PepsiCo-Muller Partnership Ends, But Should PepsiCo Look For A Dairy Do-Over?

PepsiCo‘s (NYSE:PEP) partnership with the Theo Müller Group ended this month with the sale of their $206 million factory in Batavia, New York, almost three years after Müller Quaker Dairy (MQD) began selling products in the U.S.  PepsiCo’s investment in dairy followed its strategy to offer more healthier and “good for you” products, including the likes of Quaker Oats and Naked juices. However, MQD products didn’t quite resonate with the U.S. customers, and weren’t able to compete with the more established yogurt brands such as Chobani Flip, General Mills’ Yoplait, and Dannon Oikos Greek.

So the question is, should PepsiCo just focus on what it knows best? Should the focus remain on the not-so-healthy potato and tortilla chip brands under the Frito-Lay umbrella, which continue to grow on the large American snacking habit, or should PepsiCo keep trying to encroach the organic foods and non-GMO foods domain, in line with the country’s push for a healthier lifestyle.

We estimate a $99 price for PepsiCo, which is slightly above the current market price.

See Our Complete Analysis For PepsiCo

Young customers form almost 40% of the U.S. population, driving demand for innovative and novelty products. As more customers opt for breakfast at home, there has been an increase in consumption of breakfast food in the age group of 18-to-34 and 45-to-64. According to Euromonitor, yogurt and sour milk products value in the U.S. is expected to reach $9.1 billion by 2019, up 5% at constant 2014 prices. ^[1] So there is definite growth potential in the U.S. dairy market, however, MQD performed below expectations in a highly competitive and dynamic market environment. From the branding of the yogurt products to the packaging, MQD products didn’t seem to gather much customer attention. MQD products saw a double-digit percentage decline year-over-year through the first three quarters of this year, and also had a 14 percentage point negative impact on the operating profit for PepsiCo’s Quaker Foods North America division, due to the pre-tax impairment charge of $65 million ($50 million after-tax) associated with the MQD joint venture investment.

MQD consistently lost out to competition, as aforementioned, especially to brands such as the Chobani Flip, a mix-in concept that now holds a dominant position in the yogurt category since its launch in 2013. In fact, the Chobani Flip could very well be the next billion dollar brand in yogurt. It currently operates at a run rate of $300-$350 million. The brand plans to enter the savory segment by launching unique sweet and spicy variants soon, and is bringing in more sales, by attracting customers new to the yogurt category and also by encouraging repeat sales. ^[2]

Under pressure from health activists and customers, companies have been looking to cut sugar and salt across their portfolios, and enter high-growth segments such as yogurt — which carries a positive customer perception. Riding on the high demand for Greek yogurt, which now forms over 50% of the U.S. yogurt market, up from 4% in 2008, yogurt is a tempting business for packaged food companies. And so it was for PepsiCo as well. However, while the company seemed optimistic last year about MQD product sales reaching annual retail sales of $100 million in the U.S., actual sales failed to meet the targets. The yogurt segment saw high growth rates in the last few years, but since, demand for Greek yogurt has slightly cooled off, as it no longer remains a niche small category. Nonetheless, demand for yogurt is expected to remain strong as it fulfills customers’ need for nutrition, taste, and convenience. In addition, demand is now spreading to other types of yogurts, including Aussie-style yogurt, Swiss-style yogurt, and Icelandic-style skyr. So the growth potential is definitely there.

Despite the failure of the PepsiCo-Müller partnership, PepsiCo might not be looking to retreat from the ‘healthier food segments.’ The company is planning to launch organic Gatorade and Tropicana Juices with non-GMO (genetically modified organisms) varieties as soon as next year. According to the Organic Trade Association, organic product sales increased from $3.6 billion in 1997 to $39 billion last year, with non-food products forming a small, but growing, portion. ^[3] PepsiCo might be looking to even buy stake in the fast growing Chobani business, helping them to expand their product line and distribution channels. Seeing how the Chobani Flip brand is a hit with customers, has promising product launches lined up, and the company, along with Dannon and General Mills dominates the fast-growing yogurt segment, investing in this business might be a win-win for PepsiCo — both healthy and lucrative.

See the links below for more information and analysis:

• Non-carbonated beverages spearhead growth for PepsiCo’s North America beverage business
• Why Dr Pepper is doing better than Coca-Cola and PepsiCo
• PepsiCo earnings review: core performance remains strong, although marred by structural changes
• The strong dollar is weighing down these large beverage companies
• Trefis analysis: Dr Pepper North America CSD Revenues
• Trefis analysis: PepsiCo Soft Drink Revenues
• Trefis analysis: Coca-Cola Revenues

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1. Yogurt and sour milk products in the U.S., euromonitor.com [↩]
2. Muller Quaker Dairy JV ends in disappointment, but what went wrong?, foodnavigator-usa.com [↩]
3. Coming soon to a grocery near you: Organic gatorade. Yes, really, fortune.com [↩]