The beverage business of PepsiCo (PEP 3.62%) has served as a drag on the snacks side of the ledger so much that billionaire investor Nelson Peltz wants the drinks maker to calve off the division into a separate company. Although Pepsi has so far ignored the suggestion, a just-announced agreement with sports bar Buffalo Wild Wings (BWLD) shows how it's using the one division to bolster the other.
Source: SXC.hu.
This morning, it was announced that the beer-and-wings joint had signed up Pepsi to be its primary soft-drink provider, apparently ending a multiyear relationship B-Dubs had with Coca-Cola (KO 1.50%). What will start out with Pepsi, Mountain Dew, and other beverage brands will also explore the introduction of snack items, including Doritos, Fritos, Tostitos, and Ruffles.
But Buffalo Wild Wings is looking beyond this being just a simple swap of one beverage provider for another, noting that Pepsi is a major sports and entertainment industry sponsor and the potential to piggyback onto those opportunities is too large to pass up. While it may mean guest appearances by some sports star or entertainment figure, the restaurant chain says it saw the reaction to Pepsi's collaboration with Yum! Brands' Taco Bell chain in the creation of the Doritos Taco Loco sensation, and even if it won't be as big as that billion-dollar-bonanza, it could still be meaningful to create something along those same lines for B-Dubs.
Through PepsiCo's Frito Lay and Quaker Foods units, snacks accounts for two-thirds of Pepsi's $66.3 billion in revenues, and it is enjoying volume growth across the board. Beverages, on the other hand, have been suffering from years of volume declines and 2012 revenues fell 4.5% from the prior year, with operating profits about half of those generated by Frito Lay. No doubt that was just one factor behind Peltz's push to separate the two divisions into discrete businesses.
The win by PepsiCo to supply Buffalo Wild Wing's 975 or so restaurants across 49 states and Canada was yet another example of it ousting its entrenched rival. In August, the City University of New York gave Pepsi the exclusive right to distribute nonalcoholic beverages on all 24 of its campuses in return for paying about $21 million over 10 years. Earlier this year, Pepsi turned Coke out of Costco's cafes. Interestingly, newly public chain Potbelly has both Coke and Pepsi drinks, certainly a rare occurrence in the cola wars.
Still, every win is important for Pepsi since it's estimated Coke maintains about a 70% market share of the fountain soda business in the U.S, which accounts for nearly a quarter of total soft-drink volume.
Buffalo Wild Wings is looking to spice up its results after a middling performance last quarter that saw same-store sales come in below those achieved at rivals like Chipotle Mexican Grill as it struggles to generate greater free cash flow. While a Doritos-inspired snack or a Mountain Dew'rita alone won't cause that to happen, there are synergies it can exploit in Pepsi's beverage and snack divisions that ought to help it break away from the herd.
