What PepsiCo Is Doing To Address Flagging Soft Drink Sales

Earlier this year, PepsiCo (NYSE:PEP) announced its plan to spend an additional $500-600 million on marketing and advertising its products in 2012 to address flagging soft drink sales. Recently, Beverage Digest revealed the 2011 U.S. Carbonated Soft Drink (CSD) market in which PepsiCo’s namesake beverage brand Pepsi reported a 4.8% volume decline while Diet Pepsi saw a volume decline of 8.2%. ^[1] We take a look at what the company is doing to reinvigorate its soft drink portfolio and what impact it can potentially have on its overall profitability. PepsiCo competes with leading food & beverage companies around the world including Kraft Foods (NYSE:KFT), Coca-Cola Co (NYSE:KO) and Dr. Pepper Snapple (NYSE:DPS).

We maintain a price estimate of $71, which is about 8% above the current market price.

See our complete analysis of PepsiCo

Serving up Pepsi Next

PepsiCo launched a mid-calorie version of its flagship drink Pepsi Next recently to adapt to the changing consumer demand. With increasing health awareness, consumers have been chucking traditional soft drinks for healthier alternatives such as juices, RTD coffees, water mixers, etc. The U.S. CSD volume has been declining consistently for the past seven years. Only the ‘diet’ versions have been able to perform well during this period, indicating a predilection among consumers for lower-calorie products.

However, not all consumers find the ‘diet’ products similar in taste to the regular counterparts. The company however claims that Pepsi Next tastes exactly the same as its namesake drink Pepsi with 60% lower sugar content and fewer calories. With Pepsi Next, PepsiCo can target consumers who are fond of the taste of regular Pepsi but avoid it due to calories.

The company has tied up with actress Eva Longoria to promote Pepsi Next under the tagline ‘Drink it to Believe it’ to emphasize how the taste is strikingly similar to that of regular Pepsi. ^[2] Furthermore, to boost its overall beverage portfolio, PepsiCo has signed a contract with Nicki Minaj which will see the rapper endorsing its brands. The first phase of the marketing campaign will hit the U.S. in April while the overseas phase will roll out over the course of next 18 months. ^[3]

Although we estimate the real value for PepsiCo lies in the Frito-Lay division where it continues to be the #1 snack company in the world, it is important to optimize the brand value of its beverage drink as the performance of one division can have indirect repercussions on the performance of other divisions. Moreover, with the name as PepsiCo, most people presume that Carbonated Soft Drink (CSD) is the most important division for the company and therefore falling soft drink volumes are an indication of the company’s overall health. Read our recent article, PepsiCo is More than a Cola Company, Worth $71.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Beverage Digest [↩]
2. Actress Eva Longoria Serves Up First Sips of New Pepsi NEXT in New York, Turns New Yorkers Into Believers, marketwatch.com, April 6, 2012 [↩]
3. PepsiCo Adds Fizz to Its Cola, wsj.com, March 29, 2012 [↩]