Healthy Snacks and Non-Carbonated Beverages Could Be Key For PepsiCo
PepsiCo (NYSE:PEP) reported strong Q3 2015 results with organic growth in its snacks and non-carbonated beverages segments. We believe that both these segments will be the key value drivers for PepsiCo in the future. With the U.S consumer focusing on “healthier” beverages, soda sales have been declining the past decade. PepsiCo’s strong presence in the alternative drinks market would be a driving factor for it to leverage this trend and gain market share in this space. Similarly, its snack division’s focus on a healthy menu should positively impact the company’s top line. Emerging markets hold a strong potential for growth for PepsiCo’s carbonated beverages and we believe expansion in this region would be another key driver for PepsiCo.
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Focus On Healthier Snacks To Promote Growth Of Foods Division
PepsiCo’s most important division is its foods division comprised of Frito-Lay and Quaker Oats. Frito-Lay commands more than a 30% share in the North American market, and we expect this number to reach 40% by the end of our forecast period, in our base case scenario. This is also the most profitable division of PepsiCo with an EBITDA margin of nearly 35%. While PepsiCo has been at the receiving end of negative publicity due to the unhealthy nature of its products, Frito-Lay strategically continues to introduce “healthy” snacks with more natural ingredients, baked snacks, along with gluten free products, to target the gluten sensitive consumers in North America. With the U.S. consumers increasingly looking at healthier snacking options, we believe Frito-Lay will continue to drive value for PepsiCo with this strategy. This division is also selling snacks in smaller packs, which increases average per unit prices and hence profitability. Also, the foods division is yet to fully tap the emerging markets and this is another area of potential growth.
Expansion In Emerging Markets
PepsiCo’s beverage division in North America has been hit by aggressive marketing and promotion of alternative healthier drinks. Carbonated beverages are losing their prominence in this market. The U.S. carbonated soft drink volume has been steadily declining in the past 10 years.
We believe PepsiCo will see a higher growth for its beverage division in emerging markets where growing population and better standards of living will be the key driving factors. Countries like China and India, still see low consumption on a per capita basis, but as these economies grow, there is a huge potential of increased consumption in this region. We expect the global carbonated soft drinks market size to increase from 38 billion in 2015 to around 40 billion by the end of our forecast period and a greater proportion of this volume for PepsiCo to come from China, India, and Latin America.
Non-Carbonated Beverages
PepsiCo’s Q3 2015 results showed a 10% increase in volumes of non-carbonated beverages. While customers are shifting away from carbonated drinks towards “healthier” beverages such as sports drinks, juices, ready to drink tea, and bottled water, PepsiCo has a huge potential in this market since it already has a significant presence in this space. Margins in some of these healthier drinks like bottled water could be lower, but this can be set off by higher margins in other segments such as sports and energy drinks. We believe that the non-carbonated drinks segment would be a key driver of value for PepsiCo in the future, both in the U.S. and emerging markets, given that Asia accounts for more than 40% of the global bottled water market. [1].
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