How PepsiCo Is Innovating To Attract Higher Soda Volumes

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The shrinking carbonated soft drinks market is a cause of concern for soda makers and PepsiCo (NYSE:PEP) is now experimenting with new concepts to make soda a premium and trendy drink. The company plans to open “Kola House” in New York in the spring of 2016 which is an experimental kola bar, lounge, restaurant, and event space. [1]. According to the company its goal is to create a modern hub for consumers to share social and immersive experiences that are anchored in the exploration of its cola’s artisanal craft and flavor. The lounge will serve PepsiCo’s soft drinks with its logo subtly incorporated in the space.  This comes on the back of PepsiCo’s launch of craft cola called Caleb’s Kola in late 2014 aimed at bringing the “cool” quotient back to carbonated beverages. We believe while the company is working on initiatives to attract customers to the soda market, whether positioning these beverages as premium drinks will lead to higher sales or not, will be visible in the coming years.

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Positioning Soda As A “Premium” Drink To Drive Volumes

According to our estimates, PepsiCo’s soft drink revenues will account for around 21% of its total revenues in 2016. This number was nearly 26% in 2011 and has been declining ever since. We estimate it to fall to around 18% by the end of our forecast period.

Pepsico 010216

The profitability of PepsiCo’s soft drinks segment is much lower than its snack division. According to our estimates, EBITDA margin of the soft drinks division is around 16% — much lower than the 34% number for PepsiCo’s Frito-Lay North America Segment.

The company has been working on its healthy beverage initiatives, such as introduction of organic Gatorade, however innovative steps to increase volumes in its soft drinks business are essential to arrest the decline in revenues and justify the combined entity with snacks and beverage divisions.  In late 2014, PepsiCo launched a new brand of craft cola, called Caleb’s Kola to bring the “cool” factor back into carbonated soft drinks. PepsiCo’s management feels that there is a huge potential for craft cola. [2]. With a full  menu from a rising resident executive chef, with dishes inspired by the kola nut, and a cocktail curator who will also develop specialty drinks, PepsiCo is now positioning Kola House as a premium experience for carbonated soft drinks

With sales of carbonated soft drinks declining for almost a decade in the U.S., PepsiCo’s soft drinks division is struggling when compared to the snacks segment. Although we do not expect any significant growth in its soft drinks segment, innovations such as Kola House, if successful, can create another premium market for carbonated soft drinks in the U.S.  Whether these initiatives will be successful in attracting more customers, and whether premium branding of soda will lead to higher sales, or turn out to be just a passing fad, will be made more clear over time.
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Notes:
  1. Pepsi Unveils New Hospitality Venture with Launch of Kola House, PepsiCo Press Release, January 29, 2016 []
  2. Can Caleb’s Kola Help Pepsi Restore the ‘Cool’ to Cola, Advertising Age, December 2014 []