How Important Is North America Beverages For PepsiCo’s Growth?

North America Beverages (NAB) has maintained its position as the largest revenue segment for PepsiCo (NASDAQ: PEP). However, over the last two years, while PepsiCo’s total revenues (shows PepsiCo’s key revenue components) increased by $1.86 billion between 2016 and 2018, NAB saw a reduction of $0.24 billion in its revenue base during the same time. Can North America Beverages continue to command the kind of significance it used to, or will its place be taken by other fast-growing divisions of the company? To understand this, please refer to the Trefis interactive dashboard – What Is The Importance Of North America Beverages In PepsiCo’s Business? In addition, here is more Consumer Staples data.

Division Overview

What is on Offer?

• North America Beverages, which is the company’s beverage business in the United States and Canada, includes fountain syrups and finished goods under various beverage brands – Pepsi, Gatorade, Mountain Dew, etc.
• NAB also, either independently or in conjunction with third parties, makes, markets, and sells ready-to-drink tea and coffee products through joint ventures with Unilever (under the Lipton brand name) and Starbucks, respectively.
• Further, NAB manufactures and distributes certain brands licensed from Dr Pepper Snapple Group, Inc. (DPSG), including Dr Pepper, Crush, and Schweppes.

Who is the Customer?

• NAB operates its own bottling plants and distribution facilities and sells branded finished goods directly to independent distributors and retailers.
• NAB also sells concentrate and finished goods for its brands to authorized and independent bottlers, who, in turn, sell the branded finished goods to independent distributors and retailers in certain markets.
• All soft drink customers are potential product buyers.
• Normally, the company sells the concentrate to its bottlers who then sell it to retail customers by adding water and the fizz.

Competition?

• The main competition comes from Coca-Cola and Dr Pepper Snapple, which command a substantial market share within the U.S.
• PepsiCo also has to compete with fruit juices, energy drinks, and other healthier drinks.

Segment Revenue Trend

• NAB’s revenue declined $0.4 billion in 2017, followed by a marginal increase of $0.2 billion in 2018.
• Revenue has remained under pressure due to consumers shifting away from carbonated drinks.
• However, the trend is expected to reverse with NAB projected to add about $0.6 billion to its revenue base by 2020.
• Revenue growth is likely to be driven by growth in non-carbonated beverages (NCB) volume, led by increase in the overall water portfolio and in Gatorade sports drinks.
• Additionally, higher coffee volumes due to tie-up with Starbucks is also expected to drive revenue growth.

Revenue Share

• Historically, NAB has contributed about one-third of PepsiCo’s total revenues, with the segment holding the largest revenue share in the company.
• However, the share of segment revenue has continuously declined over recent years, due to faster growth in other divisions and a drop in segment revenue in 2017.
• Though absolute revenue is expected to grow in 2019 and 2020, the division’s share in the company’s total revenue is expected to decline further, from 32.6% in 2018 to 31.6% by 2020, driven by stronger revenue growth in Frito-Lay and the European segment, which is likely to eat into NAB’s revenue share.

To understand Frito-Lay’s business and significance to PepsiCo, please refer to the Trefis analysis – Frito-Lay North America: PepsiCo’s Primary Growth Driver.

NAB’s Profitability

• Though NAB is the largest revenue contributor for PepsiCo, the same cannot be said when it comes to profitability.
• NAB’s operating profit margins have historically remained below the company’s profit margins. This is mainly due to company’s margins being boosted by healthy growth in Frito-Lay and European segment.
• We expect the segment to reverse its declining margins trends and report higher profit margin in the next two years, driven by revenue growth along with productivity savings.
• The recently announced 2019 Productivity Plan, under which PepsiCo will leverage new technology and business models to further simplify, harmonize, and automate processes, and in addition optimize its manufacturing and supply chain footprint, is likely to provide a boost to the the segment’s profitability.
• However, NAB’s operating profit margins are expected to continue to remain below the company’s margins, with higher profitability in most of the other divisions.

Conclusion

In the Q3 2019 results (which were released early October), PepsiCo saw its total revenue increase by $703 million compared to Q3 2018, out of which $187 million (27%) was contributed by NAB. Trefis estimates PepsiCo to add close to $4 billion in revenues over the next two years, out of which $0.6 billion (16%) is expected to come from North America Beverages. However, though NAB, continuing to be the biggest revenue contributor, would play a role in driving future revenue growth, lower margins and a much healthier growth in Frito-Lay and European divisions, could drive greater investor and company focus towards those divisions.

As per PepsiCo Valuation by Trefis, we have a price estimate of $137 per share for PEP’s stock.

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