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Mark Kowalski
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My investment theory consists of applying logic to financial and competitive data to find companies that will outperform the market. My work as an auditor has given me a degree of expertise to see through the numbers of financial statements to get a clear picture of the business behind them. I... More
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  • Pepsi As A Healthy Alternative For Your Portfolio.

    Pepsico's portfolio of products contains a large selection of healthier products which is well aligned with the consumer trend into healthier eating. Yet it seems up to their latest quarterly report that these product lines continue to underperform.

    Guiding Stars

    My neighbourhood Loblaws (OTCPK:LBLCF) grocery store recently rolled out a new "Guiding Stars Program"

    This program consists of a simple system where 0-3 stars are added to the displayed price tag of a food item to indicate how well the item aligns with the Canada's Food Guide, the dietary recommendations and regulations established by Health Canada. The algorithm for the stars ranking rates the density of the food and adds and subtracts ratings based on the following chart:

    Among the items ranked positively, I noticed two Pepsico brands had several products each adorned with multiple stars:

    (click to enlarge)

    (click to enlarge)

    Quaker and Tropicana are two of Pepsico's 22 brands that generate over $1 M in sales, and each of them had a number of products with 2-3 stars. I found this intriguing, particularly as consumers have become much more health conscious about the foods they choose to buy, that Pepsico would have so many products well ranked in these categories. This brought on the question about how well is this line of products performing, and what is the potential for them in the future.

    A feel good reinforcing driver such as these star rankings should go a long way towards helping drive sales growth in these brands, however to a very limited audience. It nevertheless reflects a healthy potential as these products are well aligned with the market trend.

    Tropicana

    The Tropicana brand could be a key asset for Pepsico as it tries to find growth beyond the continuous declines in the CSD - carbonated soft drinks market with healthy juice alternatives.

    And yet, of the reported decline of 4% in terms of volume for the full year 2012 in its North American beverages division, Tropicana was a significant component of this decline and in the full year 2012 posted a sales decline in the double digits. As far as the second quarter of the current year, the picture has improved, yet Pepsico still reported a small decline in its non-CSD beverage sales

    Coupled with the proper expansion strategy and marketing, it could still play a significant role in driving sales growth going forward. Tropicana's latest product, Tropicana Farmstand consists of one serving of fruits and one of vegetables per glass, and experience significant sales growth in the second quarter. It is projected to be one of the next product lines with over $100 M in sales.

    Quaker

    Pepsico describes Quaker as a solid business with high margins and returns of capital but a slow growth area. Quaker's products suffer from what Pepsico calls the centre of the store, whereby the products are already a staple but are difficult to grow. The second quarter 2013 saw sales in this division's sales increase 1% and profit decrease 14% amid higher spending on development.

    They also highlight consumers increased demand for convenience in their products. Uncle Ben's, part of the Mars Inc product line, has a Bistro Express line which a series of microwaveable pouches of rice that make a ready to eat lunch in 2 minutes. Though sales figures for it are not available, this line consistently occupies a lot of shelf space at grocery stores and seems to be well liked in online reviews despite the astronomical levels of sodium contained within. Should Quaker be able to replicate this convenience with a similar product for its whole oats line it could certainly help with this division's sales.

    One recent aspect of the company's development efforts comes in the shape of a partnership with Jamba Juice (NASDAQ:JMBA) announced in July where Quaker whole grain oats products would be made in an easy-to blend version to go with the line of fruit smoothies for an extra $0.25.

    Pepsi's Current Strategy

    Pepsico itself has identified these brands among several other in its "Good for You" Nutrition Portfolio. It has flagged this as a high growth space and continues to invest heavily in expanding the line of available products.

    Also included in these brands are Gatorade and the Naked juice brand. While Gatorade itself was not found worthy of any stars, it is clearly positioned strongly as a fitness related product and will likely not be overseen by the bandwagon. The Naked Juice brand has been strongly promoted and found excellent placement in Starbucks (NASDAQ:SBUX) cafes. In 2012, the Naked Brand sales grew 21% over the prior year.

    Pepsico is also expanding into more related product lines, with dairy products in parts of the world, hummus and other fresh dips and baked grains coming out of joint ventures or new product lines

    Conclusion

    It's absolutely no secret that consumers are becoming more health conscious, and Pepsico is well positioned in this trend with its two strong brands Quaker and Tropicana lined up for the job. However, as the financial results demonstrate, it is not enough to have these products around, and consumers require rebranding and new products to keep the sales volume.

    Nevertheless, Pepsico has demonstrated its intention to continue focusing marketing and development efforts at this division and has so far done so with some success. I believe this positioning and PepsiCo's continued marketing and branding efforts will pay off with an expanding line of healthy products on the shelves.

    Other Pepsico Brands that made the listing include the following:

    (click to enlarge)

    (click to enlarge)

    Several brands are not considered, such as bottled water (Aquafina) and tea or coffee brands (Lipton) in the program. The majority of the other brands did not receive any stars.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: PEP
    Aug 05 9:46 AM | Link | Comment!
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