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Understanding PepsiCo’s business model

Must-know: An investor’s guide to PepsiCo (Part 2 of 14)

(Continued from Part 1)

Diversified business model

PepsiCo Inc. (PEP) has a diversified business model with a strong presence in food and beverage products. In a scenario where carbonated soft drinks have been continually declining, PepsiCo’s significant presence in the snack food category gives it an edge over its closest rival, The Coca-Cola Company (KO), which is heavily dependent on sparkling or carbonated beverages. In 2013, PepsiCo’s food business accounted for 52% and its beverage business accounted for 48% of the company’s $66.4 billion revenues.

Complementary products

PepsiCo benefits from its presence in two complementary categories: food and beverages. There is a high coincidence of purchase between these two categories. According to Information Resources, Inc. (or IRI), a market research company, 54% of US consumers who buy salty snacks also buy a beverage in the same basket. For instance, PepsiCo states that when Frito-Lay snacks are merchandised along with Pepsi carbonated soft drinks (or CSDs), it results in higher sales.

Another interesting observation is that more than 60% of US households who buy Mountain Dew also buy Doritos tortilla chips.

Leveraging category strength

The presence of one category of business in a region makes PepsiCo’s entry easier into the complementary category. For instance, PepsiCo is able to leverage its beverage business in emerging markets to develop its snacks business.

Competitors have a similar business model

PepsiCo’s peers Kraft Foods Group Inc. (KRFT) and Mondelez International, Inc. (MDLZ) also have a presence in the food and beverage categories. In 2013, Kraft Foods derived 10% of its $18.2 billion in revenue from refreshment beverages and food. That year, Mondelez International derived about 17% of its $35.3 billion of revenue from beverages and snack food.

The companies mentioned above are part of the consumer staples sector. You can gain exposure to these companies through the Consumer Staples Select Sector Standard & Poors depositary receipt (or SPDR) Fund (XLP). You can also invest in PepsiCo through index tracking exchange-traded funds (or ETFs) such as the SPDR S&P 500 ETF (SPY) and the iShares Core S&P 500 ETF (IVV).

Continue to Part 3

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