Please ensure Javascript is enabled for purposes of website accessibility

How Is Declining Soda Demand Affecting PepsiCo Inc?

By Andrés Cardenal - Jun 26, 2015 at 5:11PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Per capita soda consumption has fallen to lows not seen since 1986. How is this affecting PepsiCo?

Source: PepsiCo

Soda sales have been steadily declining, as consumers are increasingly turning toward healthier alternatives. Based on data from Beverage Digest, per capita soda consumption in the U.S. is at lows not seen since 1986, and there is little reason to expect a pickup in demand anytime soon. What does this mean for a global industry giant like PepsiCo (PEP 1.66%)?

Thriving in a healthy new world
When considering the overall demand picture for PepsiCo, things look far from discouraging. The decline in soda volume is mostly concentrated in the U.S. and other developed markets, and PepsiCo has achieved significant product and geographical diversification over the last several years.

The company's revenue is split evenly between the U.S. and international markets, and nearly half of total sales come from snacks. In aggregate, carbonated soft drinks comprised less than 25% of global revenue during 2014, so the impact on the top line is not too big to handle.

The company is still delivering solid overall performance in spite of changing market conditions. Organic global beverages sales grew only 1.5% in the last quarter, and sales in the North America beverage segment were flat year-over-year. However, PepsiCo still announced a strong 4.4% increase in global organic revenue during the quarter, driven mostly by a 7% jump in organic snack sales.

One positive effect from increased nutritional awareness is that consumers are demanding smaller servings in sodas, and this is allowing PepsiCo to achieve higher average prices. The company realized three points of net pricing gains in global beverages during the last quarter. Still, higher prices can only offset declining volumes for so long, so PepsiCo needs to innovate its way toward sustained growth.

Not your grandpa's PepsiCo
CEO Indra Nooyi has been betting on this trend for a long time, and PepsiCo has reclassified its portfolio into three different product categories: "Fun for you," which includes traditional sodas and snacks; "better for you," typically offering low-calorie versions of its products; and "good for you," which targets health-conscious consumers with brands such as Gatorade, Quaker, Tropicana, Aquafina, and Naked Juice, among several others.

The company's R&D division has hired experts in areas such as nutritional science, sports, endocrinology, and metabolomics to improve the health impact of its products. Even in its "fun for you" portfolio, PepsiCo has taken initiatives such as eliminating trans fats and reducing salt, fat, and added sugar content in its key brands.

PepsiCo is actively promoting its healthier drinks and offering more choices to replace traditional sodas -- the company recently introduced new Naked Juice flavors, including Chia Cherry Lime, Chia Sweet Peach, and Bright Beat. PepsiCo has also launched Tropicana Farmstand Tropical Green, which is a green juice that includes a full serving of fruits and vegetables in each 8-ounce glass with no added sugar.

Products such as Lipton Pure Leaf and Kickstart from Mountain Dew have been particularly successful, and management has high hopes for Propel Electrolyte Water, which has the same electrolytes as Gatorade with zero calories. Also, Lipton Sparkling Tea is off to a strong start, proving that consumers still want the bubbles, even if they don't want the added sugar and calories anymore.

PepsiCo's Gatorade Sports Science Institute is studying ways to help athletes improve performance through better hydration and nutrition. The company is conducting sweat tests, measuring an athlete's body weight before and after a workout and the amount of fluids consumed during the workout to determine how much fluid was lost, and how much liquid will be required to replenish the body and optimize performance.

Breathing tests measure both an athlete's current performance and future potential, and additional tests measure peripheral vision, reaction time, and hand-eye coordination. These insights are enabling PepsiCo to create functionally improved products such as its newly designed Gatorade 28-ounce bottle, which offers improved ergonomics. According to management, this innovation is fostering double-digit retail sales growth in regions that have converted to the new packaging.

Thanks to its diversified portfolio across products and regions, PepsiCo is not overly dependent on soda sales, and the company is delivering solid results in spite of shifting consumer preferences. Also, PepsiCo is investing in R&D and innovation to replace sodas with healthier options. These alternatives will allow the company to thrive in the long-term, even as soda continues its gradual decline.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Pepsico, Inc. Stock Quote
Pepsico, Inc.
PEP
$166.73 (1.66%) $2.72

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
319%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.