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Pepsi Focuses on Higher Profit - Analyst Blog

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The leading beverage and snacks manufacturer Pepsico Inc. ( PEP ) responded to the mounting pressure from investors and shifted its gears to focus on more profitable and indulgent brands. Pepsi had to shift its concentration from the 'healthy snacks', which were hailed by chairman Indra Nooyi, but added dismal profits to the company's accounts.

Pepsi's Chief Executive Officer, Albert Carey, remarked that this shift in strategy will help the company to turn around. According to a survey, while 65% of Americans give in to tasty foods, only 25% of them are choosy about 'healthy snacks'.

As reported by The Wall Street Journal , in the U.S., Pepsi-Cola and Diet Pepsi saw sales drop 4.8% and 5.2%, respectively, last year, compared to Coca-Cola and Diet Coke's modest slip of only 0.5% and 1%, respectively.

Investors held Indra Nooyi, chairman and the then chief executive officer, responsible for distracting customers with the less-calorie options and taking their eyes off from the company's biggest brand name.

Investors also criticized Indra Nooyi for emphasizing on Pepsi's healthy food line like oatmeal and Gatorade at the expense of sodas. Indra Nooyi's emphasis on healthy products was in hope to yield higher revenues from Pepsi's Health Food segment to $30 billion by 2020.

PepsiCo's health line products make up only about 20% of revenues. The bulk of the contribution for the revenues still comes from drinks and snacks including Lay's potato chips, Doritos corn chips and Pepsi-Cola, which with an annual global retail sales figure of $20 billion is by far the company's highest selling product.

Frito-Lay North America, PepsiCo's biggest profit engine, is battling with the rising commodity costs. Meanwhile, PepsiCo's health and wellness portfolio is encountering its own set of problems. Over the past five years, PepsiCo's Tropicana fruit juices have been losing market share to Coca Cola Co. 's ( KO ) 'Simply' juice brand, while Coke's Powerade continues to reduce Gatorade's popularity.

The company also responded to the scorns of its investors by announcing its plans to spend about 30% more this year on TV advertising for its North American beverages, with soda being in prime focus. In addition to the summer ad campaign "Summer Time Is Pepsi Time", Pepsi will also be regaining market through its "X Factor'' advertisement. The company also recently launched new TV ads for Diet Pepsi and Pepsi Max, two smaller-selling colas.

Taking the beverage brands seriously, Pepsi is expected to announce a multi-year plan in early 2012 to replenish its business. Bernstein Research's analysts projects the company to invest $400 million in 2012 in North America to bolster the beverage brands.

Pepsico holds a Zacks #3 Rank, translating into a short-term Hold rating.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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