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Pepsi Is 70% Frito-Lay

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By Jeff Fischer (TMF Jeff)
May 26, 2000

PepsiCo (NYSE: PEP) is the $58 billion company that put its founder in bankruptcy in 1923.

How?

Due to short-term speculation on his part.

Mr. Caleb Bradham of North Carolina invented Pepsi in 1898. By 1915, more than 300 bottlers carried his bubbly beverage. Following World War I, Caleb got aggressive and purchased large amounts of sugar to protect against rising sugar costs. Sugar prices dissolved and plunged in 1920, however, and he was forced into bankruptcy by 1923. As a result, Pepsi teetered on the brink of extinction until 1931, when it was purchased by Loft Candy.

My, how Pepsi has changed since!

Today, the company's namesake product -- Pepsi Cola -- is not even the company's big breadwinner. In fiscal 1999, snack foods totaled 57% of Pepsi's total sales and a giant 70% of its operating income. Pepsi's Frito-Lay division holds approximately 55% of the snack food industry's market share in the United States, and 40% worldwide, with total 1999 sales of $11.6 billion (up 5.8%). Beverages totaled 43% of Pepsi's sales last year and only 30% of operating income.

Despite the company's name -- PepsiCo -- its snack food division will very likely continue to expand its lead over Pepsi's beverages regarding size, profits, and importance. And we're happy about this.

As Brian Graney has noted, snack food is a high-margin, "shelf-to-mouth" product. Consumers buy it and eat it while driving home. (OK, I admit that I have done this a few times with potato chips.) Consumers arrive at home and already they need a new bag. (OK, I admit that I have eaten a whole bag of chips in one drive.) The consumer may promise not to buy another bag of chips for a week or two, as they get out of the car feeling half sick, but eventually they do. (OK, you got me.)

In fiscal 1999, Pepsi's sales and operating income snacked, crackled, and fizzed as follows:

             PepsiCo 1999
                         
                          Sales                     
                 $ millions   % of total          
Snack foods        $11,615        57%
Beverages           $8,752        43%
Total              $20,367       100%

                    Operating Income
                 $ millions   % of total
Snack foods         $1,984        70%
Beverages             $858        30%
Total               $2,842       100%

We have only one quarter in 2000 to consider so far, but the trends are not surprising.

In the first quarter of this year, Pepsi's domestic snack food volume rose 4% and operating earnings in this division grew 10%. Interesting to note, especially following our Campbell Soup (NYSE: CPB) health discussion this week, is that the "healthier" segment of the snack food division saw a volume decrease, while the less-healthy, salty segment saw 6% volume growth. (What can we say?) Long-term, the snack food division is expected to grow volume 4% to 6% annually, which is the same volume goal that Campbell was aiming for, but missing, with soup.

Internationally, Pepsi's snack foods had a 12% volume increase and a 27% gain in operating profit. Pepsi absolutely dominates the Mexican market, where volume rose 24% last quarter. Analysts estimate that Mexico may generate up to 50% of Frito-Lay International's (FLI) profits -- so it is a vital market, indeed -- while the United Kingdom likely produces 25% of FLI's profits. Overall, Frito-Lay had another strong, industry-dominating quarter and saw profitability leap, thanks largely to good management and new initiatives.

Like Coca-Cola (NYSE: KO), Pepsi's domestic beverages saw a decline in volume. At Pepsi, volume in the U.S. dropped 2%. Pepsi is estimated to hold 33% of U.S. market share compared to Coca-Cola's 44%, but Pepsi has been making marketing headway. Mountain Dew has grown to become the fourth most popular carbonated beverage, and Pepsi is the second most popular. Still, due largely to pricing issues, volume did decline.

But, while Coke's total income declined with its beverage volume, Pepsi was able to grow earnings per share 16% last quarter, and expects to at least match that performance next quarter, too, thanks to its snack food division and Tropicana. Purchased in 1998 from Seagram (NYSE: VO), PepsiCo has cranked Tropicana into a large winner. In fact, last quarter Tropicana Pure Premium passed Campbell Soup to become the third-best-selling brand in grocery stores, and Tropicana now accounts for 5% of Pepsi's operating earnings. Last quarter, Tropicana volume grew 6% and profits soared 70%.

So, as Brian discussed in April, the first quarter looked excellent for what is still the "new" Pepsi. Most important to us as potential long-term investors, however, is this question: What is Pepsi's long-term strategy for consistent double-digit growth? We will address this question next week. Meanwhile, below are some Pepsi articles, including a Business Week feature on CEO Roger A. Enrico.

In closing, what do you like and dislike about Pepsi? To discuss the company, visit us on the Pepsi discussion board. Be Foolish this weekend!

P.S. We will not send our monthly $100 to any of our investments for June. Instead, we are saving our monthly $100 to likely invest it into our next new buy, which we hope to announce in June.

Related Links:

  • Drip Port, 4/26/00: Pepsi's First-Quarter Performance
  • Business Week, 4/10/00: PepsiCo's New Formula
  • Drip Port, 12/30/97: Pepsi Overview
  • PepsiCo Website
  • Drip Portfolio

    5/26/2000 Closing Numbers
    Ticker Company Day Chg % Chg Price
    CPBCAMPBELL SOUP11/162.22%$31.69
    INTCINTEL CORP3/82.06%$117.56
    JNJJOHNSON & JOHNSON-1 3/16-1.33%$88.13
    MELMELLON FINANCIAL CORP1/21.32%$38.44

      Day Week Month Year
    To Date
    Since
    7/28/1997
    Annualized
    Drip 1.08% 2.73% 2.55% 20.34% 56.34% 17.10%
    S&P 500 -.25% -2.06% -5.12% -6.21% 46.79% 14.52%
    S&P 500(DA) -.25% -2.06% -5.12% -6.21% 49.41% 15.24%
    S&P 500(DCA) n/a n/a n/a n/a 19.77% 6.58%
    NASDAQ -.01% -5.47% -16.98% -21.24% 104.20% 28.68%

    Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
    9/8/199722.9859INTC45.653$117.56157.51%
    11/5/199834.7321MEL34.055$38.4412.87%
    11/14/199714.965JNJ78.923$88.1311.66%
    4/13/19988.337CPB54.179$31.69-41.51%

    Trade Date # Shares Ticker Cost Value LT $ Val Ch
    9/8/199722.9859INTC$1,049.37$2,702.28$1,652.91
    11/5/199834.7321MEL$1,182.79$1,335.02$152.22
    11/14/199714.965JNJ$1,181.08$1,318.79$137.72
    4/13/19988.337CPB$451.69$264.18($187.51)
      Cash: $0.01  
      Total: $5,620.27  


    Key
    • S&P 500 (DA) = dividend adjusted. Dividends have been added to the total return of the index.

    Note
    Drip Port launched with $500 on July 28, 1997, adds $100 to invest every month, and the goal is to own $150,000 in stock by August of the year 2017. Due to the slow nature of dollar-cost-averaging and our relatively significant starting costs, we do not expect to seriously challenge the S&P 500 for the first three to five years as we build an investment base. The long-term advantages of dollar-cost-averaging still overcome the short-term disadvantages, however. Final note: our investment in Campbell Soup is frozen due to fees instituted in its investment plan. Click here for a history of all Drip Port transactions.