Did you know that PepsiCo is more than the Pepsi Cola brand; that it has a suite of leading food and beverage brands? Do Lay’s, Gatorade, Sodastream and Doritos sound or taste familiar? PepsiCo is a world-leading consumer company, housing an iconic portfolio of snacks and beverages that are sold in more than 200 countries. To put this into perspective, PepsiCo snacks and beverages are enjoyed by more than one billion consumers every day.
What is so special about a brand?
Iconic brands are the result of the compounding of time, quality, service and experience; you can’t just manufacture brand status overnight, nor get that brand in the hands of billions of consumers. The combination of quality brands and economies of scale allow these businesses to earn excess returns for shareholders. We view the PepsiCo business as a portfolio of iconic brands.
Why is PepsiCo worthy of portfolio inclusion?
PepsiCo’s snacks business has delivered consistent sales growth over the past decade, boosted by the rise of on-the-go lifestyles and a shift away from ‘three square meals per day’. While PepsiCo’s soft drinks division offers lower growth, the category is a branded duopoly with Coca-Cola and exhibits rational competitive dynamics.
PepsiCo’s size and distribution capability are also key factors in its investment case. It’s scale, particularly in the U.S., place the company in a powerful negotiating position vis-à-vis fragmented retail outlets, thereby improving its ability to maintain prices and keep its products on the shelves – whether physical or virtual.
In addition, PepsiCo is a ‘defensive’ company with established earnings streams and lower disruption risk, which presents as an attractive investment option. However, a rapidly changing retail and consumer landscape is making many large consumer staple companies less defensive than they once were. Factors such as rising private label penetration and the shift towards e-commerce threaten to destabilise entrenched market positions and diminish the power of big brands. Although PepsiCo is not immune to these upheavals, it is relatively well positioned. PepsiCo is a leader in taste and marketing, both of which are likely to be more persuasive than price, making familiar brands more appealing than private labels.
How does the company fare on ESG?
PepsiCo has risks related to the environment (water, packaging waste and land use) and social (consumer health and wellness risks). The potential impact on the business, however, we view as moderate given management action.
Water, palm oil and sugar are critical to PepsiCo products. For example, in a world of increased water scarcity, PepsiCo would encounter higher production costs; in the worst case, it could struggle to deliver products. The longevity of the brand demands these resources be available in the future, and it is important for PepsiCo to be part of the solution. PepsiCo is engaged in the sustainable sourcing of palm oil and sugar and has given itself a target of achieving 100% sustainable sourcing by 2020. In addition, PepsiCo is investing to use water more efficiently in operations, and the company is adopting best-practice standards for high-risk water facilities with targets for providing safe water to 100 million people by 2030. (To date, PepsiCo has achieved this for 44 million people.)
Packaging waste is another key risk area that PepsiCo’s management is addressing. Investment in packaging is critical to curbing waste creation and drawing even more on the environment. PepsiCo has pledged to have 100% recyclable, compostable or biodegradable packaging by 2025, and to reduce the use of first-use plastic by 35%. In addition, PepsiCo owns Sodastream, which is estimated to save five to 10 billion single-use plastic bottles annually.
PepsiCo is exposed to consumer health and wellness risks as the business is built on sugary drinks and on-the-go snacks. To address this risk, PepsiCo has increased the number of healthier alternative options in its product range.
We think the actions (and intentions) of management are a key tenet to PepsiCo’s long-term sustainable business model.