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Pepsico (PEP)Stock (Consumer Products Industry, Food Industry, Processed & Packaged Goods Industry)
 Much like any food or beverage manufacturer, PepsiCo has been faced with the challenge of keeping up with ever-changing consumer tastes. An increased concern over health and wellness has driven a shift away from unhealthy foods and beverages to more nutritious alternatives, resulting in declining demand for some of PEP's staple products. Rising materials costs have caused PEP's cost of goods sold to increase, putting extra pressure on the company. Additionally, consolidation among food retailers has decreased PepsiCo's ability to set prices freely, which can negatively impact profit margins. In spite of this, PepsiCo's operating margins have increased in each of the past three years. PEP's diverse portfolio can mitigate the impact of poor conditions in any one of its markets. Despite this, Pepsico is still heavily reliant on it's core North American operations. Overall, the company has a smaller global footprint when compared to chief rival Coca-Cola Company (KO); in 2006, PEP generated 37% of it's revenues overseas compared to 70% for KO. PEP has, however, responded well to its customers' desire for healthier food consumption. With the implementation of its Smart Spot program, PepsiCo has led both the food and beverage industries in the development of healthier products. Strong demand growth in international markets has helped offset a somewhat sluggish domestic market and provided the company with opportunities for continued expansion.
[edit] History and Corporate Overview  PepsiCo, formed in 1965 with the merger of Pepsi Cola and Frito-Lay, is composed of four divisions: PepsiCo Beverages North America, PepsiCo International, Frito-Lay North America and Quaker Foods North America. Today, PEP is one of the largest companies in the world, with 2007 revenues of over $39 billion.
[edit] BottlersPepsiCo's beverage division manufactures concentrated syrup forms for all of Pepsi's beverage brands. PEP sells these concentrates to bottlers for production, packaging, and distribution of the final products. PepsiCo grants bottlers the use of Pepsi trademarks and other brand rights within certain geographic regions. The bottling companies are separate from PepsiCo, though PEP does maintain ownership interests in most of them. The three companies that form the anchor of the PepsiCo bottling network are:
These three bottlers account for 60% of Pepsi’s North America volume distribution and 18% of its international distribution. The remaining 82% of international distribution is handled by PepsiCo International, which uses both its own bottling operations and a system of affiliated bottling partners. [edit] Products[edit] Carbonated Soft DrinksCarbonated soft drinks are the single largest component in PepsiCo’s collection of beverages, accounting for around 62% of total volume sold in North America in 2006. Within the CSD category, PEP offers both sugared drinks and diet drinks. Some of PepsiCo’s major CSD offerings include:
Most of PEP’s carbonated soft drinks come in several varieties with different flavors, caloric values, etc. [edit] Non-carbonated Soft DrinksThe remaining 38% of PEP’s North American beverage volume is composed of non-carbonated soft drinks, which include a variety of beverages such as fruit juices, bottled water, sport drinks, coffee, and tea. This non-CSD segment has been showing higher growth rates than the CSD category, resulting from higher demand for healthy alternatives to traditional CSD. Among PEP’s significant non-CSD beverages are:
Within the non-CSD category, bottled waters like Aquafnna and Propel Fitness Water are showing the highest rates of consumption growth. [edit] Snacks and FoodsThe snacks and foods category includes the branded products of both Frito-Lay and Quaker Foods. Frito-Lay's products include such brands as:
Quaker Foods, though it does produce some snack foods, is generally aimed at the convenient food market (easy-to-prepare dishes and products). Primarily sold in grocery stores, Quaker's products include:
[edit] New Product LaunchesAs a food and beverage company, Pepsico must continually adapt to the rapidly changing tastes of its consumer base. Pepsico constantly introduces new or rebranded products to refresh its product line and maintain appeal to its consumers. Some new launches include:
[edit] Trends & Forces[edit] Health and Wellness[edit] Declining demand for carbonated soft drinksRoughly 20% of PepsiCo’s revenues come from the sale of carbonated soft drinks, making it particularly sensitive to changes in demand for these CSDs.
