Frito-Lay’s Growth Supports Pepsi $71 Value with Healthy Foods, Better Brand Image

November 9th, 2011 by Trefis Team
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Frito-Lay, the most valuable business division of PepsiCo (NYSE:PEP), is continuing to see growth with the company reporting 8% growth in worldwide snacks volume in Q3 2011 compared to same period previous year. While its net income and revenues increased 4.1% and 13.3%, respectively, year-on-year basis, its gross margin declined by ~3 percentage points to around 52% owing to increasing costs. [1] Management, however, expects lower earnings in the coming quarter due to an uncertain macro-economic environment and increasing commodity inflation. Meanwhile, most food and beverage companies, including PepsiCo and CoCa-Cola (NYSE:KO), are concentrating on their initiatives in emerging markets like India and China that are seeing higher growth than developed markets.

We expect Frito-Lay’s international market share will keep improving as PepsiCo expands operations in under-penetrated markets and continues to build its brand image.

See our complete analysis for PepsiCo’s stock.

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PepsiCo’s Brand-building Initiatives in Emerging Markets

PepsiCo is focusing on improving its brand image in emerging markets as these markets account for larger part of the volume growth – a trend seen over the past several quarters. While the company’s worldwide snacks volume increased 8% in Q3, the snacks volume in Asia, Midle East, & Africa regions grew 16%. [1]

PepsiCo announced last year an investment of $2.5 billion over 3 years in China for building new manufacturing facilities, developing R&D centers, expanding agricultural development and brand-building initiatives. [2]

In India, the company is pushing for healthy foods like iron-fortified cookies and puffs that are being targeted at teen girls in the villages. [3] This initiative called “Good for you” is part of PepsiCo’s global push for healthier food alternatives with focus on dairy, juices and products like oatmeal. In this regard, the company launched Global Nutrition Group last year and CEO Indra Nooyi hopes to double revenues from these healthier products to $30 billion by 2020. Such initiatives could push PepsiCo’s snacks market share higher.

Earlier this year, Pepsico acquired a 66% stake in Wimm-Bill-Dann, Russia leading dairy, snacks and juice company, which again played a part in boosting the company’s worldwide snacks and beverage businesses during Q3. [4]

While we expect Frito-Lay’s international market share will increase from 37.8% in 2012 to 38% by the end of our forecast period, Trefis members project an increase from 38.3% to 40.5% during the same period.

We currently have a Trefis price estimate of $71.30 for PepsiCo’s stock, about 13% above the current market price.

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Notes:
  1. PepsiCo Delivers Solid Third Quarter 2011 Results, Press Release, Oct 13, 2011 [↩] [↩]
  2. PepsiCo to Invest $2.5 Billion in China Over Next Three Years, May 21, 2010 [↩]
  3. PepsiCo’s Health Push, WSJ, July 7, 2011 [↩]
  4. PepsiCo Completes Acquisition of 66% of Wimm-Bill-Dann, Press Release, Feb 3, 2011 [↩]