PepsiCo: How the snack business steered the company away from rough waters

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PepsiCo Inc. (NYSE: PEP) is a leader in its industry and the company has delivered healthy results consistently. This growth has mostly been fueled by the snacks business in the US and Canada, which is termed Frito-Lay North America. Let’s take a look at how this division has kept the PepsiCo ship smoothly sailing.

While revenues and operating profits in other segments have fluctuated, Frito-Lay North America has delivered growth consistently. Looking at the past five years, this trend is clearly visible. In 2015, revenues grew 2% helped by effective pricing and volume growth. The volume growth was aided by growth in variety packs, Doritos, Tostitos and Smartfood. Operating profit grew 6% helped by revenue growth, cost reductions and lower commodity costs.   

PepsiCo North American snacks business yearly growth trend from 2014 to 2018

In 2016, revenues grew 5%, driven by a 3% growth in volume
pushed by growth in Doritos, Cheetos and variety packs. In spite of an increase
in operating costs during the year due to higher marketing expenses, the
company managed to grow operating profits by 8%.

PepsiCo has tweaked its product portfolio from time to time,
introducing products that appeal to the changing preferences of customers as
well as rolling out healthier versions of its existing snacks. In 2016, the
company expanded its Simply line-up, launching Simply Organic Tostitos which
contain no gluten or artificial colors and flavors.

In 2017, despite a 1% volume decline and the impact from the 53rd reporting week in 2016, PepsiCo managed to grow revenues by 2% thanks to pricing. High single digit growth in variety packs helped offset declines in Lay’s, Fritos and Doritos. Operating profit grew 4%, helped by productivity savings, effective pricing and incremental investments in the business.

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In 2018, revenues rose 3.5% and volume grew 1%. Volume
growth was driven by growth in variety packs and Doritos which was partially
offset by a double-digit decline in Santitas. Revenue growth and productivity
savings helped drive a 4.5% growth in operating profit.

According to a report
by Mordor Intelligence
, the global snack food market is expected to reach $762
billion by 2024, growing at a CAGR of 5.34%, during the period from 2019-2024. Among
countries, the US continues to be the largest market, accounting for one-thirds
of the total. PepsiCo holds the largest market share in the US in snack foods.

PepsiCo’s snack business is set to grow at a healthy rate in the coming years and this business will continue to boost the company’s overall performance going forward.

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