How Much Upside Can Increasing E-Commerce Revenues Provide For PepsiCo?

With online grocery shopping rising at a phenomenal pace, PepsiCo (NYSE:PEP) 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 has been tasked with capturing growth in this rapidly growing segment.  PepsiCo’s efforts seem to be working well, as the company has witnessed tremendous growth through its e-commerce channels, with its digital business garnering approximately $1 billion in annualized retail sales.

PepsiCo’s Place In This Fast Growing Space

PepsiCo’s team of 200 people is made up of seasoned e-commerce and tech professionals, who work in conjunction with the entrepreneurial talent at the company. Since the needs and wants of this group are different from those traditionally in a consumer packaged goods (CPG) business, the unit is treated as more of a tech company and could be the key for future growth. This online unit does not function out of the company’s headquarters in New York but from about an hour away in midtown Manhattan. This group, which was started about two years ago, but whose workings were revealed recently, focuses on the marketing and packaging of the company’s products for online sellers such as Amazon, as well as brick-and-mortar retailers who are trying to build their e-commerce business.

PepsiCo’s move in this space seems warranted as online shopping is growing at a rapid pace. In fact, the U.S. 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.

According to our assumptions, PepsiCo’s Frito-Lay and North American Beverage divisions’ revenues are expected to grow from $15.9 billion and $20.9 billion in 2017, to $17.4 billion and $21.9 billion in 2020, respectively. If the company is able to accelerate its revenues from e-commerce in these divisions at a much higher rate, they can instead grow to $17.8 billion and $22.4 billion. Moreover, the company has stated that e-commerce has been particularly relevant to its better-for-you portfolio in its Frito-Lay division, which includes more premium products, and, thus, has higher margins. Hence, Frito-Lay’s margins may also improve as a result of higher sales through e-commerce. If such a scenario occurs where North American e-commerce revenues increase at a higher rate than anticipated, there is a possibility of a 2% upside to our valuation.

We have a $125 price estimate for PepsiCo, which is higher than the current market price. The charts have been made using our new, interactive platform. You can modify the different driver assumptions by clicking here, to gauge their impact on PepsiCo’s price per share metric and its valuation.

See Our Complete Analysis For PepsiCo Here

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