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PepsiCo’s Frito-Lay North America Division: A Vital Growth Driver

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Oct. 14 2015, Updated 1:07 p.m. ET

Revenue growth

Aside from the North America Beverages segment, PepsiCo’s (PEP) Frito-Lay North America division was the only other segment that generated revenue growth in 3Q15 as well as in the first nine months of fiscal 2015. Its segment revenue grew by 0.8% to $3.6 billion in 3Q15 ended September 5, 2015.

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Revenue drivers

The organic revenue for PepsiCo’s Frito-Lay North America segment grew 2% in 3Q15, driven by a 0.5% organic growth in volumes. The volume growth was driven by mid–single-digit growth in variety packs, low–single-digit growth in the Tostitos brand, and double-digit growth in trademark Smartfood.

However, the volumes of Lay’s brand fell by a low-single-digit rate in 3Q15. The segment’s net revenue was also favorably impacted by two percentage points of effective net pricing.

Performance of other segments

The organic revenue and volume growth of the Quaker Foods North America segment came in at 2% each in 3Q15. PepsiCo’s Latin America segment reported organic revenue growth of 33% and volume growth of 1%. The Europe Sub-Saharan Africa (or ESSA) segment posted 2% growth in organic revenue and 1.5% growth in organic volume in 3Q15.

The Asia, Middle East and North Africa (or AMENA) segment’s organic revenue grew 2.5%, and volume was up 2%. Currency headwinds had 38, 25, and six percentage point negative impacts on the reported revenues of the Latin America, ESSA, and AMENA segments, respectively, in 3Q15.

Segment profitability

The Frito-Lay North America division is PepsiCo’s second-largest segment in terms of revenue but the largest in terms of operating profit contribution.

In 3Q15, the segment’s operating profit grew 5.9% to $1.1 billion, reflecting the impact of higher revenue, lower commodity costs, and planned cost reductions across various expense categories. These favorable factors were partially offset by certain operating cost increases as well as higher advertising and marketing expenses.

PepsiCo’s Frito-Lay North America division competes with packaged food companies Kellogg’s (K), Campbell Soup Company (CPB), and Mondelez (MDLZ) in certain snack food categories. These snack food makers are focusing on innovation of low-sodium, low-calorie, and healthier snack options.

Frito-Lay North America division’s Tostitos Organic Scoops, which are oven baked, are an example of one such innovation. The division is also working on various packaging options to drive higher margins.

PepsiCo is a component of the Consumer Staples Select Sector SPDR ETF (XLP) and the SPDR S&P 500 ETF (SPY). PepsiCo makes up 4.8% of the Consumer Staples Select Sector SPDR ETF and 0.8% of the SPDR S&P 500 ETF.

We’ll discuss PepsiCo’s overall margins in the next part of this series.

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