PepsiCo’s Healthy Foods Expansion Can Lift Market Share, Stock Value

PepsiCo (NYSE:PEP) is the world’s second largest carbonated soft drink manufacturer and the largest packaged foods product manufacturer. PepsiCo’s beverage division competes with Coca-Cola (NYSE: KO) in virtually all sub-segments of the beverage market.

PepsiCo is best known for its namesake cola brand as well as its Frito Lay products (including Doritos and Cheetos). We estimate that Pepsi brand operations constitute about 7% of the company’s stock value, while Frito Lay products generate a more substantial 42%. Our price estimate for PepsiCo stock is $67.28, in line with market price.

The company is now making a greater push into healthy food options, which could expand Gatorade, Tropicana, and Quaker food operations, which account for a combined 31% of our price estimate. New distribution of healthy food products in China and a low-calorie fruit puree set to test U.S. markets could spark market share gains for the company. A new Gatorade product line expected for Spring 2011 could also advance the company’s market penetration, as we’ve previously discussed (See: PepsiCo’s Gatorade Could Grow Market Share with G Series Fit)

Pepsi Marketing Healthy Food Products in China

Pepsi has started to introduce a new line of healthy food options in China, where reports of chronic illnesses have been increasing. As consumers become more health-conscious, Pepsi and some of its competitors in the global packaged food market are introducing foods that include traditional Chinese folk medicine ingredients like wolfberry plants, chrysanthemum teas and tremella. ^[1]

Between 2005 and 2009 the wellness foods and beverages market in China increased by 28%, reaching $1.5 billion in 2009. Pepsi now plans to continue its expansion into China with a $2.5 billion investment over the next 3 years. In October last year, it launched Quaker Herbal Oatmealin flavors such as wolfberry and tremella, a fungus considered in China to have therapeutic properties. ^[1]

New Low-Calorie Fruit Puree Snack Set for Distribution in Test Markets

As a part of its strategy to penetrate the market for nutritious convenience foods, Pepsi will soon begin distributing an 80-calorie fruit puree called Tropolis (marketed as a snack rather than a beverage) in test markets through its Tropicana division. The new product could piggyback success of PepsiCo’s Naked Juice smoothie line (for which a bottle typically contains 200 to 400 calories). ^[2]

Pepsi will market the product in apple, grape and cherry flavors (at $2.49 to $3.49 for a 4-pack) to mothers and children. The company reportedly worked closely with its target audience to develop the product, and has high hopes for its success.

New Healthy Food Products Could Generate Market Share Upside

PepsiCo’s major rivals Coke and Dr Pepper (NYSE:DPS) have traditionally been more focused on the soft drinks market, the industry’s most profitable business line (although Coke does market fruit smoothies through its Odwalla brand). Still, PepsiCo’s heightened emphasis on nutritious convenience foods puts the company in position to grab market share at a time when consumers are becoming increasingly health-conscious.

The market share gains from increased focus on nutritious food offerings could increase profitability for PepsiCo’s Quaker Foods, Tropicana, and Gatorade product lines. Click the product lines in the display below to see the impact of various market share scenarios (as well as trends in other key metrics) on PepsiCo’s stock value.

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See our full analysis of PepsiCo here

1. The Wall Street Journal: Selling Health Food to China [↩] [↩]
2. The Wall Street Journal: PepsiCo’s Latest Challenge: ‘Snackify’ Some Beverages [↩]