PepsiCo Struggles With The Challenge

| About: PepsiCo Inc. (PEP)
This article is now exclusive for PRO subscribers.


Pepsi vs. Coke.

Water causes a challenge for Pepsi.

Snack division helps PEP growth.

PepsiCo (NYSE:PEP) is one of the top names in the American soft drink industry.

Since 1893, when Caleb Davis Bradham created the prototype "Brad's Drink," Pepsi-Cola has been a favorite beverage among the American public and has gained acceptance in many countries around the world. Pepsi's rivalry with Coca-Cola (NYSE:KO) has lasted throughout the 20th century, and now continues into the 21st century. However, a number of factors are slowing soft drink sales in general, and Pepsi has seen its revenues drop significantly over recent years.

Coke's Ongoing Predominance

PepsiCo's fortunes were tied to its competitor, Coca-Cola, from the products' very beginning. The invention of Coke a few years prior created a rivalry that continues to the present day. Coke dominated the "cola wars" continuously- except for a brief period during the late 1970s.

Today, Coke accounts for 42 percent of soft drink sales, while Pepsi holds steady at around 28.1 of total soft drink sales. Some areas of the country seem to prefer Pepsi to Coke, or Coke to Pepsi, mostly as cultural habit rather than as preference of taste. This cultural association also extends to foreign markets, such as Pepsi-Coke associations with older or newer periods of each nation's development.

The Rise of the Healthy Consumer

As more medical research came to media attention, health became a matter of importance to American consumers. Soft drinks came into disrepute for being empty calories for a nation with a growing obesity problem and rising rate of Type-2 diabetes. A push to healthier beverages such as water, juices and energy drinks began putting a drag on cola sales.

Soft drink sales fell precipitously in the years between 2000 and 2010. Sales continue to lag in western economies. A greater push into emerging nations is helping to shore up revenues, and could be the key to increased sales in future years. PepsiCo has been experimenting with altering its products to cater to more regional tastes and health-conscious consumers.

The Snack Division

One of the bright spots in PepsiCo's overall performance is in the snack food division. Its Lay's brand continues to experience increasing growth in developing areas of the world. The introduction of baked and gluten-free products is providing health-conscious consumers with more choices for snack items and help increase PepsiCo's drop in soft drink sales.

Operational Changes Could Help Shareholders

PepsiCo's aggressive expansion in foreign markets has triggered a need for operational changes that create some complex problems for the company. Some activist investors are pushing the company to split the soft drink and snack food divisions in hopes of sparking more vigorous growth, but the advantages of this strategy are dubious at this time.

CEO Indra Nooyi feels a split would hurt the company's ability to negotiate with retail customers. How PepsiCo handles this time of transition will be key to its performance in the near term. With a solid brand and significant market share, the company can be expected to weather the changes well.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.