PepsiCo Attempts To Revive Diet Pepsi With New Sweetener Mix

by Trefis Team
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Flagging sales of its soft drinks have prompted PepsiCo (NYSE:PEP) to introduce a new sweetener mix to its ‘Diet Pepsi’ line of products. The company has been steadily losing market share in North America to competitors such as Coca-Cola Co (NYSE:KO) and Dr Pepper Snapple (NYSE:DPS). PepsiCo is hoping that its latest attempt at reinvigorating its flagship drink will arrest this long-standing trend.

See full analysis for PepsiCo

Market Away From Home

In recent years, PepsiCo has maintained a strong focus on improving sales in emerging markets, especially through its packaged snacks division. This strategy has paid off well for the company and the revenues for PepsiCo from emerging markets has grown from around $8 billion in 2006 to around $22 billion in 2011, [1] fueling a bulk of the company’s growth during the period. But this growth has come at a cost to the company’s beverage sales in its home market, North America. The company in 2011 witnessed a decline in its market share in Carbonated Soft Drinks (CSDs) in the U.S. for the fourth consecutive year.

Moreover,  in developed economies seem to be moving away from sugary soft drinks due to rising health consciousness. In the face of such challenges, cola companies are turning to what they have become famous for over the years – flooding the consumer with advertising while fiddling with the way drinks taste  to improve their appeal.

More Ads, More Taste

PepsiCo raised its ad spend by around $600 million in 2011.  Celebrities like Beyonce and Nicki Minaj were used in ad campaigns to promote its flagship drinks. The company also signed a  deal with the U.S. National Football League (NFL) to sponsor the Super Bowl halftime show. Such publicity measures have proved somewhat successful with the company reporting a small gain in market share in the third quarter of 2012, despite a 2% decline in overall volume sales of CSDs. [2]

Maintaining this momentum, the company is now introducing a new combination of artificial sweeteners for Diet Pepsi in an attempt to refresh the old. While the drink traditionally used aspartame as the exclusive sweetener, Pepsi is now adding acesulfame potassium to the mix. The company claims that while this will have no significant impact on the product’s overall taste, it will help it in retaining its flavor for a longer period. The roll out of this new mixture has already begun in New York, Omaha, Nebraska, and the San Francisco Bay Area. [3]

Diet Pepsi contributed around $5 billion in revenues in 2011. The drink’s market share has been on the decline for the last ten  years as it lost out to Diet Coke, its key competitor in the zero-calorie segment. Whether the company’s attempts at reviving its sales in the North American market delivers a big enough impact remains to be seen, considering the increasing competition from Coca-Cola threatening its market share globally and Dr Pepper Snapple eating away at the domestic market.

However, if the company’s attempts at reviving sales are relatively successful and Pepsi is able to maintain its market share in the global arena, we expect an upside of 15% for the company’s stocks. Going forward, we remain bearish about the company’s prospects in the CSD market.

We have a price estimate of $79 for PepsiCo, which is about 10% higher than the current market price.

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Notes:
  1. “PepsiCo Opens Food and Beverage R&D Center in Shanghai to Drive Innovation and Growth Across Asia”, PepsiCo Press Release, November 2012 []
  2. “To Compete With Coke, PepsiCo Cutting 8,700 Jobs, Boosting Ad Spending”, Forbes, September 2012 []
  3. “Diet Pepsi quietly changes sweetener”, The Economic Times, December 2012 []
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