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In this article, I will examine PepsiCo’s (NASDAQ:PEP) current business landscape, touching on recent developments and growth potential, as well as the company’s strong snack portfolio and various beverage businesses. Additionally, I will examine PepsiCo’s strong distribution network, retailer relationships, cost advantages, and benefits of scale. contribute to its wide economic channel. I will also discuss the risks associated with changing consumer preferences and the challenges the company faces in balancing between taste appeal and health considerations. Finally, I will conclude with an analysis of PepsiCo’s share price, highlighting that while the company’s fundamentals are strong, the current valuation may be fully priced in these benefits, which may limit the further increases in the near term.
Recent Developments and Development Potential
On February 22, 2023, PepsiCo’s CEO, Ramon Laguarta, highlighted the company’s growth potential during CAGNY presentations Conferences and media interviews. Laguarta emphasized the substantial growth path for convenience foods and beverages, even after the price changes. He also mentioned PepsiCo’s consideration of opportunities to leverage assets and focus on key brands in the alcoholic beverage sector, although no major M&A deals are expected in the near term. Finally, Laguarta identified potential supply chain disruptions due to pockets of labor shortages and employment challenges in specific areas.
On March 20, 2023, Bernstein upgraded its rating on PepsiCo from Underperform to Market Perform, recognizing the company’s strong price-led category growth during the pandemic. Additionally, PepsiCo’s Gatorade share performance, Celsius’ continued growth, innovation, and Frito-Lay’s improved sales contributed to the positive outlook.
Strong Snack Portfolio and Diversified Beverage Business Fuel Growth
PepsiCo’s position as a dominant player in the savory snack market is reflected in its US market share of 39.1%, which is more than 6 times larger than its closest competitor, Kellogg (K). The snack business makes up approximately 54% of the company’s revenue.
Statista.com
Convenience has emerged as a major trend in the food industry, with a growing demand for quick and easy food options. As a result, understanding the ease of food consumption becomes more important. Based on its continued investment in brand building, innovation, and product development, as well as the secular tailwinds driving the convenience of food consumption, I expect the snack business to grow to 7% annual rate until 2029. This outlook suggests that PepsiCo is well- positioned to take advantage of market trends and cater to changing consumer preferences and needs.
PepsiCo’s beverage business, which accounts for nearly 46% of its revenue, presents a mixed picture in terms of growth prospects. While the carbonated soft drink (CSD) segment may experience flat growth due to changing consumer preferences, PepsiCo’s diverse beverage portfolio, with popular brands such as Gatorade, Tropicana, and Quaker, expected to do better.
Additionally, the company’s multi-brand strategy in the energy drink market, along with Rockstar and Mountain Dew, positions it to capture market share in this fast-growing segment. Additionally, PepsiCo’s dominant position in the ready-to-drink coffee and tea categories through strategic partnerships with Unilever (UL) and Starbucks (SBUX) (my article on SBUX is here) provides additional touchpoints to those retailers and consumers, further improving the company’s competitiveness. .
In 1994, Starbucks and PepsiCo pioneered the Ready-to-Drink (RTD) coffee category with the launch of the popular Frappuccino® coffee drink. Since then, this category has expanded into a retail business worth over $22 billion, with Starbucks holding a 41% market share. Through their North American Coffee Partnership (NACP), Starbucks and PepsiCo continue to lead the way in offering customers premium, high-quality coffee products for on-the-go consumption.
In addition to their partnership with Starbucks, PepsiCo has a joint venture with Unilever for the production of RTD iced teas, including Lipton Iced Tea, Pure Leaf Iced Tea, and Brisk Iced Tea. In 2008, Starbucks, PepsiCo, and Unilever also announced a licensing agreement for the production, marketing, and distribution of Starbucks’ Tazo® Tea RTD beverages. As part of the licensing agreement, a range of iced teas, juiced teas, and herbal infusions under the Tazo® Tea brand were made available in the United States and Canada. Looking at the broader market, the global RTD coffee market size is expected to grow significantly, with a projected size of $42.36 billion by 2027, a CAGR of 8.31% in this that time.
