Can This Soda Giant Take On Yogurt's Big Wigs?
Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Yogurt is an increasingly popular food in The United States. The two big names are General Mills' (NYSE: GIS) Yoplait and Danone (NASDAQOTH: DANOY.PK), which together control about 50% of the U.S. market. Can soda and snack giant PepsiCo (NYSE: PEP) break into a market with such large and entrenched players?
Big and Getting Bigger
Bloomberg quotes Euromonitor International in pegging the domestic yogurt market at around $7 billion dollars. An average growth rate of about 8.5% over the past five years helps explain why PepsiCo is interested in the space. Although Euromonitor expects growth to slow to 5.9% annually over the next five years, that's still well above the opportunity available from other product categories.
PepsiCo's push into yogurt is keeping with its broader focus on introducing more “healthy” fare. The soda and snack giant has been focusing around such brands as Tropicana and Quaker Oats as consumers have started to worry more about their health. Bloomberg reports that healthy fare makes up 20% of the top line, with a company goal of reaching 30% by the end of the decade.
Not Just a U.S. Push
Pepsi's yogurt ambition is global. At the annual meeting, the company noted that “We are also unlocking growth in new categories like dairy with our Wimm-Bill-Dann acquisition in Russia, our joint venture with Almarai in the Middle East and our Muller Quaker Dairy joint venture in the U.S.”
That said, it is the Muller yogurt brand that is about to see the biggest growth as PepsiCo puts its marketing muscle behind the brand in a nationwide roll out. Partnering with an experienced yogurt company is an important differentiation in this effort, since trying to build a product from scratch would be hard in a category that is relatively new to the company. It follows the successful model that Pepsi used with Sabra and dips.
PepsiCo has a long history of slow, but steady growth. However, that's increasingly difficult to achieve with revenues of over $65 billion in 2012. While it expects soda and chips to grow around 5% over the long term, tapping into a product category growing at 5.9% is clearly enticing. And, since the category is new for Pepsi, growth in the initial years will be much greater than that if it succeeds.
A Tough Fight?
Danone and General Mills, however, both have large yogurt businesses against which Pepsi will have to compete. That said, Pepsi has a lot of clout in the grocery isle, with revenues more than twice as large as Danone and around four times the size of General Mills. So, shelf space shouldn't be a big problem.
Pricing is a whole different ball game. Yogurt is often sold using generous sales and large discounts. That puts PepsiCo into a cutthroat market. Fierce competition, however, isn't new to Pepsi, either, since it has competed head to head with Coca-Cola for years. There's good reason to believe the company can make a go of it if it adequately supports the effort.
Under the Covers
Seeing Pepsi move aggressively into a new category is a testament to the company's long-term focus on growth. Sales have grown fairly steadily over the last decade, dipping only twice. The first drop was a less than 1% decline in 2009 and the second was a 1.5% shortfall last year. Earnings have roughly doubled over the decade, though the bottom line fell almost 3% in 2012.
The company describes 2012 as a transition year. Yogurt is part of the shift. The shares yield around 2.8%, backed by more than a decade of dividend increases, and are trading near all-time highs. That and a near 21 price to earnings ratio makes them most appropriate for growth and income investors.
For those interested in yogurt, but not willing to take on the risk of a newcomer, General Mills and Danone are both better options. General Mills is a large packaged food company in its own right, with products ranging from Yoplait to Pillsbury and Cheerios. The company's top line grew nicely last year, but had been stagnant for three years before that. Widening margins, however, kept earnings advancing in those years. Margin compression, meanwhile, led to a bottom line decline last year.
Commodity inflation and pricing weakness were the main reasons for the weak earnings. That said, the company is well positioned in the packaged food industry and offer investors an around 3.1% dividend yield. Its PE is around 18. Like Pepsi, growth and income types should like this stock.
Danone, meanwhile, saw its top line head higher last year but margin compression led to flat year-over-year earnings. Yogurt, meanwhile, is one of just four major product categories for the company, so this is the purest play of the trio in the yogurt space.
Danone, however, is a leader in the healthful food push, with its Activia brand and a growing medical nutrition business. The shares yield around 2% and the head start in healthy and “medicinal” yogurt is a key differentiation that should help protect market share and support long-term growth. Danone, with a PE of around 20 and a lower yield, would be a good option for more growth minded investors.
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Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends 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!