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PepsiCo’s FY2015 Lacklustre Results Suggest its Snacks Portfolio Could Benefit from a Yoghurt Brand

While PepsiCo’s reported net revenue decline of 5% “topped analysts’ expectations” in FY2015, the food arm of the business performed considerably worse than last year, with its Europe Sub-Saharan Africa division recording a 22% net revenue decline and its Asia, Middle East & North Africa division seeing a 4% fall in net revenue, a significant drop compared with its 2% growth last year. Appreciation of the US dollar is definitely to blame, as are political turmoil affecting the Middle East, general macro headwinds in Asia and stagnancy in Europe. However, there are more serious structural challenges that PepsiCo needs to think of in order to improve profitability and its return to shareholders. Its failed attempt to acquire a stake in the US yoghurt player Chobani needs to be evaluated in this wider context.

PepsiCo Inc: Net Revenue by Division 2013-2015

Pepsico inc net revenue by division

The fall of carbonates

It is no secret that carbonates are going out of fashion. The US, once hailed as the world’s biggest soda paradise, is now seeing the 10th year of decline in its carbonates market, leaving beverage giants like PepsiCo to look for growth alternatives. One such option is through the development of internal products, as Coca-Cola did with Fairlife. However, this is both an expensive and risky strategy as it is an area in which PepsiCo does not have production expertise. A safer way to broaden product portfolio is through acquisitions. However, unlike Coca-Cola, which purchased stakes in the energy drinks manufacturer Monster Beverage and organic juice producer Suja Juice in 2015, PepsiCo has been slow on the acquisition side of things. Outside its yoghurt joint ventures in the US and Russia, PepsiCo has thus far mainly focused margin expansion on organic growth and portfolio trimming. Given the dire prospects in carbonates and the slowdown in its North American food business, there is no option for PepsiCo but to follow Coca-Cola’s lead.

Yoghurt fits with PepsiCo’s wider “macrosnacking” goal

From a growth perspective, yoghurt seems to be an attractive category to venture into, particularly in the US, where the majority of PepsiCo’s sales come from and where the company seems to be struggling the most. Yoghurt value sales increased at a 5% CAGR in the US over 2010-2015, above the world average of 3%. In addition, given relatively low per capita sales in the US and consumers’ growing interest in naturally healthy, protein-rich snacks, it has considerable room for growth.

Yoghurt also fits well with PepsiCo’s overall snack and soft drinks portfolio as it can come in a drinkable format or be incorporated into oats and consumed as a breakfast or snack item. The fact that yoghurt caters to several snacking occasions is particularly relevant for PepsiCo’s Quaker brand, which is expanding its product range to include ready-to-eat cereals and oat-based drinks to better cater to on-the-go breakfast consumption. Yoghurt can also be eaten as a standalone snack, which would be a good complement to PepsiCo’s savoury snacks portfolio, which includes nuts and fruit snacks.

PepsiCo missing from the protein corridor

It also fits with PepsiCo’s broader vision of growing into different aisles in the supermarket. As Nooyi, PepsiCo’s CEO, highlighted, PepsiCo needs to be present in all shop “corridors” and vary its “better for you” strategy with regard to changing consumer habits around naturalness and health. Currently, the company has a strong presence in the grains and carbohydrates corridors and is expanding its coverage in nuts and fruit snacks; however, it is underrepresented in the protein corridor. With the recent announcement that it is ending its yoghurt venture with Müller, there cannot be a better time to introduce a strong dairy brand.

Top Yoghurt Companies in the US vs World by Value Share: 2010/2015

top yoghurt companies by value share 2015

Going after a European yoghurt player could pay more dividends in the long run

While all the reasons to expand into dairy are there, Chobani was probably too ambitious a target. Selling the majority stake of its family business to a carbonates giant would have been an unlikely choice for Hamdi Ulukaya, the proud owner of “America’s Number 1 Greek Yoghurt Brand”.

Rather than going after the world’s 10th biggest yoghurt company, PepsiCo could try Filippou Group, owner of Fage Total Greek Yoghurt, which rose at an impressive 11% value CAGR over 2010-2015 globally, outpacing overall category growth by seven percentage points and jumping into fourth position in the US yoghurt market, just behind Chobani. Filippou also has a solid presence in Western Europe, where PepsiCo has struggled to maintain its sales and margins, and it might eventually help the company to return to a positive growth trajectory.

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