) is the leading manufacturer of savory snacks in the U.S., but
trails Coca-Cola in the carbonated soft drinks (
) division and the overall beverage market. Pepsi's global CSD
business has historically accounted for more than a fourth of the
company's revenues, but has seen declining sales in recent times.
On the other hand, the Frito-Lay North America division, which
contributed only ~20% to the total revenues in 2012, constitutes
almost 35% of the company's valuation by our estimates.
We estimate a $87 price for PepsiCo
, which is around 5% above the current market price.
Growing health awareness among consumers, particularly in the
developed countries, has reduced CSD sales in the last few
years. In 2012, the U.S. CSD market declined by 1.2%
year-on-year in terms of volume. The figure has further decreased
by 2% in the nine months ending September this year. Studies have
raised concerns over the unhealthy amount of sugar intake
associated with juices and smoothies. As a result, beverage sales
are taking a hit in North America and Pepsi is looking to uphold
its strong performance in the snacks business in the region.
See Our Complete Analysis For PepsiCo
Frito-Lay More Profitable
Frito-Lay North America forms more than a third of PepsiCo's
valuation by our estimates. One of the main reasons for this is the
heftier margins of this division, as compared to the beverage
division. In 2012, while the company-wide margins stood at 20%,
Frito-Lay North America had an impressive EBITDA margin of
Therefore, a higher proportion of Frito-lay sales in North
America will be more profitable for Pepsi. The U.S. savory snack
market was worth $29 billion in 2011, having grown at a CAGR of
5.1% since 2007. Looming health concerns such as obesity in the
country have targeted the consumption of snacks with high calories
and trans fats. However, snacks continue to be popular in North
America, backed by the successful launches of healthier
alternatives within the segment. The U.S. savory snacks market is
expected to grow at a CAGR of 3.5% to reach ~$36 billion in annual
revenues by 2016.
PepsiCo Dominates Snacks Market In The U.S.
Although PepsiCo plays second fiddle to Coca-Cola in the U.S.
beverage market, it has a formidable market share of over 35% in
the savory snacks market. Within the savory snacks, PepsiCo has a
stronghold in the potato chips, tortillas chips and corn snacks
The potato chips market, in which Pepsi has a share of 58%, was
worth ~$9 billion in 2012. Fueled by the introduction of baked and
gluten-free chips, this market is expected to grow at a CAGR of
3.1% and reach annual revenues of over $10 billion by 2017.
Along with diversifying within its portfolio, Frito-Lay has also
successfully expanded into other food divisions. Doritos Locos
Tacos, which was launched in partnership with Taco Bell, has
surpassed 0.6 billion unit sales since its launch last year.
Growth Potential Within The Market
In addition to the mid-tier segment comprising chips/crisps,
corn snacks and tortillas, the premium and bottom ends of the U.S.
snacks market also offer promising growth potential.
According to Goldman Sachs
, the premium end grew by 7% annually through 2010-11, and the
bottom end is expected to grow by 4% annually in the next few
years. Both these areas are growing at a faster rate compared to
the overall snack market.
PepsiCo has identified the premium-priced products and value
offerings for lower income groups as potential growth segments. The
company will look to leverage its strong brand appeal and
widespread distribution channels to improve its performance in this
segment of the market.
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