PepsiCo, Inc. (PEP) is the leading global snack food company and the second largest soft drink company, providing food and beverage products in more than 200 countries. The company’s strong new product pipeline, robust international sales, on-going manufacturing productivity initiatives and an active stock program are all positives for PepsiCo.
Domestically, management is implementing multiple initiatives to counter the weak retail environment for carbonated soft drinks (CSDs). In addition to a strong new product effort in diet carbonated beverages, non-carbonated beverages, and healthier snacks, the company utilizes new packaging to shift consumers to more profitable purchases.
PepsiCo has also strengthened its partnerships with bottlers, especially Pepsi Bottling Group, with contracts that clearly define objectives and roles.
To enhance sales growth, PepsiCo implemented a new “Smart Spot” initiative in both beverages and snacks. Under the initiative, the company places green Smart Spot symbols on products that offer a healthier alternative based on statements from the U.S. Food and Drug Administration (FDA) and the National Academy of Sciences (NAS). About 35% of PepsiCo’s North American products qualify for the Smart Spot.
In addition, to reduce its carbon footprint, the company recently announced that it will develop 100% plant based PET having the same qualities as that of the traditional PET. On a long term basis, this initiative will help the company save costs.
PepsiCo International is reporting growing revenues and profits across many regions, especially developing markets. Asia Pacific markets, such as China and India, are leading the way with double-digit volume increases in snacks and beverages. The Middle East and Africa region is also seeing excellent results from countries such as Turkey and Egypt.
The company is investing $1 billion in China over four years. The initiative began in 2008. The investment includes the expansion of manufacturing capacity and local research and development catering to new products tailored to Chinese consumers in addition to building the company’s sales force and funding brand-building initiatives.
Management also plans to invest up to $3 billion in Mexico over the next five years to stimulate growth of beverage brands along with Sabritas and Gamesa snacks. The company also plans to invest $1 billion in the Russian market, including investments in a new beverage facility in Domodedovo and a snacks plant in Azov.
Further, to offer health and lifestyle products to consumes out of North America, PepsiCo has formed a joint venture with Strauss to primarily produce and sell fresh dips and spreads in key markets.
Despite all this, the company is challenged by severe rise in commodity costs which are pressuring profitability. Rising corn oil and orange costs, are forcing both bottlers and retailers to pass along the higher costs to consumers. Higher pricing at retail suppresses demand and/or increases market share of private label alternatives.
In addition, PepsiCo has significant international operations and can be severely impacted by negative currency translations during times of U.S. dollar strength. The nonalcoholic beverages segment of the commercial beverages industry is highly competitive, with its prime competitor Coca Cola Company (KO). Other significant competitors include, Nestlé, Dr Pepper Snapple Group, Inc. (DPS), Groupe Danone, Kraft Foods Inc. (KFT) and Unilever (UL).
These potential risks severely undermine the company’s future growth prospects and profitability. This leaves limited space for above-market performance of the company.
Currently, we have a long-term Neutral rating on PepsiCo. However, the stock holds a Zacks #4 Rank, which translates into a short-term ‘Sell’ rating.
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