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Meat snacks is getting hot. Once found mainly in truck stops and petrol stations, dried meat is now turning up everywhere, from the snack aisles of Whole Foods to the alcoholic drinks shelves of Tesco. Over the last two years, growth in meat snacks brands such as Jack Link’s has far exceeded that of major chips/crisps brands, including Lay’s and Pringles. With annual sales of US$1.5 billion, Link Snacks, the owner of Jack Link’s, has now become the world’s 10th largest savoury snacks player, ranking just behind Kraft-Heinz.
As a result, the category has seen increasing interest from some of packaged food’s biggest players. For example, confectionery giant Hershey acquiring Krave Jerky in 2015 and Cheerios producer General Mills adding premium meat snack maker Epic Provisions to its portfolio earlier this year. So why has PepsiCo, the world’s biggest snack producer, stayed away from meat snacks, and, more importantly, should it continue to do so?
Source: Euromonitor International Industry Demand Model
While meat snacks have showed strong growth over 2010-2015, meat is inherently a risky category to venture into. Meat, in particular red meat, the main ingredient in meat snacks, is subject to extreme price hikes, weighing on margins, which, in turn, forces smaller companies out of business, leaving the industry in the control of a handful of meat giants.
In addition, PepsiCo’s biggest markets are among processed meat’s riskiest ones. China, the US and Russia, which together account for over half of PepsiCo’s annual revenue, are the most uncertain processed meat markets in terms of their probable positive/negative swing in absolute retail volume terms. Of the three, Russia has the lowest market potential. While China has relatively high unmet market potential, this is outweighed by competition from local players, which almost entirely dictate the meat market. This leaves only the US (and potentially the UK) as an attractive market.
The problem with the US is that the category is quickly becoming saturated. There are dozens of artisanal meat snack players banking on the natural protein hype, and meat giants such as Tyson have already started to launch snack variants of their existing brands. In addition, with Hershey and General Mills having already made their forays into the category, PepsiCo is already facing competition from its main rivals.
Perhaps more importantly, however, PepsiCo’s potential entry into meat snacks goes against the company’s “Power of One” strategy of aligning the snacks and beverage portfolio to benefit from cross-promotional marketing activities, increased shelf space and overlapping distribution. It would entail entering a brand new supply chain, which has minimal synergy with snacks and cereals, making it almost impossible for the company to establish a vertically integrated supply chain. The production of meat is very local, which, again, is not commensurate with PepsiCo’s brand strategy, which focuses on growing its global power brands.
In addition, in developed markets meat consumption is decreasing or at best stable as a result of health, environmental and ethical concerns. After the anti-soda, anti-sugar backlash, PepsiCo probably would not want to be tied to another category that is vilified by Millennials as a result of its strong association with violation of animal welfare.
Instead of entering an inherently risky category like meat snacks, PepsiCo could consider augmenting its healthy snacks portfolio by exploring protein-rich non-meat snacks. The company is already looking to diversify its salty snacks portfolio beyond potato and corn and, to this end, has launched Twistos bread snacks in the US and Deli pita chips in the UK. However, PepsiCo still lacks a pulse-based snack that has a clear protein positioning. One way of filling this gap is through the acquisition of a snack player already specialising in pulse snacks. Japanese-based Calbee Foods could be a potential candidate.
PepsiCo and Calbee already have a natural alliance. In 2013, Calbee partnered up with Frito-Lay North America to sell its Jagabee snacks under the Ruffles Crispy Fries brand. A full acquisition would make the two companies vertically integrated, which is in line with PepsiCo’s long-term growth strategy.
More importantly, the two companies’ market overlap is relatively small, with Asian markets such as Japan, Hong Kong and Thailand being the main common markets. The potential merger could, therefore, increase PepsiCo’s footprint in Asia Pacific, where it faces strong competition from local players such as Want Want. An acquisition of Calbee would also add pea snacks such as Harvest Snaps (known as Snapea Crisps in Spain and Yushoi Snapea rice sticks in the UK) and Lentil Snaps to PepsiCo’s portfolio, which, since 2011, have been available through America’s biggest supermarket chains, including Costco and Walmart. Buying Calbee would not only provide PepsiCo with entry into the world of non-meat protein snacks, but also enable it to make a foray into ethnic snacks, creating a halo-effect among both Boomers and Millennials, PepsiCo’s key target consumer groups.