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The Science of Hitting
The Science of Hitting
Articles (413) 

PepsiCo: Management Stands Behind "Power of One"

February 12, 2012 | About:

About the author:

The Science of Hitting
I'm a value investor with a long term focus.

As it relates to portfolio construction, my goal is to make a small number of meaningful decisions. In the words of Charlie Munger, "Patience followed by pretty aggressive conduct."

I run a concentrated portfolio, with a handful of positions accounting for the majority of my equity holdings (currently two). From the perspective of a businessman, I believe this is adequate diversification.

Rating: 4.4/5 (19 votes)


Hongquan7389 - 4 years ago    Report SPAM
I don't really understand the management's talk about their key advantages of staying together. I don't see much overlap of beverage and snack in R&D, procurement, consumer insight, and merchandising. So, can you explain me about cross leverage across the value chain?

On the second advantage, is it about the ease of distributing their snacks when they have distribution system of beverages in place?

Finally, do you think the combined scales of the two businesses make PepsiCo a more attractive place to work for?

Balajisridharan - 4 years ago    Report SPAM
Good article!! Can you please explain what do you mean when you say --

PepsiCo American Beverages business generated for the year, in a market where the company has a near monopoly... (How is it a near monopoly?)
Tonyg34 - 4 years ago    Report SPAM

on behalf of the author-

yes it is a big cost advantage for PEP to be able to ship both Cola and Frito products on the same trucks to vendors.

secondly, if a vendor wants to carry a pepsi product, or conversely a frito lay product, PEP can force them to vend products from both sides of the business.

third, of course they realize overlap in consumer insight, merch and r&d b/t snacks and drinks. doritos and mt dew go together like gamers and acne.
Extramiler - 4 years ago    Report SPAM
What do you think about their margins? EPS growth has not kept pace with revenue growth. Thanks.
The Science of Hitting
The Science of Hitting - 4 years ago    Report SPAM

To expound further on Tony's points:

The biggest items for me is the power in negotiation with retailers, the cross-platform reach to consumers, and distribution. On the first point, look at Coca-Cola, which was pulled from Costco shelves for a bit in 2009 due to a price dispute; large retailers are increasingly powerful in negotations, and having a larger stable of key consumer brands under one roof (Gatorade, Tropicana, Naked, Frito-Lay, Pepsi, etc) is an important barganing chip that tilts the scales that much more.

For consumers, Pepsi has a huge untapped opportunity to cross-promote their brands; while management has consistently talked about this (since at least the 2-day analyst event last year), I've seen/heard of little to date to push this initiative.

In regards to employment, I think that point is a really small piece of the decision; PepsiCo has been consitently ranked a great place to work, and I don't think that's because they sell chips AND soda.


I was referring to the Frito-Lay business; sorry if that didn't come across clear. I say that they have a near monopoly due to their outsized market share (50% plus in most key markets), which is 10:1 over their nearest global competitor. For example, Frito-Lay increased volume by 1% in Q4, compared to a 1.5% decline for the market (according to John Compton, CEO of PepsiCo Americas Foods); at the same time, the division took nearly 5 points of pricing, resulting in revenue growth of 6% for FLNA in Q4 (on a constant currency basis). I could talk further on this if you have other questions...


Honestly, I'm not concerned with their margins (in the short term); I'm only interested in watching the competitive dynamics of the segments they compete within and making sure they sustain the moats that allow them to generate excess free cash flow.

I think they can take price when needed, particularly in snacks; I'm not concerned about the attractiveness of this business, but rather some of the red flags that pop up in the management team. The stated initiatives will be a key part of Mrs. Nooyi's tenure, and will determine her legacy at PEP.

Hongquan7389 - 4 years ago    Report SPAM
Thanks Tony and The Science of Hitting, your answers are really helpful!

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