Pepsi’s Marketing Push Can be the X Factor to Reach $71

PepsiCo (NYSE:PEP) is focused on reinvigorating its portfolio of core brands. The core brands include its traditional beverage brands as well as the snacks such as Doritos and Ruffles which fall under Frito Lay. The recent time has seen the sales of its beverage brands flagging and for the first time, sales of its namesake brand Pepsi fell behind Diet Coke in 2010. Under Ms Indra Nooyi, the Chief Executive, the company has often been criticized for focusing exclusively on building a healthier portfolio and neglecting the core, indulgent brands. PepsiCo competes with leading food & beverage companies around the world including Kraft Foods (NYSE:KFT), Coca Cola Co (NYSE:KO) and Dr Pepper Snapple (NYSE:DPS)

See our complete analysis for PepsiCo stock here

Marketing Push

According to Bernstein Research, PepsiCo could spend a handsome $400 million marketing its beverage business in North America alone in the coming year. ^[1] Part of the plans are a renewed focus on ‘Power of One’ which jointly promotes beverages and snacks.

In fact, this year the company grabbed the primary sponsorship rights for TV soap ‘The X Factor’ to boost the sales of Pepsi. ^[2] The company feels the core brands enjoy a strong brand recognition and a greater focus on these can substantially add value to the company.

PepsiCo has also heated up the cola war by ousting Coca Cola from University of Delaware. Campus rights are a multi-million dollar business for beverage companies as they offer exclusive rights on the campus for several years. Coke had been on the university for 9 years prior to this. ((Cola wars hit campuses as marketers battle on, December 20,2011)

Pepsi enjoys healthy gross margins on its indulgent, core brands. Increased sales mean the operating costs, which are more or less fixed, spreading over a greater revenue which will result in higher operating margins for the company.

We maintain a price estimate of $71, which is about 10% above the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. PepsiCo to return focus to ‘indulgent’ brands, FT.com, December 15, 2011 [↩]
2. PepsiCo Embraces Indulgent Brands, brandchannel.com, December 14, 2011 [↩]