Pepsi Looks Inward for International Growth

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Pepsi (NYSE: PEP), otherwise known as the Coca-Cola (NYSE: KO) runner-up, released its Q2 results this past July with a few highlights. The beverage and snack manufacturer posted a $1.12 EPS for the quarter, $0.03 over Thomson-Reuters’s estimates. With 5% organic growth, the food and beverage giant continues to deliver on its promise to shave productivity costs, and also shows promising developments outside the U.S.

These strong indicators notwithstanding, Pepsi faces an uphill battle with major reinvestment costs, negative foreign currency evaluation, and struggling market share. Coca-Cola continues to hold both first and second rank in market share of sugary beverages, with Coke (17%) and Diet Coke (9.9%). Dr. Pepper Snapple Group (NYSE: DPS) follows behind Pepsi (9.5%) and Mountain Dew (6.8%) with its Dr. Pepper soft drink, which accounts for 6.3% of market share. 

Pepsi is doing a reboot of its brands in Mexico and China, in the hope of better suiting its products to different tastes. This investment was reflected in its earnings report with a net revenue decline of 8% in emerging and developing markets. The food and beverage maker did show promise in Eastern European markets with a 9% organic revenue increase in emerging and developing markets.

Many analysts remain neutral on their prognosis of Pepsi. Media spend budgets increased by 40% in the U.S., and the news that it’s reshuffling the deck in China and Mexico demonstrates an obvious reinvestment period. Negative foreign currency translation also continues to hurt bottom lines which, on its own, caused a 2% drop in net revenue. The company’s leadership indicates that they are still on course for an overall 5% decline in net revenue for 2012.  The Q3 earnings report, which is scheduled for October 11th, is expected to show a figure in line with that estimate.

But it’s not all doom and gloom for Pepsi. The company has a strong portfolio, with over 22 major brands, and the 5% increase in overall media spending demonstrates a commitment to keeping its products fresh and familiar. The new marketing expenditures are largely the result of a deal with broadcast company CBS (NYSE: CBS) for the  2013 Superbowl; Pepsi has taken a full minute of ad time and is a sponsor of the halftime show.  

Superbowl advertising is a high-price item, but is also renowned for its efficacy – with analysts noting that about 50% of viewers tune in to see advertisements, rather than the actual sporting event. CBS notes its already on pace to sell out the event with 90% of inventory already sold as of Sept. 6 (a 10% increase year over year).

Aside from renewed interest in keeping its brands profitable, Pepsi’s restructuring program is also a silver lining amidst declining revenue. The company expects to save $4 billion in productivity costs over the next four years.  Many of the initiatives within that program are aimed at keeping growth consistent.

While Pepsi confirmed that sales slipped in Q2 by 2% year over year, each of its holdings did produce organic growth. PepisCo Americas Foods jumped 4% in net revenue, with increased productivity offsetting high advertising and marketing costs. PepsiCo Americas Beverage (PAB) saw a drop in 5% year over year with the international rebrand sending net revenue spiraling. 

Pepsi’s European offerings saw net revenue fall 5% year over year, mainly the result of negative foreign exchange translation. The company also saw a dive in reported net revenue for its Asia, Middle East & Africa (AMEA) division, with a decline of 8%. This was in large part due to refranchising its bottling operations in China as Pepsi entered into a partnership with Tingyi Holding Corporation. The new beverage manufacturer is taking the lead on Pepsi’s carbonated soft drinks and Gatorade brands. There are also plans for Tingyi to co-brand its own juices using the Tropicana name. With this newly formed alliance, Pepsi will be able to bring new products to market quicker, reduce costs, and improve overall efficiency.

With a prospective cost-reducing restructuring and major investments in international growth, Pepsi is poised for long-term success. Investors should also be aware that low consumer demand, strong competition, and negative foreign currency translation makes PEP a risk in the short term.

 


muhammadbazil has no positions in the stocks mentioned above. The Motley Fool owns shares of PepsiCo. Motley Fool newsletter services recommend PepsiCo and The Coca-Cola Company. 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.

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