PepsiCo Focusing On Diversifying Drinks Portfolio To Steady The North American Beverages Revenue

by Trefis Team
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PepsiCo (NYSE:PEP) reported its fourth quarter and full year results that topped analysts’ estimates, despite a changing retail environment and a continued soft market for carbonated beverages, driven by a particularly strong quarter at its Frito-Lay North America division. Its earnings came in at $1.31 per share on revenues of $19.53 billion, versus an expectation of $1.30 and $19.39 billion. In order to halt the decline in its North American Beverages segment, the company is focusing on developing products that have low or no calories and sugar, as well as innovating its core brands. As part of its productivity program, the company is laying off less than one percent of its workforce, primarily in its corporate office. Such efforts should ensure growth in its bottom-line in the future, while efforts undertaken by the company to adapt to the changing consumer preferences and a dynamic environment should ensure consistent top-line growth.

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Softness In The North American Beverage Market

A neglect of the core brands had been highlighted to be the main factor driving the weakness in the North American Beverages segment in the third quarter. While the company has been undertaking a number of steps, such as increasing the advertising behind these brands, the impact will take a few quarters to be fully realized.  Hence, while the trends continued to remain poor in the segment in Q4, the metrics improved sequentially, and this should continue as FY 2018 rolls on.

PepsiCo is also focusing on other avenues of growth, such as ready-to-drink teas and coffees, and bottled and sparkling water. In this regard, it is making an effort to return its tea brands (through a joint venture with Unilever) – Brisk, Lipton, and Pure Leaf – back to positive growth, by launching new flavors and re-advertising the core brands. PepsiCo has also partnered with Starbucks in the ready-to-drink coffee business, with their strong innovation pipeline ensuring growth in the years to come. With water being a big and fast growing segment, it is imperative for PepsiCo to have a foothold in all its forms, such as still, sparkling, flavored, etc. The company launched LIFEWTR, an electrolytic water, in FY 2017, and the brand is reported to be performing well. PepsiCo recently launched Bubly, a flavored sparkling water drink, and will be playing catch-up to established brands such as Perrier, San Pellegrino, and National Beverage’s LaCroix brand. The tremendous growth in the water segment 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.

Growth In The E-commerce Space

With online grocery shopping rising at a phenomenal pace, PepsiCo is placing a big bet on the online space. The company is making an increasing effort to address the growth opportunities across eGrocery, pureplay, urban grocery delivery, direct-to-business, and direct-to-consumer models. Keeping this in mind, the cola giant has developed a team of roughly 200 e-commerce professionals that have been tasked with capturing growth in this rapidly growing space. Till now, PepsiCo’s efforts seem to be working well, as the company has witnessed tremendous growth through its e-commerce channels, with the company’s digital business garnering approximately $1 billion in annualized retail sales.

PepsiCo’s move in this space seems warranted as online shopping is growing at a rapid pace. In fact, US online grocery shopping is set to grow five-fold over the next decade, with American consumers projected to spend over $100 billion on food-at-home items by 2025, according to a report by the Food Marketing Institute and Nielsen. The report also notes that the online channel is likely to capture a substantial portion of the market share from traditional stores. At present, about a quarter of the households buy some groceries online, up from 19% in 2014. This is expected to rise to approximately 70% in the next ten years.

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