PepsiCo’s Gatorade Positioned to Lift Market Share

PepsiCo’s (NYSE:PEP) Gatorade, a sports drink brand targeted at young students and teenagers, has seen a decline its market share by one percentage point from 2005 to 2009 due to stiff competition from brands like Kraft’s (NYSE:KFT) Kool Aid and Coca-Cola’s (NYSE:KO) Powerade as well as a fall in consumer spending during the economic downturn that caused customers to seek cheaper substitutes.

Gatorade competes in the wider US fruit juices, sports drinks and energy drinks market against players like Coca Cola, Kraft Foods, Dr Pepper Snapple (NYSE:DPS) and National Beverage (NASDAQ:FIZZ).

PepsiCo’s Gatorade & Other product segment constitutes around 17% of its stock value based on our estimates. Hence, despite the Trefis community’s projected upside to our base market share estimate, the upside to PepsiCo’s stock value is limited. The Trefis community expects Gatorade’s market share to reach 18% (vs. our 15% estimate) by the end of our forecast period.

We currently have a Trefis price estimate of $67.28 for PepsiCo’s stock, roughly in line with market price.

Newer Products Expected to Strengthen Gatorade Brand…

The Gatorade brand is well-known to consumers. It was instrumental in starting the sports drinks segment in the US and still owns a majority of the market. In 2010, Gatorade announced a marketing campaign promoting its products under “G Series,” a three part regimen designed to fuel every step of its consumers’ athletic performance.

As part of the campaign for G Series Fit, Gatorade is targeting a broad distribution network of large convenience and grocery stores and is also adjusting the bottle size of the G Series Fit energy drink to cater towards its target demographic. (Refer to our article: PepsiCo’s Gatorade Could Grow Market Share with G Series Fit)

…But Competition from Substitutes a Concern

Kraft Foods’s Kool Aid and Coca-Cola’s Powerade are Gatorade’s strongest competitors in the sports and energy drinks market. However, PepsiCo now faces competition from a growing number of substitutes. These substitutes are concocted with easily available ingredients and threaten to neutralize Gatorade’s unique positioning in the market. One such example is switchel, a drink made with water, molasses and honey/ginger which promises to replicate many of Gatorade’s functionalities.

Trefis Community Forecast

The Trefis community expects Gatorade’s US market share to breach 18% by the end of our forecast period, vs. our base case estimates of flat market share around 15%. While the Trefis community estimate implies significant upside for the Gatorade brand, the ultimate impact on PepsiCo’s stock value is limited, as Gatorade only contributes an estimated 17% to total company value.

Our complete analysis for PepsiCo’s stock is here.