An Overview Of PepsiCo’s Carbonated Soft Drinks Business

by Trefis Team
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PepsiCo’s (NYSE:PEP) carbonated soft drink (CSD) business operates some popular brands and has a global presence. According to our estimates, the business makes up more than 20% of the company’s total value. However, the business unit that markets brands like Pepsi, 7UP and Mirinda for PepsiCo has been under pressure over the last few years due to declining consumption of CSDs in developed markets. Because of this growing trend, PepsiCo’s CSD business relies heavily on the emerging markets for future growth. Here we provide an overview of some of the key trends driving this business.

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Emerging Markets Growth

    We believe that the emerging markets will be the growth frontiers for PepsiCo’s soft drink business going forward as the company faces tough times in the developed world. Amid continually declining CSD consumption in developed markets, beverage companies are increasingly relying on consumption growth from emerging markets. Economic growth in the emerging markets is lifting consumer income levels and driving urban lifestyles, which is in turn is increasing demand for convenient foods and beverages. Due to higher growth from these markets, the share of emerging and developing markets in PepsiCo’s revenues has increased from 24% in 2006 to 35% in 2012. We expect it to further increase in the long run. [1]

    Within the emerging market universe, China is the most important bet for almost all multinational food and beverage companies. This is because of its high economic growth rate and a huge population base. The country’s beverage market is expected to become the world’s largest by 2015. [1] As a result, we expect China to play a crucial role in PepsiCo’s soft drinks business going forward. The company is aware of it and has picked up its game recently.

    PepsiCo has been outperforming the beverage industry in China since its strategic partnership with Tingyi in 2011 that has helped it scale up its operations in the country. Although the deal closed just last year, we have already seen some positive signs. PepsiCo posted a strong 22% organic revenue growth from its beverages business in China during the second quarter. The company’s CSD volumes grew ~10% during the first six months of this year, compared to Coca-Cola’s flat performance over the same period. [2] This indicates PepsiCo’s 2011 strategic alliance with Tingyi that operates China’s most extensive bottling and distributing network is paying off well and has put the company’s operations in the large beverage market of China in the fast lane. The company is also performing well in other important emerging markets such as India, Brazil, Egypt and Philippines.

    Well Established Brands

      PepsiCo has been marketing its products for more than a century now. As a result, most of its flagship beverage brands are well entrenched in the consumer psyche and reaching for a Pepsi product in a shopping mall is a natural habit for more many customers. Some of its popular CSD brands include Pepsi, Diet Pepsi, Mirinda, 7UP and Mountain Dew. Each of these brands generates more than $1 billion in revenues annually. The almost universal household recognition of these brands globally is a huge intangible asset for the company. This not only helps PepsiCo sustain and grow its volume share in the global markets but also provides it with stronger pricing power that results in better margins. The company has been reinforcing this advantage with higher investments in R&D, packaging and design of its key brands along with increasing consumer engagement through marketing and advertisement. PepsiCo invests almost 6% of its revenues in marketing and advertisement activities annually. [2]

      The Soda Slump In Developed Markets

        The consumption of CSDs has been declining in developed markets over the past few years. The situation in the U.S. is a key example of this trend – per capita consumption of CSDs peaked around 1998 at about 54 gallons a year. Today, the figure stands at around 44 gallons a year. [3] A major reason behind this has been growing consumer awareness about negative health impacts of CSDs. A research paper recently published in the American Journal of Public Health concluded: “Soft drink consumption is significantly linked to overweight, obesity, and diabetes prevalent worldwide.” This certainly is bad news for major cola companies Coca-Cola (NYSE:KO) and PepsiCo, both of whom have been hit hard by this trend. PepsiCo posted a 1% decline in organic net revenue in its Americas beverage operations for the second quarter as lower volumes more than offset higher net pricing.

        Since the developed markets still account for a majority of PepsiCo’s CSD sales, consumption growth from the emerging markets is currently not enough to offset the impact of the soda slump in these markets. Moreover, the growing proportion of sales from emerging markets also has a negative impact on the company’s average revenue per case. The higher dependence on emerging markets also increases the volatility of a company’s revenues due to exchange rate fluctuations. Therefore, despite the significant growth potential in the emerging markets, PepsiCo’s CSD business is expected to see more pain in the short to medium term unless the consumption decline in developed markets starts reversing.

        We currently have $89 price estimate for PepsiCo, which is ~10% above its current market price.

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        Notes:
        1. PepsiCo 2012 Annual Report, pepsico.com [] []
        2. Q2 2013 Earnings Call, pepsico.com [] []
        3. Water becomes America’s favorite drink again, usatoday.com []
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      • commented 1 years ago
      • tags: KO DPS KRFT PEP
      • Good piece of work but whenever we talk about Pepsi, Coca Cola can't be missed out. Both these companies have similar financial conditions. Ratios like Dividend Per Share (DPS), Dividend Yield and Debt/Equity are almost the same for both the comapny. Certainly, there are some differences also, which can be seen ad read in detail from: http://goo.gl/YZ9LUm