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PepsiCo: Fighting the Beverage Battle

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The Covid-19 pandemic has had a mixed impact on PepsiCo, Inc. (NASDAQ:PEP). While the negative impact on the food-service industry and other related sectors has affected the beverage business, the corresponding benefit with respect to grocery store consumer demand has been enjoyed by its snacking brands. Quaker and Frito-Lays have been among the biggest beneficiaries in this environment and have helped the company deliver a strong quarterly result.


The company continues to pay a dividend and expects to have a decent upside with an expected jump in the snacks segments. However, its biggest struggle continues to be the beverages space, where it is looking to fight back with its Rockstar acquisition.

Company overview

PepsiCo is one of the world's oldest and largest food and beverage companies. It is headquartered in Purchase, New York and operates through six main business segments: Frito-Lay North America (FLNA), Quaker Foods North America (QFNA), North America Beverages (NAB), Latin America, Europe Sub-Saharan Africa (ESSA) and Asia, Middle East and North Africa (AMENA).

Apart from its standard beverage products, the company offers a wide variety of branded dips, cheese-flavored snacks, chips, coffee, dairy products, etc. It has one of the largest distribution networks in the world and serves its products to end-consumers through wholesalers, distributors, foodservice customers, grocery store and convenience store retailers, etc. It also has direct-to-consumer sales through its e-commerce platforms.

Recent results

PepsiCo delivered strong earnings results recently, beating analyst expectations for the second quarter of 2020.

The company reported revenue of $15.95 billion, which was significantly above the analyst consensus estimate of $15.35 billion but slightly lower than the corresponding quarter of the previous year.

Snacks were the outperforming category with a 5% growth that helped offset the 7% decline in the core beverages business. Quaker was especially strong. Not only did it increase household penetration, it also showed organic growth of as much as 23%. The same goes for Frito, which saw a boost arising from the increasing consumption of chips.

In terms of earnings, the company reported earnings per share (EPS) of $1.32 that was well above the analyst consensus estimate of $1.26.

Challenges in beverages

The biggest challenge for PepsiCo has been its North American beverage business

In the recent quarterly result, the segment's organic revenue declined 7% resulting from a drop in the convenience, gas station and foodservice channels. The at-home consumption of beverages causing increases in purchases from grocery, mass production and dollar stores led to some growth, but it was not sufficient to offset the negative impact caused by the higher-margin food-service slowdown.

PepsiCo's management has undertaken various revenue management initiatives and attempted to vary pricing in carbonated soft drinks and sports drinks, which did lead to some gains.

Pepsi Zero Sugar and Bubly have consistently delivered strong double-digit net revenue growth. Also, the company's ready-to-drink coffee products have delivered a high single-digit net revenue growth in the quarter where PepsiCo actually gained some market share. The management claims that market share trends have improved in carbonated soft drinks, sports drinks and juices resulting from a higher take-home consumption.

PepsiCo's biggest struggle has been energy drinks, with Mountain Dew being unable to penetrate the market. The recent acquisition of Rockstar Energy in a $3.85 billion deal is expected to change this. The Rockstar acquisition adds more depth and breadth to the company's portfolio. It can use its superior distribution capabilities to improve the store presence of Rockstar and accelerate the performance of Bang Energy. While this may not have a material impact in 2020, I think it is sure to impact the future revenues and profitability of the beverages segment.

Takeaways

PepsiCo's stock price has recovered well and has remained more or less flat over the past few months.

Despite the struggles in the beverage business, changes in consumer behavior have benefitted the company, as there has been a stronger inclination of the average consumer towards snacking and stocking on various snacks in the lockdown period.

Disclosure: No positions.

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This article first appeared on GuruFocus.