Frito-Lay has been one of the pillars of strength for PepsiCo (NYSE:PEP) at a time when its soft drink sales have been sagging over the years. In fact, we believe it is the most important segment and contributes more than 35% to the total stock price. Frito-Lay’s strength lies in brands such as Doritos, Tostitos, Lay’s, Rold Gold, etc., which are neither considered premium/upscale nor inexpensive or super-value offerings.
But, due to a lot more activity going on at the extreme ends of the salted snacks market, Frito-Lay plans to target the respective markets by launching a new line of products and making them available at certain types of stores to attract consumers who are more likely to buy such products. Overall, Frito-Lay dominates the North American salted snacks market, and we believe the market share will continue to rise, albeit gradually.
We maintain a price estimate of $69 for PepsiCo, which is in line with the current market price.
Altering the Traditional Strategy
According to Goldman Sachs, the market for premium snacks has grown at an annual rate of 7% in the last two years.  Products already in the company’s portfolio which appeal to more health conscious consumers include Stacy’s Pita Chips and Sabra, which offer packaged Mediterranean dips such as hummus. The latter is a joint venture with the Strauss Group. The same partnership also saw the company launching Obela spreads and dips in Mexico in June this year.
Apart from offering the premium product, it is important to create the right perception that goes with the image of an upscale product. Frito-Lay is making its premium products available in high-end stores (such as Citarella) and the deli sections of grocery chains.
Looking at the lower end of the spectrum, we believe this segment will grow at an annual average rate of 4% in the coming years.  Frito-Lay plans to portray Cracker Jack as a brand offering high value-for-money. Similarly, Taqueros will be made available in dollar stores and other retail outlets that typically attract value-seeking consumers.Notes: