Here’s Why PepsiCo Is Increasing Focus On In-house Content Development

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Two years after its launch, PepsiCo (NYSE:PEP) is now increasing focus on its in-house content development segment called “Creators League”. The company recently opened its own 4,000 square feet state of the art studio in New York which will be used to create branded content allowing artists to work with PepsiCo brands as well as on other independent projects.  According to PepsiCo management, the studio is an indicator of the “company’s commitment to innovation and ability to foster deeper connection with consumers through content creation and real time publishing”.  The company is looking to deliver engaging content to consumers efficiently through multiple channels and plans to use the new studio to meet this goal. We believe that, through its focus on content creation, PepsiCo is looking to offset its brand marketing budget against content revenue in the short term.

See Our Complete Analysis For PepsiCo

 Better Control Over Marketing, New Revenue Stream

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In the era of multiple marketing channels, including social media, video ads and television networks, PepsiCo is looking at a more efficient way to reach its consumers via multiple channels. Creating content in its own studio gives the company better control over its marketing campaign – which can be tailored to suit the requirements of multiple media channels. While creating content in house can be cost effective, thus trimming the marketing budget, it can also create an additional revenue stream for the company. The company plans to sell enough unbranded content to cover the costs of creating ad content that does not fuel sales. Creators League has already signed a deal with AOL’s Partner Studios to co-create a slate of branded and unbranded content around music, pop-culture and health and wellness for distribution on AOL and Microsoft properties.  PepsiCo is also creating a movie in partnership with The Firm, a management and production company and hip hop artist Tip Harris.

According to our estimates, the EBITDA (earnings before interest, tax, depreciation and amortization) margin of PepsiCo’s soft drink division is around 16% and we expect the company to maintain this margin over our forecast period.

Selling and general administrative expenses account for nearly 40% of PepsiCo’s net revenues and a high marketing budget puts pressure on these margins. However, with in-house content creation and a strategy to offset unbranded content revenue against brand marketing, PepsiCo might be able to reduce its net marketing expenses to some extent, thus improving margins. Higher EBITDA margins can have a positive impact on our price estimate for PepsiCo.

We believe PepsiCo’s focus on content creation can help the company in two ways.  First, it will give the company better control on its marketing messages and increase its visibility on multiple media channels.  Second, the company can reduce its overall marketing budget and impact margins positively by offsetting unbranded revenues against expenses. Over the long term, entertainment content can become a new revenue stream for the company.

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