In response to this shift in consumer demand, PEP has increased its development of both diet CSD and non-CSD beverages. PEP is faced with the task of balancing the risk of new innovations with the low growth rates of established brands, a predicament for manufacturers throughout the beverage industry. [edit] Shift towards healthier foodsThe other half of PepsiCo’s revenue comes from the sale of snacks and other foods. This segment has not been immune to the increased desire for healthier food consumption. As a result of these changing consumer tastes, PEP has increased its offerings of healthier alternatives to its traditional snacks, which are notoriously high in salt, fat, and simple sugars. Many of these new offerings are baked versions of existing products, which is a way for the company to maintain brand loyalty while still reducing the amount of salt, trans fat, etc. in its products. [edit] Smart Spot labeling programIn response to the increased public interest in health and wellness, in 2004, PepsiCo implemented a labeling program called the Smart Spot Program. Smart Spot labels are placed on products that meet nutritional criteria set by the National Academy of Sciences and the U.S. Food and Drug Administration. Brands that meet Smart Spot requirements have enjoyed significant growth; in 2006, PepsiCo’s Smart Spot-labeled products accounted for 40% of total revenue. In the same year, Smart Spot products accounted for 70% of PepsiCo Beverages North America's revenue, 55% of Quaker Foods' revenue, and 15% of Frito-Lay's revenue. [edit] Emerging MarketsEmerging markets across the globe present strong growth opportunities for Pepsico. As populations grow wealthier in emerging markets like BRIC countries (Brazil, Russia, India and China), consumers are becoming ever more sophisticated shoppers. Generally, this exposure benefits Pepsico--emerging markets can grow at three to four times the rate of developed markets such as the US, Western Europe and Japan. Although not quite as large as rival Coca-Cola Company (KO), Pepsico's international presence means that it can benefit greatly from such rapidly growing economies. In the latest quarter, Pepsico International achieved an impressive 22% revenue growth and 19% growth in operating profits. Pepsico has sought to expand its presence is fast growing emerging markets through several recent acquisitions. In Feburary, 2007, Pepsico offered to purchase Lucky snacks of Brazil in an effort to expand its foot print in South America and the fast growing Brazilian market. In June, 2007, Pepsico also announced that it would acquire Ukrainian juice maker Sandora which holds 50% of the Ukrainian juice market. [edit] The DollarAnother trend affecting Pepsico is the relative strength of the dollar. Although the company is based in the US, PEP derives almost 37% of its operating income from outside United States. Because of this, the company is sensitive to the strength of the dollar. Over the past few years, the dollar been consistently weakening. As foreign currencies strengthen relative to the dollar, goods sold in foreign markets gain a pricing advantage and are suddenly worth more dollars back in the US, boosting earnings. If the dollar continues to weaken, it will continue to have a positive effect on PEP's earnings. PEP has broad exposure to foreign currencies and actively hedges a large portion of these to avoid wide swings in earnings from currency fluctuations. Although this hedging limits the potential upside of a weakening dollar, it also insulates the company from drastic upswings in the dollar's strength. [edit] Sensitivity to Commodity Costs   PepsiCo's profitability can be affected directly and indirectly by the costs of various production inputs. PEP is responsible for purchasing the raw materials used to make its products in all its markets and also acts as an agent for the purchase of its bottlers' raw materials. Some of the raw materials used by PEP include grains such as corn, wheat flour, oats and rice; fruit and vegetable products like oranges, potatoes, and juice concentrates; sugar; and vegetable and essential oils. Changes in the prices of such raw materials could impact total production costs and the company’s profit margins. Changes in bottlers' production input costs can also indirectly impact PEP's profits. If a bottler's raw materials become more expensive, it might pass on the increase to customers, which could lead to a loss of market share as customers switch to more affordable alternatives. The primary raw materials used by bottlers are high fructose corn syrup, which is used as a sweetener, aluminum, used