Soda may be Pepsico's best-known product, but snack foods from its Frito-Lay division are what really drives this company forward.
Although best known for its soda, Pepsico (PEP 0.71%) generates almost as much money from snacks as it does from its North American beverage operations. No doubt salty chips from the Frito-Lay business help drive its drink products, which has helped boost revenues around the world where the two segments are typically combined.
Over the next five minutes, this guide will give you a down-and-dirty look at this monster beverage company so you'll feel more comfortable knowing how it makes its money -- and how investors can benefit.
A global enterprise
The North American business, whether it be soda or chips, remains Pepsi's biggest money maker, accounting for 60% of the total $63 billion it generated in 2015, including Quaker Foods. Of that amount, beverages represented a third of the total, and snacks almost a quarter.
While the European segment is the next largest market for the beverage maker, its importance has been slowly ebbing as snacks have taken on a larger role in the company. Where the Frito-Lay division has grown its share of total revenues by two percentage points over the past two years, the European segment has declined by four percentage points to 17% of the total. With revenues declining by a like percentage in the fourth quarter, it was only the second worst performance for Pepsi behind Latin America, which tumbled 26% year over year, as the strong dollar affected results.
Foreign exchange rates, in fact, hit revenues companywide by 8% in the fourth quarter, and by 10% across all of 2015. As a global business where 40% of its revenues comes from foreign markets, Pepsi is going to acutely feel the ebb and flow of currencies fluctuations.
Soda is still flat
The North American soda business has lost its fizz. Although volumes increased 1% last year, that was wholly the result of a 6% increase in non-carbonated beverage volumes and a 3% increase in prices. Carbonated soft drink volumes continued their years-long slide, falling another 2% for the year.
Of course, Pepsi's not alone in feeling the impact of the changing consumer preferences that have seen them move away from soda. Rival Coca-Cola (KO 0.23%), which is virtually a pure-play on beverages, is also suffering from the decline, particularly in diet soda, where the beverage companies loaded up the drinks with artificial flavors. Now that consumers are becoming more health conscious, they're abandoning soda in favor of water, juices, and teas.
And this is why Pepsi's results have been favorable. It experienced a double-digit increase in volume in its water portfolio, as well as mid-single-digit increases in Gatorade sports drinks and high-single-digit increases in Lipton ready-to-drink teas.
That slide also explains why billionaire investor Nelson Peltz once called for breaking up Pepsico into two separate companies: one focused on beverages the other on snacks. CEO Indra Nooyi dismissed the notion, saying the two businesses were integral, but it highlights the potential weakness Pepsi (and Coke, too, for that matter) faces.
Snack on this: Frito-Lay is PepsiCo's second biggest business, but its most profitable.
Beverages are a commodity
While soda and other carbonated and non-carbonated drinks may be driving revenues, it's the snack business that's paying the bills. Frito-Lay accounts for over half of Pepsi's operating profits on a GAAP basis (and about 40% on a non-GAAP basis), with the North American beverage business representing a third of the total.
Frito-Lay has been a consistent performer, generating volumes that typically grow around 2% annually. Similarly, the segment's revenues have also grown about 4% a year with profits around 6%, give or take, for a long time.
Pepsi has focused on a strategy of what it calls "grow the core and add more," allowing it to steal market share from its snack rivals.
Popping the top for investors
In addition to being a reliable performer, despite the weakness soda represents, Pepsi has rewarded loyal investors, paying out a healthy dividend that currently yields about 2.9%, and raising it annually for 44 consecutive years. The beverage giant just also increased its annualized dividend by 7.1% this year.
In just five minutes, it's possible to get an understanding of how Pepsico does business that works for shareholders, and all of this suggests investors have something tasty to look forward to in the years ahead.
