Not Your Grandfather's PepsiCo: How the Company Is Reinventing Itself

 | Jul 10, 2018 | 4:05 PM EDT
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PepsiCo Inc. (PEP) which is 119 years old, continues to reinvent itself for the future of carbonated water and savory snacks.

As Amazon's (AMZN) Jeff Bezos puts it, we live in an age of "divinely discontent customers." The changing consumer tastes are always a strain for companies such as PepsiCo, which is known for its namesake product.

If the second quarter's results are any indication, PepsiCo is not letting consumers' changing tastes slow it down: it's diversifying, expanding healthier product offerings, looking to ramp up production automation and is launching a new innovation hub called "The Hive" to accelerate product launch.

On Tuesday, the company, which is an Action Alerts PLUS holding, reported earnings per share of $1.61, and the management reiterated full-year guidance of $5.70 earnings per share.

It showed robust international growth. Sales in Europe and sub-Saharan Africa rose 7%, while Asia, Middle East and North Africa increased 6%. On the home front, Frito-Lay's business was the big outlier with the 4% growth in sales.

Frito-Lay as the 'Growth Engine'

The sales for North American Beverages business, which includes the namesake brand, declined 1% in the second quarter.

"Despite PepsiCo's namesake implying that it is a beverage company, we continue to point that this narrative is incorrect because Frito-Lay has developed into the core of PepsiCo and the main growth engine," according to Jim Cramer's Action Alerts Plus note to members on Tuesday.

Healthier Alternatives

Don't blame it all on the millennials. The trend is not limited to the millennials: consumers want their fizzy water to have less sugar, have a wider variety of products and not feel bad about drinking it.

So the earnings call on Tuesday showcased a lot of products and processes that would do better and cater to these ever-changing tastes.

PepsiCo's CEO Indra Nooyi, who's one of the most influential female CEOs in the consumer space, powered through a list of products catering to the new tastes and demands: Bubbly, which claims to have no artificial flavors or sweeteners, Gatorade Zero hydration drink with zero sugar, and Quaker Super Foods, which is a new premium platform in Latin America offering "oats with rye, amaranth, flaxseed and quinoa."

New Innovation Hub

Like many legacy companies, PepsiCo has struggled to launch products and innovate from within.

So it plans to launch a new U.S. business unit called The Hive, a new entrepreneurial group split off from its headquarters.

"We want to create an environment where we have a business within a business, a small entrepreneurial sort of agile group that's thinking about the new age consumers that love discovery brands, while allowing the big brands to thrive in the overall mothership," said CEO Indra Nooyi on a call. "That's going to take some of the best new products that we launched a certain size, but we never really allowed it to thrive in the DSD (direct story delivery) system."

The new initiative is not global, but local in its scope and a way to stay connected to customers.

"There is a consumer that is willing to pay for discovery brands and they can reach a decent level growth," she said. "So we're going to go off and see how to make it happen. We're feeling excited about what we have launched. Let's see what happens in the next few months and years."

At the same time, the company is investing in efficiency of its existing product line. It's trying to think more like a startup.

"This next tranche of investments relate to digitalization, thinking through more automation in our plants, in our go-to-market systems, figuring out how we can unleash more productivity, but more efficiency and effectiveness, so that we can serve the changing retail world in more efficient and productive ways."

So far, investors have been buying PepsiCo's transformation story.

The stock rose 4.75% on Tuesday to $112.88.

"Compared to Coke they are much better situated to handle the millennials' avoidance of sugary drinks," says Chuck Carnevale, a registered investment advisor and co-founder of Tampa, Florida-based F.A.S.T. Graphs.

Daniel Martins, an analyst for D.M. Martins Research, said Pepsi's gross margins of 54.8% in the second quarter sets up well for strong revenue through the rest of the year.

"Pricing remains robust across the board, which bodes well for margins despite increased costs of operation," Martins said.

-- Martin Cassidy contributed to this story



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