How Important Is Europe & Sub-Saharan Africa For PepsiCo’s Growth?

Europe & Sub-Saharan Africa (ESSA) is likely to be the fastest growing revenue segment for PepsiCo (NASDAQ: PEP) in the near term. While PepsiCo’s total revenues increased at a CAGR of 1.5% from $62.8 billion in 2016 to $64.7 billion in 2018, ESSA’s revenues increased at a much higher CAGR of 6.2% from $10.2 billion in 2016 to $11.5 billion in 2018. Will ESSA’s significance in PepsiCo’s growth story continue to grow? To understand this, please refer to the Trefis interactive dashboard – What Is The Importance Of Europe & Sub-Saharan Africa In PepsiCo’s Business?

Division Overview

What does it offer?

• PepsiCo makes, markets, distributes, and sells a number of leading snack food brands including Lay’s, Walkers, Doritos, Cheetos, and Ruffles, as well as many Quaker-branded cereals and snacks, through consolidated businesses as well as through noncontrolled affiliates in the ESSA region.
• Its offerings also include beverage concentrates, fountain syrups, and finished goods under various brands. The company has an international joint venture with Unilever (under the Lipton brand name) through which it sells ready-to-drink tea products.
• ESSA also sells a number of leading dairy products including Chudo, Agusha, and Domik v Derevne.

Who is paying?

• These branded products are sold to authorized bottlers, independent distributors, and retailers.
• All households are potential customers.
• Pepsi, like Coke, is one of the few brands that are not targeted at some specific demographic or customer segment, and the company intends to keep it that way.

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

• ESSA division’s revenue increased from $10.2 billion in 2016 to $11.5 billion in 2018, adding $1.3 billion in the last two years.
• Higher revenue has been driven by increased volume and effective net pricing. Snacks sales increased in Netherlands and Russia, whereas beverage volume saw healthy growth in Poland, Nigeria, France, and Germany.
• The division is expected to add about $1.6 billion in revenue in 2019 and 2020, primarily reflecting the impact of the SodaStream acquisition and strong growth in Nigeria and Poland. However, currency movements could affect revenue growth to a certain extent.

To see how each operating division of PepsiCo is expected to perform, view our dashboard analysis.

Revenue Share

• ESSA’s share in PepsiCo’s total revenue has increased from 16.3% in 2016 to 17.8% in 2018.
• This trend is expected to continue with the division’s revenue share likely to move up to 19% by 2020.
• Segment and the company as a whole are expected to see revenue growth, but ESSA’s share is expected to rise due to slower growth in other divisions such as North America Beverages, Quaker Foods, etc.

ESSA’s Profitability

• Though ESSA is expected to see healthy revenue growth in the near term, the same cannot be said when it comes to profitability.
• ESSA’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 the Frito-Lay segment.
• We expect the segment to report slightly higher profit margin in the next two years, with it projected to increase from 6.5% in 2018 to 6.8% in 2020 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 segment’s profitability.
• However, ESSA’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

Trefis estimates PepsiCo to add close to $4 billion in revenues over the next two years, out of which over $1.5 billion (39%) is expected to come from Europe, Sub-Saharan Africa, making it the fastest growing division over the next two years. Though margins are expected to be much lower than PepsiCo’s overall, ESSA is likely to be the most important division for the company to expand its top line, which could drive greater investor focus toward the company.

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