PepsiCo Inc. Betting On Emerging Markets For Continued Growth

PepsiCo Inc. (NYSE: PEP), the world's second-largest food and beverage company, claimed the No.784 spot on the IBTimes 1000 list by expanding aggressively in emerging markets and catering to consumers' demand for healthier food and beverages.

The IBTimes 1000 is a proprietary list produced by the International Business Times of the 1,000 fastest growing, publicly traded companies in the world, gauged by their compound average growth rate over three years, from 2009 to 2011.

The Purchase, N.Y.-based company has enjoyed a three-year compound annual growth rate of 15 percent, making it the seventh fastest growing player in the beverages industry.

The Summer Of 1898

The summer of 1898, as usual, was hot and humid in New Bern, N.C. So a young pharmacist named Caleb Bradham began experimenting with combinations of spices, juices and syrups, trying to create a refreshing new drink to serve to his customers.

His most popular creation was a unique mixture of carbonated water, kola nuts, vanilla and rare oils, named Brad's Drink by his customers.

Caleb decided to rename it Pepsi-Cola.

From its humble beginning, Pepsi-Cola has grown into a global household brand. The company behind it, PepsiCo Inc., was founded in 1965 through the merger of Pepsi-Cola and Frito-Lay.

PepsiCo finished fiscal 2011 with $66.5 billion in revenue. While PepsiCo might see earnings decline slightly this year due to higher commodity costs and the increase in spending, the company said it is likely to harvest revenue growth of about 5 percent to 6 percent, and earnings per share growth of about 7 percent to 10 percent over the next decade.

Commodities make up about 30 percent of sales for PepsiCo and only about 70 percent to 80 percent of PepsiCo's commodities costs are currently hedge-able, Hugh Johnston, PepsiCo's chief financial officer said on Feb. 24 at the Consumer Analyst Group of New York Conference.

PepsiCo lost market share in the U.S. carbonated beverage market to the Coca-Cola Company (NYSE: KO) from 2008 through 2010, according to Beverage Digest, an industry newsletter. Over the past decade, Coca-Cola has invested more in marketing than PepsiCo as a percentage of its net sales.

While Coca-Cola is the global cola leader, PepsiCo is the dominant force in the global snack market.

Pepsi controls around 64 percent of the U.S. salty snack market, 60 percent of the market in Brazil, and 46 percent of the U.K. market. The North American snack business is Pepsi's most profitable segment, generating 24 percent of the firm's total revenue in 2011, but 41 percent of its operating profits.

Emerging Markets

Although we remain concerned about sluggish Americas beverage trends, we see exposure to stronger international markets as a potential offset, Standard & Poor's analyst Esther Kwon wrote in a research note to client.

Between 2006 and 2011, emerging and developing market revenue has grown from $8 billion to $22 billion, with the mix increasing from 22 percent of revenues to 34 percent of the revenues over that same time frame.

We're focusing on supporting the continued growth of our emerging markets businesses and stepping up our brand building, especially in our more competitive global beverage business, Johnston said.

Speaking at the same conference, PepsiCo's Chief Executive Officer Indra Nooyi said, More than ever, any company's growth is going to be defined to the extent to which they have a presence in developing and emerging markets. And I believe this trend will continue into the future as developed markets' growth rates slow down and developing and emerging markets pickup.

Just last week, PepsiCo announced that it landed regulatory and shareholder approval to move forward with a strategic beverage venture in China with Tingyi (Cayman Islands) Holding Corp. (HKG:0322) aimed at carving a large piece of the soft drink market in the region.

Nooyi said last week's deal with China's biggest maker of packaged food leaves PepsiCo extremely well-positioned for long-term growth in China.

Restoring reliable, strong profit growth in its international operations is critical for PepsiCo to regain top-tier growth and valuation, Bank of America Merrill Lynch analyst Bryan Spillane wrote in a research note.

In striking a deal with Tingyi in China, Spillane estimates PepsiCo is eliminating about $200 million in operating losses while putting PepsiCo on a better long-term track to be profitable in China.

PepsiCo was one of the first American companies to enter China. The company's total investment in the world's second-largest economy has exceeded 10 billion yuan ($1.6 billion).

Consumer Trends

Profound changes are underway, both due to the aging population and significant pressure from external sources for consumers to change their lifestyles and to get healthier.

PepsiCo has an impressive record of creating or acquiring products that are aligned with emerging consumer trends, Morningstar Inc. analyst Thomas Mullarkey wrote in a research note.

Nooyi joined PepsiCo in 2006 with a vision to grow the company's global nutrition portfolio into a $30 billion business by 2020.

Earlier in March, PepsiCo announced it has partnered with Germany's biggest diary company Theo Muller Gmbh to open a $206 million yogurt production facility in New York, which was seen as Pepsi's first step towards entering the U.S. dairy market.

However, the company is already present in dairy business in Russia through its $3.8 million acquisition of the country's leading diary company Wimm-Bill-Dann Foods OJSC in 2011. The deal is PepsiCo's largest-ever transaction outside of the U.S.

Over the past decade, Pepsi's good-for-you portfolio has grown to $13 billion in annual sales from $2.2 billion, as consumers increasingly demand tasty and nutritional foods and drinks.

It's focus on health and wellness should continue to drive the top line, S&P analyst Kwon said.

Stock performance

Over the last five years, shares of PepsiCo Inc. (NYSE: PEP) appreciated less than 5 percent, while shares of The Coca-Cola Company (NYSE: KO) rose 55 percent in value.

Currently, the market appears fixated on problems in the company's beverage business, and is ignoring its dominant position in snacks, Morningstar analyst Mullarkey said.

PepsiCo's stock advanced 0.53 percent, to $66.70 a share in early Monday afternoon trading. Meanwhile, Coca-Cola added 0.16 percent, to trade at $74.13 a share.