Why PepsiCo is Stepping Up Marketing Spend in 2012

by Trefis Team
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PepsiCo (NYSE:PEP) is planning an additional $600 million spend in advertisements in 2012 which will likely heat up the cola wars. Indra Nooyi recently completed five years as the chief executive of the company. During her tenure, the stock remained flat whereas Coca-Cola Co (NYSE:KO) has seen its stock rising more than 40% over the same period. PepsiCo’s Q4 and full year earnings released last week failed to create enthusiasm among investors as the company downgraded its earnings forecast for the year 2012. The current year is a transitional year for PepsiCo as it steps up its marketing spend and initiates a cost-cutting program.

See our complete analysis of PepsiCo

Coca-Cola is More Valuable Than PepsiCo’s Entire Cola Portfolio

We estimate Coca-Cola Co’s flagship drink Coca-Cola contributes 27% to the total stock price. Based on the current market capitalization of $155 billion, the value comes to more than $40 billion. PepsiCo’s entire cola portfolio constitutes close to 20% of the stock price, implying a value of around $20 billion based on its current market capitalization of $100 billion. In the U.S., brand Pepsi has traditionally trailed Coca-Cola in terms of sales. However, Diet Coke overtook Pepsi in 2010, and Pepsi now ranks third in the U.S. carbonated soft drink (CSD) market. The increased advertisement budget with greater focus on soft drinks was long overdue and is a step in the right direction for the company.

PepsiCo More Than a Beverage Company

PepsiCo is definitely more than just a beverage company. Rather the company name may be a misnomer since the biggest contributor to the stock price is Frito-Lay, which contributes a little more than 45% to the $100 billion valuation. However, neglecting the beverage segment would undermine the brand’s value. In addition to a rich history, the company’s beverage brands enjoy a strong emotional connection with consumers. That is, if you or I were to introduce a new cola brand with a similar taste, it would hardly make similar sales or for that matter enjoy the same loyalty that Pepsi or Coca-Cola enjoy. Building a brand of this scale takes decades, and it is much easier to generate incremental sales than creating a brand.

Moreover, the company’s “good-for-you” and “better-for-you” product offerings in the snack segment nowhere enjoy the same margins as sugared water. Meanwhile PepsiCo is well positioned to leverage growing demand for beverages and snacks in the emerging markets.

As harsher laws are passed against companies promoting obesity, Pepsico’s healthy and diverse product portfolio will enable it to maintain a stranglehold in the booming international snacks market.

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

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