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Are Premium Snacks the Next Big Growth Area for Pepsi (PEP)?

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PepsiCo, Inc. (PEP - Free Report) holds the number one position in global snacks with popular brands like Doritos, Cheetos and Lay’s. Over half of Pepsi's sales come from snacks, while the remainder is contributed by beverages. Pepsi’s strong and growing snacks business has largely offset its sluggish beverages business in the several past quarters.

The Frito-Lay North American snacks business has delivered consistent solid performance over the last 3-4 years. In the first half of 2016, the segments organic revenues grew 4% while the core constant currency operating profit was up 9%. Its other American snacks business, Quaker Foods, manufactures and sells cereals, rice, pasta, dairy and other branded products.

PEPSICO INC Price and Consensus

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At the second quarter conference call held last week, Pepsi CEO Indra Nooyi said they were confident about its Frito-Lay segment continuing to deliver strong sales and profits as the demand for savory snacks is on the rise.

Notably, Pepsi’s recent innovation efforts in snacks focus mainly on higher-margin healthy and premium salty snacks as there is a definitive market for such products now. Nooyi said on the call that Frito-Lay has less exposure in the premium snacks business. It is ‘’just getting started," and so there is a huge opportunity for Frito-Lay to grow in the premium side.

Its newly launched premium snacks include Quaker Breakfast Flats crispy baked snack bars which contain real ingredients like oats and pieces of fruits, are low in calorie and are made without any artificial flavors or added colors. Under the Frito-Lay business, Pepsi has expanded the Simply line with the introduction of Simply Tostitos Black Bean chips made from real black beans.

The Simply line has also introduced Simply Tostitos organic chunky medium salsa and Simply Tostitos organic black bean and corn mild salsa, and both salsa varieties are USDA-certified organic. It has also launched Smartfood Delights low fat caramel-flavored popcorn and Sun Chips Veggie Harvest snacks. Nooyi also added that its Frito-Lay US premium portfolio was growing four times faster than the rest of its portfolio.

Product launches have not been limited to just snacks. Pepsi has also launched several premium products in the beverage category as well. These include 1893 premium cola, Gatorade G Frost flavor lineup, Mountain Dew Black Label, Aquafina sparkling water and Naked Pressed line of cold-pressed juices.

The new product launches are expected to be supported by aggressive marketing campaign and are anticipated to drive solid top line growth in the second half. Importantly, premium products generate higher margins and should thus boost profits of the company as well.

Zacks Rank

Pepsi carries a Zacks Rank #3 (Hold). Other beverage stocks worth considering are Primo Water Corp. (PRMW - Free Report) , Molson Coors Brewing Company (TAP - Free Report) and Constellation Brands Inc. (STZ - Free Report) . All the three companies hold a Zacks Rank #2 (Buy).

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