uploads///PepsiCo segment operating margins

PepsiCo’s Frito-Lay North America Poised for Further Growth

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Oct. 4 2015, Updated 12:05 a.m. ET

Frito-Lay North America

At the Barclays Global Consumer Staples Conference held on September 9, Thomas R. Greco, CEO of PepsiCo’s (PEP) Frito-Lay North America, spoke about the company’s initiatives to further strengthen its snack food business in North America.

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Segment operating margins

PepsiCo’s Frito-Lay North America division contributed 22% of the company’s net revenue in fiscal 2014. The segment posted an operating margin of 28% in fiscal 2014. In contrast, the North America Beverages segment accounted for 30% of fiscal 2014 revenue and had an operating margin of 12%.

Growth opportunities

According to Thomas R. Greco, based on combined research with IRI and Technomic, Americans spend ~$1.4 trillion on food and beverages, of which $687 billion is purchased in retail channels and the rest in food service channels such as restaurants. Macro snacks currently make up 13.3% of food and beverage consumption at retail, so there is a huge potential for growth here.

PepsiCo’s rivals Coca-Cola (KO), Dr. Pepper Snapple (DPS), and Monster Beverage (MNST) lack a presence in the snack food category. PepsiCo makes up 4.6% of the portfolio holdings of the Consumer Staples Select Sector SPDR Fund (XLP) and 0.7% of the iShares S&P 500 Value ETF (IVE).

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Innovation

Through its popular brands and innovative products, Frito-Lay North America has increased its market share in the macro snack market from 16.2% in 2012 to 16.6% in 2015 (year-to-date). In 2015, the division introduced Doritos Roulette chips in the United States. One in five Doritos Roulette chips is extremely spicy. This product has already been successful in several international markets. The company used social media to promote the product. A game show was hosted on Twitter’s live streaming app Periscope, where consumers could win prizes by playing Doritos Roulette.

The company has also been working on product sizes and pricing to address the changing dynamics. With more households with two people or fewer, the company felt the need to introduce smaller packets. PepsiCo recently launched a smaller 8-ounce bag of Lay’s with a full variety of flavors. It repositioned the 10-ounce bags as a family size and reduced the lineup on this size. It also added 15.25–15.75-ounce party size packs. This assortment of different sizes and prices aims to increase household penetration and market share as well as improve margins.

Recent product innovations include Cheetos Sweetos, Rold Gold Pretzel Crackers, and Tostitos Organic Scoops. The company is also looking for capturing opportunities in the food service channel with innovative products such as Doritos Tacos. The company is now testing Fritos Tacos with Taco Bell (YUM) in Memphis.

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