Hello Goodness, Organic Gatorade : Is PepsiCo Preparing To Tap The Healthy Beverages Market ?

Nearly 49% of the global consumer’s soft drinks budget in a retail outlet was spent on healthy drinks in 2013, according to Euromonitor. The company stated that water, ready to drink tea, and juice will generate 65% of new sales by 2018 while 95% of the growth in carbonated beverages will come from emerging markets, as consumers in developed economies shift towards healthy beverages. ^[1]. It appears that PepsiCo (NYSE:PEP) is taking concrete steps to capture this trend and grab a higher share in the growing healthy beverages market. On December 14, the company launched its “Hello Goodness” initiative of vending units which will offer consumers healthy product choices from the company’s diverse food and beverage portfolio. ^[2] PepsiCo also announced that it plans to launch organic Gatorade and Tropicana Juices with non-GMO (genetically modified organisms) varieties. ^[3].

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 2016: A Shift Towards Healthy Beverages ?

In the first three quarters of 2015, PepsiCo saw a 5.5% growth in non-carbonated beverage volumes in North America and a 2% decline in volumes of carbonated beverages. This is mainly as customers continue to ditch sugary drinks, such as carbonated soft drinks, in favor of alternatives such as ready-to-drink teas, sports and energy drinks, and even carbonated water. PepsiCo’s non-carbonated drinks segment, comprising of Gatorade, energy drinks such as AMP, Tropicana, and other juices, comprises more than 20% of the company’s valuation according to our estimates, while the contribution of the soft drinks division is less than 15%. We expect the global sports and energy drinks market to increase from around $75 billion in 2015, to nearly $116 billion by the end of our forecast period, and Gatorade and other drinks to maintain their market share of around 12% over our forecast period. The launch of organic Gatorade in 2016 can lead to increased customer interest as an increasing number of consumers prefer more natural foods. Availability of this beverage in its “Hello Goodness” vending machine can attract more consumers, leading to a higher market share. This product could also prove incremental for the sports drinks category, bringing in customers new to this segment.

We estimate the global juice market to increase from $120 billion in 2015 to around $150 billion by the end of our forecast period, and estimate a gradual decline in Tropicana’s (and other juices) market share to stabilize around 5% over our forecast period. An increase in this market share due to the non-GMO initiative can lead to an upside in PepsiCo’s price estimate.

In 2016, PepsiCo plans to place several thousand units of its “Hello Goodness” vending machines throughout the U.S. in a variety of locations. Along with offering a healthy selection of snacks and beverages to consumers, the machines will have smart equipment to give the company real time consumer preference insights. We believe this feedback mechanism will enable PepsiCo to tailor its products to changing consumer needs. The company hopes to revive vending machines with this initiative, as they see a slump in sales due to being considered as “unhealthy.”  As the sales of carbonated beverages decline in the U.S., and consumers shift focus towards healthier beverages, we believe PepsiCo is adopting the right strategy to focus on future growth.

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1. Health and wellness a priority in developed beverage markets,  Foodbusinessnews, October 2014 [↩]
2. PepsiCo Press Release, December 14, 2015 [↩]
3. PepsiCo plans organic push with Gatorade and Tropicana, Seeking Alpha, December 16, 2015 [↩]