Morningstar | Pepsi’s leading portfolio of beverage and snack brands has given it a defensible competitive edge.
PepsiCo’s leading portfolio of beverage and snack brands has carved out a wide moat for the firm, ensuring excess returns on invested capital over the long run. We believe both Pepsi and Coca-Cola will continue dominating the domestic nonalcoholic beverage market. Each has a market share in the low-20s, more than double the next-closest competitor, Dr Pepper Snapple. Pepsi and Coca-Cola's respective entrenched retail relationships and economies of scale create powerful barriers to entry. Moreover, we expect rational pricing relationships between the firms to persist over the long run, leading to gains from price and product mix. Although Coca-Cola’s carbonated soft drinks enjoy greater share abroad, we believe Pepsi’s snack portfolio is well-positioned for international gains. Pepsi also has established agreements to distribute brands such as Starbucks, Sabra, and Rockstar Energy, further strengthening its retailer relationships.We anticipate growth will be fueled by Pepsi’s noncarbonated beverage and snack businesses, which should enable it to offset the impact of secular declines in the consumption of carbonated soft drinks (which account for less than one quarter of overall sales) in developed markets. We appreciate the firm’s focus on “guilt-free†products (that contribute 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, further bolstering the intangible asset source of its wide moat. 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 over packaging and distribution and deeper integration between the snack and beverage businesses.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.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
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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