PepsiCo Inc. (PEP) and The Coca-Cola Company (KO) are fundamentally different stocks. While they're both well-recognized for their flagship drinks (and on that one, I'll side with Coke), they have remarkably different business strategies. While Coke focuses on, well, Coke (and other beverages like VitaminWater), Pepsi has fingers in a lot of different pies, holding important snack brands like FritoLay.
Pepsi just announced that it is going into a joint venture with Germany's Theo Muller group to enter the yogurt industry:
The joint venture, Muller Quaker Dairy, is building a yogurt plant in Batavia, N.Y., that PepsiCo says will be one of the largest in the country. [...] PepsiCo noted that the U.S. yogurt market is expected to reach $9 billion by 2016, double what it was in 2008.
Pepsi's commitment to diversify its portfolio and increasing sales through increased focus on "good for you" products has so far paid off. With many Americans cutting back both on their wallets and their waistlines, sodas aren't quite as popular as they used to be:
In April, the food and beverages company reported that its first-quarter earnings fell 1.4% on higher costs as revenue growth slowed and sales from Americas beverages continued to slide.
Thus, PepsiCo is positioning itself well by entering the yogurt market, another "up-and-coming" health foods market. As noted above, the yogurt market's size is expected to double by 2016. But currently, America's yogurt consumption far lags behind consumption in Canada and Europe. (Per capita consumption in Europe is 3X that of America, and Canadian consumption is 2x.)
One of the primary reasons is because yogurt is seen as "boring." Consumers eat it because it's supposed to be good for them, not because they find it particularly appetizing: as Stefan Muller put it, American yogurt is "boring." But Pepsi is trying to change that:
Müller by Quaker will try to change that with what Mr. Lteif calls "mainstream premium" products that fill a gap between mass brands like Dannon and Yoplait and niche Greek yogurts like Fage and Chobani. [...] Besides traditional fruit flavors like strawberry and blueberry, these supplements include caramelized almonds, tiny chocolate-covered crunch balls and granola.
The yogurt has been well-received by many, including Alan Faust, director of dairy perishables and frozen foods at major retailer Kroger.
Pepsi's Refresh project has paid off for investors so far, and its yogurt plans look like a good addition to an already-solid portfolio. The market is changing, and Pepsi CEO Indra Nooyi is responding well. PepsiCo's diversification allows it to reach consumers like me who prefer other soft drinks like Coke. The recent yogurt addition is just one more reason to like Pepsi stock, which trades at a fairly inexpensive P/E (17.3) and has a strong history of dividend raises.
Pepsi was one of the core holdings I named in my Christmas Gift Portfolio, and at current valuations, noted value investor Donald Yacktman compares purchasing PepsiCo to "shooting fish in a barrel." The recent yogurt expansion is yet another sign of strong, innovative management at PepsiCo.
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