Pepsi Loses Dunkin, Eyes Emerging Markets
Bobby is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Two of the most famous arch-rivals in the stock market, PepsiCo (NYSE: PEP) and Coca-Cola (NYSE: KO) have been at war since the 1800s. Despite very little real production differentiation, high levels of brand loyalty in a number of countries worldwide have led to the companies looking at new ways to increase their market share.
One of the most effective ways in which this has been done is through developing partnerships with food outlets. There is little point in cafes and restaurants offering both PepsiCo and Coca-Cola products, so most choose to settle with supplying just one range. Up until very recently, PepsiCo enjoyed integration with US-based donut and coffee retailer Dunkin’ Donuts (NASDAQ: DNKN), which has stocked PepsiCo drinks products for years. Back in April, it was announced that Dunkin’ Donuts has signed a multi-year contract with Coca-Cola, replacing PepsiCo as a supplier.
While the reasoning behind the decision by Dunkin’ Donuts is unclear, it is likely the company has been able to offer products at a lower price. An official from PepsiCo announced there was no animosity over their customer loss, saying Dunkin’ Donuts had been a valued client over the past five years. While PepsiCo will be feeling the effects of losing such a lucrative contract, it is no doubt already on the lookout for another up-and-coming food outlet to develop a partnership with.
I don’t think we can read too much into PepsiCo’s fortunes based on this recent development, and wouldn’t expect their share price to plunge because of it. We have seen retailers switch from Coca-Cola to PepsiCo in recent times too – last year Papa John’s did exactly that. These decisions are often due to costing, which could be influenced by location, and problematic issues regarding one of the suppliers in the past.
But investors in Coca-Cola will indeed be pleased with its new contract with Dunkin’ Donuts, not least because the popular coffee and donut store has announced it will be introducing new stores across the US, with plans for many Dunkin’ Donuts and Baskin-Robbins outlets to stock a wide range of Coca-Cola products. It announced back in January that investment would be made to double the number of outlets in operates across the States, from 7,000 to 14,000 over the next 20 years. It wouldn’t be surprising if we saw the company integrate with other stores as part of its expansion.
In the UK, we saw donut retailer Krispy Kreme (KKD) team up with Tesco (TESCO) to sell its products in the high street store. Similarly, coffee shop Costa Coffee partnered with book store Waterstones recently, and now has a number of coffee shops located in the company’s retail book stores. I find it highly likely that Dunkin’ Donuts’ will strive to imitate these moves in order to boost its market share. Coca-Cola, in turn, will benefit from the company’s planned expansion – without having to pump in any investment itself.
Prospects for investors couldn’t be higher, and I think its current share, which is trading at around $74 dollars, is undervalued. Over the next decade I expect we will see the healthy growth levels that have been present in the past (providing the economy stays on its feet). The company is widely exposed to the emerging market, which is set to grow in the coming years, and generates large quantities of cash flow. It shouldn’t have a problem keeping up with positive investment opportunities.
But there is tough competition in the US snack food industry too. PepsiCo’s largest competitor here is Kraft Foods (NASDAQ: KRFT), which holds a smaller share of the market, but looks to be on its way up. The company earns more than a billion US dollars across the world on an annual basis, a figure that was helped along by the acquisition of Cadbury early in 2010. Kraft Foods currently has plans to split into two companies, one focusing on the sale of grocery products, and the other on the retailing of snack foods.
Obviously it is the latter that will be in competition with PepsiCo, which I think will be good news for its share price. Kraft currently earns around one third of its income from grocery products, but this is the growth portion of its industry. The share price of the new snack foods spinoff looks to be relatively stable, which in turn should contribute towards a stable stock for PepsiCo.
Despite strong competition in both the soft drinks and the snack food markets, I think PepsiCo is a good buy for investors at this moment in time. The company is prioritizing growth by investing in new emerging markets. It is already in the process of securing long term ties in countries such as China and Brazil. I think we can expect to see healthy growth in its share price value over the next five years.
BobbyFisher has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.