Pepsi's Diversified Revenue Stream Gives It an Advantage over Coke
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Although PepsiCo (NYSE: PEP) is most commonly recognized for its flagship cola drink, the company has a diverse product line of internationally established beverages and foods.
Pepsi is the largest food and beverage company in Russia following the purchase of Wimm-Bill-Dann in 2011. The aim of that acquisition is development of a $30 billion operation throughout Central Asia and Eastern Europe by 2020.
Pepsi also completed an arrangement in 2012 with Tingyi, which is one of the leading food and beverage companies in China. The agreement also called for co-branding of juice drinks under the Tropicana name. Despite recently slower growth in China, the country is expected to comprise the world's largest beverage market by 2015.
Introduction of Pepsi NEXT in March 2012 was intended to attract new cola drinkers using a formula with 60% less sugar than regular Pepsi. Unfortunately, Pepsi continued losing market share to Coca-Cola (NYSE: KO) in 2012. Diet Coke had already overtaken regular Pepsi as the second largest selling soda brand during 2010.
In response to criticism, Pepsi altered the blend of sweeteners in Diet Pepsi starting in January 2013. This move appears to convey an effort at Pepsi to boost sales of it top selling carbonated drinks.
A continuing focus at Pepsi is attracting consumers to its brands in the fast growing beverage category of non-carbonated drinks. Pepsi products in this group include products such as, Lipton, Aquafina, Tropicana, Gatorade.
In March 2012, the Frito-Lay division launched Doritos Dinamita tortilla chips, which are spicier than regular Doritos and rolled in the shape of a taquito. Packaging has names such as Chile Limon and Nacho Picoso.
Pepsi has also leveraged its Quaker Oats brand to promote healthy snack foods that eliminate trans fats. In 2012, the division introduced a new line of packaged oatmeal cookies. Later in the year, the product line was extended with the addition of Quaker Perfect Portions flavored instant oatmeal.
A new marketing campaign called Quaker Up was launched in December 2012. Its aim is showcasing the nourishing qualities of Quaker Oats products. Components of the program include use of social media, crowdsourced marketing, a logo redesign, and Hispanic targeted themes.
Pepsi inked a sponsorship and promotional deal with singer Beyonce during 2012 and a long-term arrangement with the National Football League to sponsor Super Bowl halftime shows. New television ads have featured New Orleans Saints quarterback Drew Brees, singer Nicki Minaj, boy band One Direction, international soccer stars such as Lionel Messi, and television star Sofia Vergara.
Pepsi intends to spend around $500 million in 2013 for promoting Gatorade, Mountain Dew, and Tropicana in addition to Pepsi soda. Much of this spending will occur in North America, where Pepsi has lost ground to Coca-Cola. Promotional spending is also focused on the rising per capita beverage consumption for ready-to-drink teas, juices, sports drinks, and bottled water.
Third quarter 2012 revenue declined 5%, which reflects adverse foreign exchange factors. However, sales volume for snack brands was 6% higher and beverage volume increased 3%.
Despite lower sales volume in North America, Pepsi has a major presence in foreign markets. Approximately half of the company’s revenue is generated outside the U.S. Third quarter 2012 sales in emerging markets were especially strong. Volume was 10% higher in the Asia, Middle East, and Africa unit. Sales of both beverages and snacks were robust throughout region, which included significant growth in the Philippines, India, Pakistan, Vietnam, and Saudi Arabia. The Latin American foods segment provided 13% volume growth. Beverage sales in Russia and developing Europe more than offset declines in Western Europe.
Another plus at Pepsi is its leadership in healthier products as a response to consumer preferences. The nutritional snack business is expected to reach $30 billion from the current level of $13 billion.
The competitive beverage market is dominated by a battle between Coke and Pepsi for shelf space. This duopoly reduces the ability of upstart sports drinks to gain broad exposure.
The mature snack food market presents Pepsi with few challengers to its market share. This leaves Pepsi with a principal objective to increase market size. That’s the thrust behind rewarding consumers with new products.
Pepsi’s revenue growth projection for 2013 is in the middle single digits. The company plans to allocate 5% of revenue to capital spending. Management allocated $6 billion to dividends and share repurchases in 2012. That year marked the company’s 40th consecutive annual dividend increase. Based upon the stock price in early 2013, the dividend yield is around 3%.
Resilient growth over the past several quarters foreshadows high potential for Pepsi’s fundamentals to improve over the long term. With a price of less than 15 times projected earning in 2014, the stock’s valuation holds appeal. Pepsi has a favorable product mix, substantial international exposure, and high cash flow to support promotional initiatives. If the company meets its growth forecasts, contrarian investors should profit considerably.
valuewalk 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!