How PepsiCo Is Set for a Cola Showdown

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The 47-year old phenomenon called PepsiCo(NYSE: PEP) under the stewardship of its Chief Executive Officer of six years has continued to reward its shareholders with consistent financial and operational performance translating into persistent dividends.

The year 2012 saw the beverage veteran generate a staggering $65 billion in revenue representing an impressive 5% organic growth. It recorded a 15% core operating margin along with a 15% core net return on invested capital. Over the past 10 years, the company has delivered a steady growth in EPS and dividends per share at a CAGR of 9% and 14%, respectively.

The consistent performer

The continued performance of the company evidences its commitment to outperform the challenges posed by the fast changing dynamics of the markets. The company has been quick to frame its strategy to address the demands of the changing markets.

The recent surge in demand in the developing and emerging markets has seen the company heavily invest in growth opportunities in those markets. The rising awareness amongst the general public about the hazardous effects of soft drinks and other similarly placed products has prompted the company into diversifying its product base in order to cater to the changing tastes and preferences of its targeted customer base.

As of 2012, the company’s major revenue streams comprise of Snacks and Beverages. While Snacks account for about 51% of the company’s total revenue, 49% of the revenues are contributed by the beverage business. It is also noteworthy that the company’s two product groups mentioned above are complimentary of each other which means that the sale of an item from either product group drives the sale of an item from the other product group as consumers prefer to buy snacks and beverages together.

The company is well equipped to catapult itself ahead of its competitors with a portfolio of 22 brands contributing over $1 billion each to its revenues and 40 others with a contribution to revenue of up to $1 billion each.

Industry: Threats and advantages

Unfazed by the worldwide economic downturn, the global market for beverages is contemplated to grow at a compounded annual growth rate of 4.6% between 2012 and 2017 and is expected to reach a remarkable $1.3 trillion by 2017. The shift in consumers’ preferences causing a rise in demand for variety has resulted in the industry to come up with a series of innovative products to make the most of the opportunity.

The beverage industry is highly customer centric making it an extremely competitive arena and demands all the players to be on their toes at all times in order to deliver quality products.

At the same time the soft-drinks market provides tremendous opportunity for growth particularly in the developing economies. The prime drivers of demand in these markets are characterized by rising population, higher disposable income and greater urbanization.

Furthermore, it is worth noting that with widening markets come widening scales of operation which certainly project a favorable position for all the players in the soft drinks field.

In view of the above, PepsiCo’s strategy focusing on the emerging markets give it a competitive advantage on the global scene.

Competitive landscape

Pepsico finds its major competitor in The Coca-Cola company (NYSE : KO).

The Coca-Cola company has been in existence since 1919 (year of incorporation). The company has, since, developed a wide portfolio of products with operations spanning across 200 countries. Over the years the company has managed to develop the world’s largest distribution system comprising of bottling partners, distributors, wholesalers as well as company controlled bottling operations.

The past year saw the company buy a 50% stake in the beverage business of the Middle Eastern leader, Aujan Industries. The deal would enable Coca-Cola to capture the Middle Eastern market thereby allowing it to secure a decent share of the high-growth oriented Middle Eastern market.

The above move evidences the company’s strategy of setting its foot in developing high-growth markets in an attempt to solidify its competitive position.

Dr Pepper Snapple Group (NYSE: DPS) is another competitor on the soft-drinks scene.

Founded in 2008, this company is much younger compared to its giant competitors. Nevertheless, in its short span of existence, the company has managed to develop a portfolio of 50 assorted brands which includes 6 of the 10 leading non-cola drinks. The company is known to provide adequate returns to its shareholders which 0are evident from its declaration of 5th consecutive increase in dividends recording a 12% increase in its quarterly dividend in Q4 2012 compared to Q3 2012.

Moving forward as the company establishes its brand and taste in the hearts and minds of people, DPS is sure to gain in the long run and become a major player in the beverages market not just in North America but as a formidable competitor in the world market.

Foolish potential

With rapid growth of emerging economies and massive change in the lifestyles of people driven by higher disposable incomes, growth in the beverages market is inevitable.

PepsiCo has positioned itself well to reap the benefits of such change as is evident from its forward-looking strategy and consistent financial and operational performance.

Considering the above factors I believe in the medium to long term, Pepsi Co is a worthwhile addition to your portfolio.

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Rashmi Singh 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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