The Secret Behind PepsiCo’s Better Performance

Rajesh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

PepsiCo (NYSE: PEP) posted better than expected fourth quarter earnings where profit rose 17% compared to the prior year figure. This lit up investor hopes particularly after lackluster performance of the company for quite some time. The company enjoyed sales gain in each of its business segments. Higher sales volume and increased prices helped the company record better numbers for the period as well as forecast a positive outlook for 2013.

A look beyond numbers
The world’s largest snack food maker recorded a net income of $1.66 billion, up 17% from $1.42 billion in the prior year quarter. This was majorly led by higher prices and marketing initiatives undertaken to boost sales and promote new products. The company heavily invested in promoting the Lay’s brand as well as stressed on reviving its US soft drink market in order to recapture its lost market from Coca-Cola. However, the top-line declined 1% to $19.95 billion for the quarter hurt by structural changes related to China and Mexico and a stronger dollar.

Organic sales in the company’s America beverage business improved 2.5% against arch rival Coca-Cola’s (NYSE: KO) 2% rise in drink volume in North America though the soda business fell 2%. Even Dr Pepper Snapple (NYSE: DPS), like PepsiCo and Coca-Cola, has been suffering from declined soda sales in the past 8 years. The rising prices also failed to compensate for the fall in sales volume.

However, the non-carbonated beverage sales have been pretty decent for Coca-Cola as it helped to compensate for the sluggish European market where demand remained dull. The non-carbonated segment is considered as a strong part of PepsiCo’s product portfolio as well, and is considered to have great growth prospects. All in all, the company experienced decent growth of 5% in organic sales driven by a fantastic 9% growth in the emerging markets. The American food business also saw 8% organic growth with Latin America stealing the show with a 13% sales gain. In contrast, Coca Cola saw a rise of just 3% in its global sales volume.

What’s new?
The beverage and snack giant made several new offerings to widen its existing offering and made sure to provide new products that would stay for a longer period in the market. For instance, the company freshly introduced Quaker Real Medleys which is oatmeal with real fruits and nuts. This was branded as the breakfast product for 2012. Another hit product was Doritos Locos Tacos, which sold over 325 million shelves, happened to become one of the best launches for Yum! Brands’ Taco Bell in 50 years.

In addition, Pepsi Next, which contains 60% less sugar enjoyed a retail sale of $100 million. This drink has just about half the calories than the regular Pepsi contains. Dr Pepper Snapple has been working on a carbonated soft drink that has ten calories a serving and the company is very confident about it. It proposes to invest around $30 million to promote and expand this new line of drink that it called the Ten platform. However, the higher packaging and input costs could stress the company’s bottom-line.

Other than Pepsi Next, the company has been working on its Good-for-Your Portfolio which forms part of its nutritious offering and includes successful brands including Tropicana, Gatorade, Quaker, Sabra and Stacy's. Such a diversified product portfolio helped the company to post better figures. Additionally, the company also undertook aggressive steps in terms of positioning its business and enhancing its brand value by heavily investing to maximize shareholders value. Let’s take a look at the strategy undertaken by the company.

The strategy
The company has worked very hard in advertising and marketing over the past year. It increased its marketing budget to range between $500 million and $600 million. The company’s snack business which has been a great success experienced average results. In order to effectively compete with fellow peer Coca Cola it is important for the company to fix this segment soon. The company is also working on marketing techniques and investing heavily to rebuild its brand in the soda segment.

In addition, Chief Executive Indra Nooyi appears to be extremely excited with some “promising projects” about the upcoming product launches that the company is working on. Presently the products in the pipeline are being reviewed by the FDA. Once these products are commercialized, it would give stiff competition to the Diet Coke and Coke Zero offered by Coca Cola.

In addition, Pepsi’s prospect in Asia looks much stronger than Coca Cola’s, particularly after the former’s joint venture with Chinese player Tingyi. The alliance has made Pepsi grow into the largest beverage company in the mainland, despite Coca Cola’s huge investment in this emerging market. While, both Coca Cola and Pepsi have huge international presence, Dr Pepper Snapple’s global presence is much lesser. The addition of Dr Pepper Snapple to Zaxby’s offering would help the company expand over 13 states with a total of 565 locations in the domestic market.

Looking forward
The company has been undertaking a number of steps to push its revenue up. It still believes that the soda segment has attractive prospects. PepsiCo has a number of upcoming products with reduced calories which could give both Coca-Cola and Dr Pepper Snapple drinks tough competition. The company is making sure that calories are brought down without compromising with taste. It is therefore experimenting with a natural sweetener which would keep the taste intact. With a robust product pipeline, better managed supply chain and improved processing techniques the company is confident to experience a stronger year ahead.

liveinvestor has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of PepsiCo. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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