PepsiCo (PEP, Financial) is adapting to the changes in the food and beverages industry, with rising preferences for healthy options and wellness products. These mega trends have been changing the dynamics of the packaged food and beverage sector. PepsiCo has been taking the required initiatives for sustainable growth. Some of its efforts include a steep decline in use of sodium and sugar content and relentless expansion of health-focused brands.
PepsiCo is consciously stressing premium brands to support its revenue and margins in the long run. Despite the shifting trends in the industry and the relevant risks involved, the company appears to be heading higher considering the material efforts it’s making to adapt to the dynamics of the market.
What looks promising?
PepsiCo’s effort of widening its portfolio by introducing healthier products will fuel its long-term growth. Additionally, the beverage giant has increased its advertising expenditure and expansion of e-commerce network globally, which again solidifies its future growth potential. The company’s solid distribution network is noteworthy, besides its initiative to use big data for improved customer communication and understanding. This should enable PepsiCo develop a refined e-commerce platform to boost its revenue.
Recently the company expressed its interest in acquiring Vita Coco in a $1 billion deal. Vita Coco, being a leading coconut water brand, would be a great value addition to PepsiCo’s portfolio. If the deal goes through, it would undoubtedly aid the company’s sales and bottom line in the future.
Healthy financials
The US-based multinational food, snack and beverage giant recently released its second quarter earnings, beating both revenue and earnings estimate, thanks to the higher sales in the Frito-Lay segment in North America. Revenue for the quarter came in at $15.7 billion, up 2% as compared with last year’s same quarter. Net income surged 5% in Q2 of 2017 to $2.1 billion as compared with Q2 of 2016.
PepsiCo’s two principal sectors namely Frito-Lay North America (FLNA) and North America Beverages (NAB) flourished during the period producing net revenue growth of 3% and 2%, respectively. The company’s organic growth for the quarter was striking, up 3% which was an improvement from 2.1% in the first quarter.
While stressing the need to be more inventive and innovative, PepsiCo CEO Indra Nooyi said in a press conference, “We have a can-do spirit with a must-do result… The business is very different than it was five years ago and we expect it to be very different five years from now."
PepsiCo gives way to guilt-free products
PepsiCo continues to expand and strengthen its portfolio by recently launching premium-priced bottled water known as LIFEWTR as well as the new Quaker Overnight Oats. The company is also cautious about the content level of sugar, sodium and saturated fat.
As far as PepsiCo’s carbonated soft drinks business, it is experiencing a slowdown across all its stores in the U.S. However, the company’s strategy of reformulation and other innovative moves will support in neutralizing the softness in volume sales. Furthermore, the company continues to introduce fresh products such as premium bottled water, ready-to-drink tea and coffee categories, and value-added dairy. Tea House Collection, among the company’s latest introductions, has nourished its tea business and should help gain traction in the market.
The food-and-beverage sector includes soft drinks like Mountain Dew, Tropicana and Doritos. PepsiCo has been making continual efforts to offer guilt-free and healthy products as the population preferences incline towards healthy consumption while avoiding soda and carbonated drinks.
What stands out for the company is that it has consciously worked on decreasing its dependency on revenue from the carbonated beverage segment that has suffered from volume decline over the past few years. This is evident from the company’s revenue composition, wherein more than 45% of the net revenue now comes from guilt-free products.
Last word
The company’s outlook for 2017 looks neat. On the financial front, PepsiCo projects a 3% growth in organic sales and estimates to earn a core diluted EPS of $5.13 this year. On the strategic front, if PepsiCo manages to add Vita Coco in its portfolio, the move would offer it a diversification to deal with the seismic shift that the beverage industry is currently undergoing. The company’s initiative looks to be in the right direction and augurs well for its future growth.
Disclosure: I do not hold any position in the stock mentioned in this article
