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The big three beverage companies, Coca-Cola (NYSE: KO ) , PepsiCo (NYSE: PEP ) , and Dr. Pepper Snapple Group (NYSE: DPS ) , possess qualities that every long term investor should love such as ubiquity, brand name recognition, and excellent dividend yield. But one company in particular, PepsiCo, offers something extra that you should consider in your investment decisions.
PepsiCo represents the only member of the big three beverage companies that sells more than beverages. In addition to its traditional soda offerings such as Pepsi and Mountain Dew, the company sells snacks like potato chips under the Frito Lay name and healthy foods such as oatmeal under the Quaker brand. Moreover, any company that sells anything perceived as healthy will possess an advantage in this increasingly health-conscious age. Snacks represent PepsiCo's highest growing segment, expanding organic volume (adjusted for divestitures) 3% in its most recent quarter.
The big three beverage companies all understand the need to diversify from their traditional soda businesses, as consumers slowly shift toward healthier drinks and beverages. In its Americas beverages segment, PepsiCo saw a decline in the "mid-single digits" for its carbonated soda. Coca-Cola's worldwide sparkling volume was flat (pardon the pun), while its still beverage volume increased 6% in its most recent quarter. Dr. Pepper saw its carbonated volume decline 3% , versus a decline of 2% for its non-carbonated segment. Clearly stronger demand exists for non-carbonated drinks such as bottled water, tea, and juice.
What does this mean?
The future for these companies will lean less on their traditional carbonated roots and more on healthier beverages and foods. PepsiCo already demonstrated that it's one step ahead by boosting its food segment volume as a result of a 35% increase in its snack advertising budget during 2012 . The company understands that the fast pace of modern life means people will increasingly need food on the go.
Coca-Cola probably needs to follow suit by purchasing a snack business of its own or starting one from scratch. While its non-sparkling beverage business grows at a healthy pace, over the long term it will certainly prove far more difficult to differentiate commoditized products such as orange juice and bottled water. Dr. Pepper needs to improve on all fronts. While Mott's and Snapple served as a buffer against further decline in its non-carbonated segment, brands such as Hawaiian Punch helped serve as an anchor into negative volume territory. It has demonstrated feeble efforts to make its sodas seem healthier by introducing the "Ten" product line or sodas with only 10 calories; however, it's still just soda. It also needs to spruce up its non-carbonated line. It wouldn't hurt Dr. Pepper to look beyond beverages as well.
PepsiCo stands out among its competition because of its diversity beyond beverages. This company can lean more on its snack business as people move away from traditional sodas. While non-sparkling beverages currently carry Coca-Cola forward, maybe it should consider branching out into snack foods via an acquisition. Dr. Pepper needs to improve its main business all around before it can consider doing anything else.