Over time, some companies change their business models, and the smartest investors closely monitor the development of new business lines. The business changes at PepsiCo (PEP 3.62%) have been larger than most, with the company's current incarnation vastly different from what you might expect, given that its name comes from one of its key soda brands. Here's what you need to know about PepsiCo and why its future is more likely to be about snacks than soda.
Moving parts
PepsiCo was founded as a beverage company, but it has owned many other businesses along the way. For example, it once owned the Taco Bell, Pizza Hut, and KFC fast-food nameplates, to which it sold its beverages. It spun those off into a company now known as Yum! Brands. Along the way it also acquired the Quaker Oats business, which brought along with it the Gatorade sports drink line. It has continued to make Quaker products. More to the point here, however, PepsiCo owns Frito-Lay, the iconic and giant snack brand.
Image source: Getty Images.
Despite all of the moving parts, beverages are still the largest part of PepsiCo's overall business. Through the first three quarters of 2022, the consumer staples giant's U.S. beverage division made up roughly 30% of sales. Foreign operations, which encompass both soda and food items, totaled around 39%, but that's spread over four divisions. Quaker Foods North America is tiny, almost a rounding error, at 3.5% of sales.
You'll probably notice that Frito-Lay North America isn't on the above list. It weighs in at just under 27% of sales. That's smaller than both PepsiCo's foreign operations and its North America beverage unit. And yet the smartest investors watch this division more closely than any of the others.
Why? Because Frito-Lay North America accounts for 40% of the company's operating profit. That's way larger than all of the foreign businesses combined and Quaker Foods North America. The only business that's of equal size, actually just slightly larger, is PepsiCo's North America beverage division, at 45.5% of operating profit.
Profitable and growing
Now, the first read from the above figures is probably that the North America beverages division is still the king at PepsiCo. But that's not really the situation. The beverage space is very mature and recent growth has been modest. For example, in the third quarter of 2022, PepsiCo Beverages North America posted organic growth of 13%. But 9 percentage points of that came from "acquisitions, divestitures, and other structural changes." In other words, the core of the business saw growth in the mid-single-digit space. In a mature sector, "buying" market share, via things like acquisitions and partnerships, is pretty normal.
Meanwhile, the organic growth at Frito-Lay North America was 20%. There were no qualifiers on that. To be fair, there is rapid inflation taking place today and price hikes likely represent a sizable portion of that organic growth figure. But inflation and price hikes are taking place across the company's portfolio, so the discrepancy between beverages and snacks in North America really highlights the strength of the Frito-Lay brand relative to PepsiCo's beverage lineup.
A shift in importance
Simply put, soda is important to PepsiCo's future. But it is the foundation on which the company is building a potentially even more important business -- Frito-Lay. Smart investors are watching the company's snack operations as much, if not more, than its drinks.
