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PepsiCo's New Lays Plant in China

PEP KO

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Looking to capitalize on the popularity of its Lays brand potato chips in China, PepsiCo Inc. (PEP - Analyst Report) recently opened a new food manufacturing plant there which will have the capacity to produce 15,000 tons of Lays chips annually.

The plant, located at Wuhan, is the sixth food manufacturing site in the Greater China Region. It also boasts of being the only snack plant in China to be certified by Leadership in Energy and Environmental Design, or LEED, the world's leading green building standard.

PepsiCo is indeed busy expanding its food and beverage business in China. Earlier this year PepsiCo completed its strategic alliance with leading Chinese food and beverage maker, Tingyi Holding Corp. whereby Tingyi’s beverage subsidiary was appointed as PepsiCo’s franchise bottler in China. The deal has created the number one liquid refreshment beverage (LRB) manufacturing network in China and is expected to help PepsiCo to revamp its Chinese business.

This emphasis on the emerging markets, particularly in China and India, came in the wake of weakness in the maturing domestic market. The company has tripled its revenues from the emerging and developing markets in the past five years. The economic outlook of these fast growing nations is at present much better than the developed markets due to the improving standard of living of the middle class.

Our Recommendation

Currently, the stock has a Zacks #4 Rank (short-term Sell rating). Over the long term, we provide a Neutral recommendation on the stock.

We are encouraged by PepsiCo’s strong brand portfolio, its product and geographic diversity and solid cash flow generation. Moreover, PepsiCo’s marketing support investments, brand building innovation and cost saving efforts will boost growth in the long term.

However, a challenging consumer spending environment combined with higher commodity costs raises concern. Moreover, PepsiCo faces strong competition from The Coca-Cola Company (KO - Analyst Report). The Coca-Cola Company commands a larger share of carbonated soft drinks (CSD) consumption in the U.S. measured channels and also enjoys higher market share in many markets outside the United States than PepsiCo.

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