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Will PepsiCo Gain from Innovation & Productivity Plans?

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Sales for beverage giant PepsiCo Inc. (PEP - Free Report) have remained subdued in recent quarters due to growing health and wellness consciousness as well as currency headwinds. PepsiCo’s shares have evidently sunk approximately 4% in the last three months. Nonetheless, the company is leaving no stone unturned to reinvigorate investors’ confidence and regain its footing by innovations and diversifications.

Key Growth Drivers

PepsiCo’s distinctiveness in the soft drinks space lies in the fact that it holds a balanced portfolio of both snacks and beverages, which are complementary food categories. Salty snacks and liquid refreshment beverages have extremely high co-purchase incidence more than any other commonly purchased items. The complementary portfolio results in cost leverage, capability sharing, cross-category promotions and other commercial benefits.

Changing demographics and purchasing behaviors make it important for any beverage giant to understand and capitalize on main consumer insights that identify growing trends. Health awareness has been prime concern for consumers in recent times and capitalizing on this trend can prove to be beneficial for any beverage company in 2017.

For this, PepsiCo is gradually reshuffling its portfolio toward healthier “Everyday Nutrition Products.” These products contain nutrients such as grains, fruits, vegetables, or protein, and the portfolio falls under a broader category of “Guilt Free Products." The company now generates 45% of its revenues from this category, which also comprises beverages with less sugar and sodium content.

Now, good-for-you products and bottled water are gradually gaining traction amid the shift in consumers’ preferences. Coconut water has become a prime alternative to coolers across North America and Europe. Consequently, in North America, the company launched LIFEWTR in Jan 2017, a premium bottled water, PH balanced, with electrolytes for added taste. Again, in 2016, PepsiCo acquired a sparkling probiotic U.S. drinks company, KeVita, thereby diversifying its soft drinks portfolio amid slowing soda sales. The addition of KeVita will expand PepsiCo’s health and wellness offerings in the premium chilled beverage space.

Furthermore, the company has stepped up productivity and cost-saving initiatives to boost profitability by reducing overall costs.

Importantly, to preserve investors’ confidence in the stock, PepsiCo has increased dividend for 45 consecutive years that includes a dividend hike of 7% in 2017.

Challenges

It goes without saying that consumer tastes are rapidly shifting from carbonated soft drinks (CSDs) to non-carbonated beverages. Hence, sluggish CSD volumes are pressing concerns for this beverage giant as well as for other nonalcoholic beverage companies such as The Coca-Cola Company (KO - Free Report) , Monster Beverage Corporation (MNST - Free Report) and Dr Pepper Snapple Group, Inc. (DPS - Free Report) .

Though PepsiCo has increased marketing investments and is driving package and product innovation to boost the carbonated beverage business, no meaningful improvement has been seen yet. The company’s CSD volumes were down 2.5% in the second quarter of 2017.

Meanwhile, foreign exchange (Fx) is a major headwind for PepsiCo with around 39% of its revenues coming from outside the United States. Though the company now anticipates Fx to have less negative impact on core earnings than previously expected, it is expected to hurt 2017 revenues and earnings per share by 2%.

Bottom Line

Going forward, we expect the company's efforts toward offering more products with less sodium, sugar and saturated fat, along with productivity and cost-cutting initiatives will help fight revenue woes.

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