities. These actions led to cost productivity gains of $170 million in 2008. Towards the end of the year, PBG announced our Structured to Succeed global restructuring program that will ensure the operating effectiveness of our business and deliver multiyear cost savings.

Always focused on how we can improve our customers’ businesses, PBG’s frontline employees executed with precision at the point of sale. Through hard work and heavy lifting, we continued to demonstrate the advantages of PBG’s selling and service capabilities.

People and Culture Investments

At the center of PBG’s success are our people and the culture we’ve built that inspires and prepares them to reach their potential — in the company and in the community. PBG’s approach to building a sustainable company revolves around people, the environment and communities.

Our efforts to provide a compelling workplace were validated again by our inclusion on DiversityInc, Black Enterprise and Hispanic Business magazines’ best places to work lists. In the environmental area, we reduced our use of natural resources, conserved 300 million gallons of water per year and saved 16,000 tons of plastic through improved manufacturing processes.

Understanding that being a great employer means also being a good corporate citizen, PBG contributed more than $23 million in financial and product donations to nonprofit organizations and encouraged and rewarded employees who volunteered their time. Community service has always been a fundamental value for our company; we are as eager to help our neighbors as we are to serve our customers and each other. That’s the power of PBG.

Focus on the Future

As the title of this year’s annual report affirms, PBG is Focused on the Future, armed with the right strategy to navigate through tough times and emerge stronger and better positioned for growth. Guiding us are four key objectives:

  1. Reposition and Strengthen our Brand Portfolio. We continue to pursue our goal of selling the number one or two brands in growing and profitable LRB segments. This will require filling gaps in our portfolio. To that end, we have added Crush in the U.S., a new entry for PBG in the fruit-flavored carbonated drink category, beginning in 2009. We also will enter new and emerging categories where we don’t yet have a presence, as we did with Muscle Milk, a protein-enhanced functional drink. In addition, we will build scale in existing growth categories. A great example is our recent acquisition with PepsiCo of Lebedyansky, the largest juice manufacturer in Russia and the sixth largest globally.
  2. Transform Performance through Operational Excellence. As we look forward, a second priority is in the area of Operational Excellence with a focus on reconceptualizing our approach to revenue and margin management and making step-function changes to our cost structure. Our new price and packaging initiatives are designed to offer better consumer value and generate incremental volume while also improving margins. We also will look to leverage all of our go-to-market activities to maximize supply chain productivity and performance. One example of this is the expansion of our self-manufacturing capabilities, including the addition of state-of-the-art bottle blowing production lines that drive productivity and reduce energy, water and plastic consumption.
  3. Capitalize on Geographic Growth. PBG has a strong geographic portfolio led by the U.S. and Canada, Russia, Turkey and Mexico; and we will continue to build our presence in these growing markets. In 2008, PBG completed the acquisition of Lane Affiliated Companies, the eighth largest Pepsi bottler in the U.S. This expands our footprint across contiguous territories and enhances our ability to serve our customers. Outside of the U.S., we also see significant opportunities. From 2005 to 2008, 62 percent* of our revenue growth came from our international markets, along with 74 percent* of our operating profit growth. To leverage this trend, we teamed up with PepsiCo to acquire Sobol-Aqua, a move that accelerates PBG’s expansion into Siberia and Eastern Russia and helps secure our position as the leading beverage company in the region.
  4. Leverage the Power of our People and Culture. No other company can match the Unquenchable Spirit of PBG. To attract and retain the best, we will continue developing programs that encourage Health & Wellness, promote Diversity & Inclusion and provide Leadership Development opportunities. In addition, we are deeply committed to improving our communities and will, as always, support the local causes that are important to our employees. In essence, PBG invests in our people, their families and communities to help them prosper. This philosophy is at the core of who we are and how we win.

This is an exciting time for PBG. While we face economic uncertainties, PBG is determined — and prepared — to satisfy the thirst of on-the-go consumers with refreshing, hydrating and invigorating beverages.

PBG will get stronger in 2009 and beyond because we have the knowledge, resources and passion to persevere and thrive, including:

As we Focus on the Future, these are the assets we will use to deliver strong results year in and year out, in good — and challenging — times. It is a winning formula that has long defined our success and bodes very well for every PBG stakeholder.


Eric J. Floss
Chairman of the Board and Chief Executive Officer

* Comparable financial figures. See reconciliation of non-GAAP financial measures on pages 83-84.