PepsiCo: How the snack business steered the company away from rough waters

PepsiCo Inc. (NYSE: PEP) is a leader in its industry and the company has delivered healthy results consistently. This growth has mostly been fueled by the snacks business in the US and Canada, which is termed Frito-Lay North America. Let’s take a look at how this division has kept the PepsiCo ship smoothly sailing.

While revenues and operating profits in other segments have fluctuated, Frito-Lay North America has delivered growth consistently. Looking at the past five years, this trend is clearly visible. In 2015, revenues grew 2% helped by effective pricing and volume growth. The volume growth was aided by growth in variety packs, Doritos, Tostitos and Smartfood. Operating profit grew 6% helped by revenue growth, cost reductions and lower commodity costs.   

In 2016, revenues grew 5%, driven by a 3% growth in volume pushed by growth in Doritos, Cheetos and variety packs. In spite of an increase in operating costs during the year due to higher marketing expenses, the company managed to grow operating profits by 8%.

PepsiCo has tweaked its product portfolio from time to time, introducing products that appeal to the changing preferences of customers as well as rolling out healthier versions of its existing snacks. In 2016, the company expanded its Simply line-up, launching Simply Organic Tostitos which contain no gluten or artificial colors and flavors.

In 2017, despite a 1% volume decline and the impact from the 53^rd reporting week in 2016, PepsiCo managed to grow revenues by 2% thanks to pricing. High single digit growth in variety packs helped offset declines in Lay’s, Fritos and Doritos. Operating profit grew 4%, helped by productivity savings, effective pricing and incremental investments in the business.

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In 2018, revenues rose 3.5% and volume grew 1%. Volume growth was driven by growth in variety packs and Doritos which was partially offset by a double-digit decline in Santitas. Revenue growth and productivity savings helped drive a 4.5% growth in operating profit.

According to a report by Mordor Intelligence, the global snack food market is expected to reach $762 billion by 2024, growing at a CAGR of 5.34%, during the period from 2019-2024. Among countries, the US continues to be the largest market, accounting for one-thirds of the total. PepsiCo holds the largest market share in the US in snack foods.

PepsiCo’s snack business is set to grow at a healthy rate in the coming years and this business will continue to boost the company’s overall performance going forward.

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