PepsiCo: Focusing On The Healthy Snacks Business

by Trefis Team
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Giving a huge push to its “health” initiatives, recently PepsiCo (NYSE:PEP) announced its new targets to reduce calories and sugar in its beverages, and salt and fat in its snacks, by 2025. As it adapts to changing consumer preferences, PepsiCo believes that healthier products will be key for long-term growth and the company is looking at several ways to make its portfolio of products healthier. From organic Gatorade to offering probiotic health drinks and lowering sugar in its beverages and salt in its snacks, all these initiatives are aimed at driving sales amid a growing base of health-conscious consumers. According to the company, its “everyday nutrition” products will witness the fastest rate of sales growth by 2025.

See Our Complete Analysis For PepsiCo Here

Key Driver Of Growth

A key driver of PepsiCo’s revenues in Q2 2017 was its portfolio of healthy snacks and beverages. As PepsiCo works towards transforming itself to adapt to the changing customer preferences of healthier lifestyles and aims to limit its environmental footprint, the company has adopted a motto of “Performance with Purpose.”  In order to meet the evolving needs of customers globally, the company is shifting its portfolio to a wider range termed as “Everyday Nutrition Products.”  These products contain nutrients such as grains, fruits, vegetables, or protein. This portfolio falls under a broader category of “Guilt Free Products”.

The company now derives approximately 45% of its revenues from these “Guilt Free Products” indicating that it has transformed its portfolio towards healthier products according to the new customer preferences. These products include “diet and other beverages that contain 70 calories or less from added sugar per 12-ounce serving and snacks with low levels of sodium and saturated fat,” as well as “everyday nutrition products” – products with nutrients like grains, fruits and vegetables, protein, unsweetened tea, and water. These latter products constitute 28 points of the 45.  LIFEWTR, a product in its water portfolio, performed particularly well. In just five months since its launch in the first quarter, the product has already generated sales to the tune of $70 million and is on track to reach $200 million in sales on an annualized basis.

With the growth of its beverage business slowing down, as a result of sluggish soda sales, this segment will be a focus for the company in the future to drive its sales. Frito-Lay is also pushing towards a premiumization of its products to fuel its revenue and margin growth. Consumers have been moving away from eating unhealthy products, which has put pressure on the volumes. Hence, by concentrating on premium brands, there can be a shift from low-priced, high-volume products to the high-priced, low-volume range, which may result in top and bottom line growth.

Expansion Into Whole Foods

According to a report by Bloomberg, Frito-Lay, PepsiCo’s snacks division, is aiming to break into organic stores, such as Whole Foods, with its new line of products without artificial ingredients, marketed under the name ‘Simply.’ These include organic versions of 11 core chip brands, including Doritos, Lay’s, Cheetos, and Tostitos. According to PepsiCo executive Jonathan McIntyre, these products meet the stringent requirements needed to be sold in Whole Foods. Such a move is part of a concerted effort taken by the company to improve its unhealthy image, given the shift in consumer preference towards natural and organic products.

The acquisition of Whole Foods by Amazon could not have come at a better time for PepsiCo, as the former would have never accepted the presence of brands such as Doritos into its stores in the past. This is not only due to the junk food image of Doritos, but also due to Whole Foods’ aversion to products sold by big consumer packaged goods companies. However, the acquisition may change things in the future. The Simply line of products is already sold on Amazon’s website. Moreover, Amazon may be more comfortable cozying up to CPG behemoths, as it is only such companies that are capable of meeting the high volumes demanded. Smaller brands, which are more easily found in Whole Foods, may actually face a tough time keeping up with Amazon’s requirements.

While the packaging of Simply products such as Doritos and Lay’s is different from its traditional counterparts, most consumers would still have reservations regarding its organic image. Hence, for PepsiCo, a presence in Whole Foods would go a long way towards convincing health-conscious customers to consume its products. The company’s other health-conscious brands such as Stacy’s and Naked Juice are already available in Whole Foods, but making greater inroads into Whole Foods would do PepsiCo’s business a whole lot of good.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for PepsiCo

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