The Double Life of the Other Cola King
Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I recently wrote about the potential trouble facing energy drink makers, which included a look at Dow-30 member Coca-Cola (NYSE: KO) and PepsiCo (NYSE: PEP). I was reminded of Pepsi's double life as a major drink company and a dominant chip/snack company. I've always had a soft spot for Pepsi's diversification, so I thought I would take a moment to dig deeper into its business with a strengths, weaknesses, opportunities, and threats analysis (SWOT). The fact that Pepsi shares have lagged its major soda competitor for the past two and a half years or so might make now an interesting buying opportunity.
A SWOT analysis is one of the best ways to force yourself to consider both the good and the bad about a company and its prospects. Since Pepsi has been a laggard, looking at the bad is particularly important right now. To create a SWOT analysis, all you need to do is make a quick, but thoughtful, list of what you consider a company's strengths and weaknesses, which are both internal factors, and the opportunities and threats it faces, which are both external factors. In the end, you'll have a valuable, and more complete, picture of your investment candidate.
The Other Cola King
PepsiCo was created via a merger of Pepsi-Cola and Frito-Lay in 1965. Tropicana and Quaker Oats were added to the fold in 1998 and 2001, respectively. The later acquisition brought the Gatorade brand to cement Pepsi's position in the sports drink category. The company's restaurant holdings (Taco Bell, Pizza Hut, and KFC) were spun off in 1997. Today, the company owns an enviable collection of high-profile brands including namesake Pepsi-Cola, Frito-Lay, Gatorade, Quaker Oats, and Tropicana. Under these larger brands are numerous smaller brands, including Mountain Dew, Doritos, Walkers, Rica-A-Roni, Near East, Cap'n Crunch, Dole drinks, Rold Gold, Cracker Jacks, and many, many more. The company is truly a diversified quick food and drink giant. Here are my thoughts on its strengths, weaknesses, opportunities, and threats.
- Massive collection of high profile brands.
- Diversification across multiple products: Drinks, salty snacks, and breakfast foods.
- Powerful distribution system that reaches multiple sales channels (Grocery, restaurant, convenience store, etc.).
- Purchasing power due to large size.
- Global footprint and reach.
- Diversification can lead to a lack of management focus.
- Exposure to often volatile commodity prices.
- Products are largely discretionary, so economic weakness can take a toll on sales.
- Size makes it easy for brands to get “lost” (Seen a Funyons ad lately?).
- Global reach requires management to tailor products and delivery to each country in which in operates.
- Main cola product often considered inferior to the leading industry participant (Coke).
- Continued development of emerging markets.
- Acquisitions in new and existing markets.
- Drink industry is stagnant in most developed markets.
- Customer tastes in new markets are often vastly different from those in established markets.
- Some of the markets with the most potential are also under heavy government regulation.
- Competes with major players in all of its business lines.
Like most food and consumer goods related companies, any growth potential is going to come from foreign developing economies. This is not news to any of the company's competitors, so competition is fierce in virtually every market the company is in or is looking to be in. For example, Coca-Cola has a material presence in China, one of the markets in which Pepsi is looking to expand, too.
While having multiple product lines helps Pepsi, in that it provides the opportunity to grow in multiple ways rather than just one, it also means the company's competitor list includes more industry giants than just Coca-Cola. For example, Pepsi also goes head to head with Kellogg (NYSE: K) in the breakfast food and chips aisles. While Pepsi clearly has the dominant position in chips, Kellogg is much better situated in breakfast foods, possessing multiple leading brands to Pepsi's one (Quaker). Moreover, this type of competition is world wide. There is no market in which Pepsi doesn't face stiff competition, even if it is the leader in a particular product category.
So while the company looks set to benefit from the emerging middle class is less developed markets, it will still have to play the market share game. Market share will be a key issue to watch, particularly since it can be covered over by sales growth that is lifting all boats.
Have to Talk About Coca-Cola
It would be impossible to discuss PepsiCo without mentioning Coca-Cola. Coke is the undisputed cola king, particularly after it took both the number one and two spots in the domestic soda space. This was a major black eye for Pepsi and helped to cement the image that Pepsi is the second choice for consumers. Still, being number two in the soda industry can be very profitable. Moreover, Pepsi has leading positions in other areas in which the companies go head to head, such as orange juice and sports drinks. Investors, however, probably miss these strengths. Moreover, the company's Frito-Lay salty snack brand is the world's dominant chip company, a fact that often gets glossed over because of the Pepsi brand.
The Resent Price Weakness
So PepsiCo has great brands and growth opportunities, but it faces stiff competition that will require a strong management team to navigate. This is where the company's problems lie. Indeed, despite largely performing in line with management's projections, strategic initiatives have resulted in bottom line weakness that hasn't been present on the books of some competitors. Thus, investors appear to be displeased.
With the financial strength to work out its current troubles, now is probably a decent time to consider purchasing PepsiCo stock, particularly in light of its around 3% dividend yield and long history of annual dividend increases. For those looking for more yield, it would be worth keeping PepsiCo on your watch lists for a market dip that brought its yield closer to 4%, at which point it would likely represent a tremendous value.
ReubenGBrewer has no positions in the stocks mentioned above. The Motley Fool owns shares of PepsiCo. Motley Fool newsletter services recommend The Coca-Cola Company and 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!