to make cans, and PET Resin, used for plastic bottles. [edit] Retailer consolidation riskRetail consolidation can have a great impact on product pricing. In 2006, PepsiCo's top five customers accounted for 26% of all beverage revenues in North America. Wal-Mart is particularly significant to PEP, accounting for 9% of its total worldwide revenue in 2006. As supermarkets consolidate, a smaller number of firms account for larger percentages of PEP's sales, making each of them more important to PEP's bottom line. This gives retailers the power to negotiate for lower prices, which can put pressure on manufacturers' profit margins. Additionally, Wal-mart and other retail chains have begun placing a larger emphasis on private label brands, which can compete with PEP's products and force the company to lower prices to remain competitive. [edit] Competition
[edit] BeveragesIn the domestic beverage market, the Coca-Cola Company (KO) is PepsiCo's main competitor. In 2006, Coca-Cola had a 42.9% share of the U.S. non-alcoholic beverage volume, while PEP held a 31.2% share. Although KO has a larger overall share of the beverage market, both domestically and worldwide, PEP has a more diverse product line and leads the industry in non-carbonated soft drink innovations. Non-CSD beverages accounted for 38% of PEP's North American volume in 2006, compared to 26% of KO's. PepsiCo's revenues are also substantially higher than Coca-Cola's, due to PEP's snack and convenient foods business, a market in which KO does not participate. In 2006, PepsiCo’s total revenue totaled over $35 billion, while KO's sales added up to $24.1 billion. PepsiCo's presence in the snack and convenient food industries, as well as its industry-leading innovations in the non-carbonated soft drink segment, gives it a somewhat more balanced portfolio than Coca-Cola and provides the company with some protection against further declining demand for CSD. [edit] Snacks and Convenient Foods PepsiCo's Frito-Lay and Quaker brands compete in various parts of the larger food industry. Its snack foods manufactured by the Frito-Lay segment hold a commanding share of the U.S. market, accounting for around 58% of domestic snack food sales in 2006. Quaker Foods primarily produces breakfast foods and boxed pasta dishes and competes against a different set of companies for market share. For breakfast cereals, PepsiCo held a 7% market share in the U.S. in 2006. PepsiCo's main competitor in the food market overall is Kraft Foods (KFT). Kraft's products include snacks, cheese, diary, and cereal products, which puts it in competition both with Frito-Lay and Quaker products. Much like the Coca-Cola Company (KO), Kraft does not participate in both the food and soft drink markets, giving PEP the advantage of having a more diverse offering of products. [edit] Coke vs. PepsiFor decades now, Coke and Pepsi have battled for our hearts and minds... but what about our capital? Which company will add the best flavor to your investment portfolio? Although both companies share powerful brand names and global franchises, there are two important distinctions between Pepsico and Coca-Cola that any investor should consider before choosing between these comestible titans: [edit] Global FootprintWhen it comes to international presence, Coca-Cola easily trumps Pepsico. In 2007, Coca-Cola generated around 70% of its revenue overseas compared to just over a third of revenue for Pepsico. Coca-Cola's impressive global footprint puts it in a better position to benefit from strong growth across the globe, particularly in the developing world. Furthermore, because Coke generates so much of its revenue abroad, it stands to benefit greatly from the continuing weakening of the dollar as sales denominated in foreign currencies are suddenly worth more dollars back home. At the same time, Pepsico's heavy dependence on North America makes it much more susceptible to a slowing US economy. [edit] Diversified Product OfferingAnother important distinction between the two companies is their product offering. While KO is essentially a one-product company that focuses on beverages, Pepsico has a much broader product base that includes beverages, foods and snacks. Coca-Cola's heavy dependence on beverages, particularly carbonated beverages, makes it more susceptible than Pepsico to growing a growing aversion to soda which is perceived as fattening and unhealthy. On the other hand, Pepsico's extensive portfolio of beverages, foods and snacks puts it in a better position from the trend to healthier eating. [edit] References |
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