Morningstar | Pepsi’s Brand Investments Should Support Its Pricing Power and Top-Line Trajectory
We think PepsiCo’s leading portfolio of beverage and snack brands has allowed it to carve out a wide moat, ensuring robust returns on invested capital over the long run. We believe both Pepsi and wide-moat Coca-Cola will continue dominating the domestic nonalcoholic beverage market (according to Beverage Digest, these firms hold a combined volume share of around 50%), as their entrenched retail relationships and economies of scale create meaningful barriers to entry. Moreover, we expect rational pricing relationships between the firms to persist over the long run, supporting gains from price and product mix.We anticipate growth will be fueled by Pepsi’s noncarbonated beverage and snack businesses, which should help it offset the impact of secular declines in the consumption of carbonated soft drinks (which account for less than one fourth of overall sales) in its home market. We appreciate the firm’s focus on “guilt-free†products (roughly half of sales), which align with consumer trends, and surmise sustained brand-related investments (with combined expenditures on advertising and research and development remaining above 7% of sales over our forecast) will allow it to develop and market innovative new products, helping its portfolio adapt to changing consumer tastes. In addition, efforts to drive efficiency gains (targeting $1 billion in savings annually) stand to enhance its margins and free up funds to support its product set.Pepsi took control of its two largest bottlers in 2010, consolidating around 80% of its North American beverage system, and we expect these bottling operations to remain integrated with the firm. From our vantage point, this dynamic allows for increased control and deeper integration between its brands. We contend that the combination of the food and beverage businesses has also shored up Pepsi's competitive edge, thanks to synergies in marketing and distribution, as well as strengthened relationships with retailers that rely on its leading snack and beverage brands to drive turnover. We also think this combination has enhanced its international scale, which should help Pepsi maintain its attractive cost structure as it expands abroad.PepsiCo is a food and beverage company. The company's segments include: Frito-Lay North America, which includes food and snack businesses in the United States and Canada; Quaker Foods North America, which includes cereal, rice, pasta and other food businesses in the United States and Canada; PepsiCo Beverages North America, which includes beverage businesses in the United States and Canada; Latin America, which includes beverage, food and snack businesses in Latin America; Europe, which includes beverage, food and snack businesses in Europe; and Africa, Middle East and South Asia, which includes beverage, food and snack businesses in Africa, the Middle East and South Asia.
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Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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