There’s A Sparkling New Battleground In The US Beverage Industry

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PEP: PepsiCo logo
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PepsiCo

As the beverage industry undergoes a transformation with carbonated soft drinks losing their position and consumers preferring “healthier” beverages, cola giants have focused their attention on other avenues to spur their sales. One such route is the sparkling water category which has witnessed spectacular growth rates. The market for sparkling water is set to continue its strong growth in the next few years, driven by the introduction of new and innovative flavors, as well as its image as a healthy alternative to carbonated drinks. The Coca-Cola Company (NYSE:KO) and PepsiCo (NYSE:PEP) have to play catch-up to established brands such as Perrier, San Pellegrino, and National Beverage’s LaCroix brand. While Coca-Cola announced the acquisition of premium sparkling mineral water brand Topo Chico in the beginning of October 2017, PepsiCo has been rumored to be launching its own flavored sparkling water brand called Bubly in early March.

We have a $118 price estimate for PepsiCo, which is slightly lower than the current market price.

Tremendous Scope For Growth In The Sparkling Water Market

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Given that nationally, more than $2.3 billion worth of bottled sparkling water is sold every year, according to consumer market researcher Information Resources Inc., it is definitely a significant market for PepsiCo and Coca-Cola to ply their trade. In the first half of 2017, this market grew by almost 40% in terms of volume, with double-digit growth reported in dollar sales. This tremendous growth is expected to continue in the future as well, as the soda sales contract, and consumers look towards sparkling water to satisfy their cravings for carbonation.

On the other hand, sales of sugary, carbonated beverages have been on the decline for a while now, with consumer preferences tilting towards more healthier options such as teas and flavored waters. Diet drinks, which were once considered healthy, have received a lot of flak with increasing concerns about the dangers of artificial sweeteners. This shift away from carbonated drinks and diet sodas has precipitated the growth of the sparkling water category. Moreover, seeing the immense potential of this market, the entry of Coca-Cola and PepsiCo in this lucrative space does not come as much of a surprise.

For PepsiCo, Bubly can be expected to form only a small portion of the North American Beverage revenues, once the product is launched, given the enormous sales reported of its established cola brands. Hence, at least in the near term, there cannot be expected to be much upside to the company’s valuation with a launch of this product. According to our scenario, the new brand can be expected to garner $200-$300 million in sales per year by 2020, but that is a drop in the bucket when compared to the over $22 billion in sales projected from this segment. The graph has been made using our new, interactive platform. You can click here to modify the drivers to ascertain how much of an impact it will have on the company’s valuation as well as its price per share metric.

See Our Complete Analysis For PepsiCo Here

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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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