Statista.com
I expect PepsiCo’s beverage sales to grow at a moderate pace of 1% to 2% annually through 2029, driven by the company’s diversified product portfolio and strategic partnerships.
Strong Distribution Network and Retailer Relationships Drive Competitive Advantage
PepsiCo’s extensive distribution network and close relationships with retailers make it an important partner for many businesses, from grocery stores to gas stations. The company’s wide variety of beverages, both carbonated and non-carbonated, and snack brands, catering to various budgets and regional preferences, provides an efficient, one-stop solution for inventory planning. , stocking, and replenishment.
In addition, PepsiCo’s technology-enhanced direct-to-store logistics system adds value to its retail partners, delivering a level of reliability and flexibility that is hard to match. The company is also investing in digital tools and advanced technologies to improve supply chain efficiency, with a particular emphasis on data integration to gain better insights into individuals and households purchasing its products. To illustrate, in its business in Mexico, the company implemented technology that led to an increase in store visits from 22% to 25% per day on the normal route, resulting in more efficient and effective processes to sell.
Additionally, PepsiCo’s strong relationships with retailers provide it with favorable allocation and shelf placement, as well as the ability to design and execute in-store promotions that strengthen brand awareness and pricing power. By working closely with retailers and using transaction and logistics data analytics, PepsiCo gains valuable insights into consumer and retail dynamics, allowing timely and accurate commercial plans and execution.
Cost Advantages and Economies of Scale Strengthen Broad Economies of Moat
PepsiCo’s huge revenue base of $86 billion gives it significant bargaining power in procurement negotiations, from raw materials to advertising services. Its diversified purchasing basket enables the company to manage costs effectively, even in times of high inflation. In addition, PepsiCo’s wide distribution scale allows it to reach more retailers and consumers faster and at a lower cost. This scale advantage not only helps accelerate product commercialization and capture profitable market share but also attracts preferred partners seeking to use PepsiCo’s distribution platform, further strengthening of scale and distribution capabilities.
This moat allows the company to consistently achieve an ROIC that exceeds the cost of capital.
YCharts
Continuous Topline Growth and Revenue Growth perfectly priced at
Based on my DCF valuation method, I determined that the value of PepsiCo shares would be $178. To calculate this value, I used a cost of capital of 6.5%, derived from an unlevered beta of 0.88. This unlevered beta is obtained by taking the revenue-weighted average of the soft beverage industry (1.2) and the food industry (0.5).
From 2024 to 2029, I expect revenues to grow at a rate of 4.9%. This growth was driven by a 7% increase in the snack segment and a 1.5% increase in the beverage segment. High growth in the snack segment will be driven by a strong performance from the company’s brands, while a diverse beverage portfolio will enable PepsiCo to expand market share in non-carbonated categories, such as sports drinks, water, and ready-to-drink coffee. .
I expect the EBITDA margin to improve to 160 basis points in 2029, driven by gross margin expansion from the manufacturing efficiencies gained in the snacks business, better leverage of marketing and advertising expenses, and more efficient, technology distribution spending. These factors contribute to the growth of the company’s bottom line and long-term profitability.
Below are the main assumptions:
Author estimates and company 10-K filings
The Risk of changing consumer preferences
The growing health awareness of consumers creates the challenge of balancing between taste appeal and health considerations. Even with reform efforts and recipe changes, concerns about the health effects of PepsiCo products may persist, or attempts to address these concerns may prove ineffective. costs and will put pressure on margins.
Conclusion
PepsiCo is well positioned to capitalize on its strong portfolio of snacks and diversified beverage businesses, supported by an extensive distribution network, strong retailer relationships, and cost advantages gained from the wide economic channel. The new developments reflect the company’s commitment to exploring growth opportunities and navigating market challenges. However, it is important to remain aware of the risks and uncertainties surrounding changing consumer preferences and the ongoing balancing act between taste appeal and health considerations. While PepsiCo’s fundamentals are strong, the current share price appears to be fully priced into these benefits, which may limit the potential for further upside in the near term.
