The Prudent Investor

How PepsiCo Makes Their Money
April 10, 2007, 7:18 am
Filed under: Consumer Goods

Before we really get into comparisons, I need to take a look at how each company makes their money. An understanding of this crucial element will allow for a proper comparison, and may lead me to remove a company from consideration.

The first company I will look at will be, by far, the largest, PepsiCo. At first blush one would think that the primary comparison against PepsiCo would be Coca-Cola, but according to Yahoo, Coca-Cola is in the Beverages – Soft Drinks industry, and PepsiCo is in the Processed & Packaged Goods industry. This placement requires that we understand how PepsiCo makes their money.

In addition to carbonated and non-carbonated beverages, PepsiCo manufactures a variety of salty, convenient, sweet and grain-based snacks, and Frito-Lay North America is one of their four business segments. Approximately one third of their net revenue comes from this division, which consists of Fritos corn chips, Lay’s potato chips, Cheetos, Rold Gold pretzels, Sunchips, and a host of other snack foods.

PepsiCo Beverages North America is the segment with which we are most familiar, and contributes 28% to the revenues. The beverages manufactured within this arm of the organization are Pepsi, Mountain Dew, Sierra Mist, Mug, Gatorade, Tropicana Juice Drinks, and a number of other carbonated and non-carbonated beverages.

PepsiCo International, as measured by revenues, is the largest section of the company, offering 35% to the total, operating in over 200 countries, with the largest being Mexico and the United Kingdom. The products within this section include Sabritas, Gamesa and Alegro in Mexico, Walkers in the United Kingdom, and Smith’s in Australia. Beverage concentrates and fountain syrups (Pepsi, Mountain Dew, Gatorade, and Tropicana as examples) are sold to franchise bottlers outside of North America, although in some markets the company owns their own bottling plants and distribution facilities.

Finally, Quaker Foods North America adds 5% to the revenues, through products like Cap’n Crunch, Life, Quaker hot cereals, Rice-A-Roni, Aunt Jemima mixes and syrups and Quaker grits.

The outlook is considered to be quite favorable for PepsiCo. Standard & Poor expects to see net sales the four segments respectively growing 6%, 8%, 14%, and about 5%, averaging to 7-8% for 2007. Their earnings per share estimate of 11% for this year and the future would certainly fit my definition of a positive outlook. The fact that the company’s products are spread out in many areas, and their market includes not just North America, but the world, allows for a diversification not available to most other companies.


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