PepsiCo (PEP, Financial), the well renowned American multinational food and beverage corporation, has been making some interesting moves to counter the negative effect of health awareness. Sales of soda makers have been declining due to its numerous negative health impacts. However, companies have been looking for ways to counter this. SodaStream (SODA, Financial) recently transformed its business from soda to sparkling water and similarly, Pepsi is also reducing its dependence on sugary drinks. Although Pepsi’s earnings are growing, the company needs to branch out its revenue streams to counter the effect of dropping soda sales.
As observed in Q1FY15, organic revenue increase 4.4% with Global snacks and Global Beverages up 7% and 1.5% respectively. Core gross margins escalated 150 basis points. Core operating margin escalated 65 basis points excluding the deficiency charge and gains.
Core constant currency profit and core constant currency EPS grew 11% and 16% respectively. The company expects foreign-exchange conversion to adversely impact net revenue and core earnings-per-share growth by around 10% and 11% points, respectively. The company’s results represent the 43rd successive year of annual dividend increase and an estimated 60% payout ratio centered on 2014 core EPS.
Due to PepsiCo’s widespread products, the company is growing constantly. The flagship Pepsi brand in recent times beat Diet Coke to become the second-most popular soda in the United States. In the meantime, PepsiCo generated 2% organic revenue growth in beverages in the Americas last quarter.
Stevia products
Pepsi and Coca-Cola (KO, Financial) are the top two leading brands in beverages. Both the companies have taken steps to introduce healthy products in the market. Unique approach that both Coke and Pepsi are retorting to this swing in customer preferences - and one chief feature of conversation in investment rounds during 2014, was the introduction of Stevia to numerous products.
The two main leading Stevia products are:
- Coca-Cola’s Life
- Pepsi’s True
The plan of introducing Stevia was rumored over the last 12 months, and now both the lead Stevia products are off to the competitions.
Coca-Cola’s Life and Pepsi’s True has 35% and 40% fewer calories compared to regular Coca-Cola and regular Pepsi respectively. Coca-Cola’s Life is available nationally and in selected countries across the world, whereas Pepsi’s True is available online at Amazon and Walmart, also being sold in three cities in the US. Neither Life nor True is 100% Stevia sweetened as both companies brawl to mask Stevia's aftertaste.
Looking for new ways
Furthermore, PepsiCo ramped up its R&D spending to $718 million last year, up from $552 million in fiscal year 2012. Pepsi is also using its R&D cash in order to look for healthier alternatives to its existing products. In FY2014, Pepsi's management said innovation accounted for more than 9% of the company's net revenue.
Conclusion
Increasing R&D expenses and arrival of new products shows that Pepsi will be able to counter the negative effect of increasing health awareness among people. While the company is still not able to completely cut down sugar from its soda, it is making progress. I believe Pepsi will be able to produce a healthier version of its offerings soon, making it a good buy.
