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Inside PepsiCo’s Frito-Lay North America—And How It Could Offset the Soda Slump

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Complementary portfolio

PepsiCo’s (PEP) food business accounted for 53% of its net revenue in fiscal 2015, which ended December 26, 2015. Beverages accounted for the remaining percentage. PepsiCo considers its snack food and beverages businesses to be complementary. According to the company, there is a high coincidence of purchase between the snack food and beverage portfolios. The company’s complementary food and beverage portfolios include 22 brands that each generated over one billion dollars in estimated annual retail sales in fiscal 2015.

Inside PepsiCo's Frito-Lay North America—And How It Could Offset the Soda Slump

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Frito-Lay North America, a key growth driver

PepsiCo’s Frito-Lay North America division is the company’s second-largest segment and contributed 23% of net revenue in fiscal 2015, trailing only the North America Beverages segment, which accounted for 33% of fiscal 2015 revenue. The Frito-Lay North America division is also very profitable for the company and contributed 46% of the fiscal 2015 division operating profit.

To some extent, the performance of PepsiCo’s Frito-Lay North America segment is helping the company offset the weakness in its soda beverage volumes. PepsiCo and its peers continued to face weakness in carbonated soft drink volumes in fiscal 2015. (For more information on this, check out “Still Beverages: A Key Focus for Nonalcoholic Beverage Companies.”) Unlike PepsiCo, rivals Coca-Cola (KO) and Dr Pepper Snapple (DPS) lack a snack food portfolio.

In fiscal 2015, the revenue of PepsiCo’s Frito-Lay North America division increased by 1.9% to $14.8 billion, and the division’s operating profit increased by 6.2% to $4.3 billion. The segment benefitted from increased volumes, higher effective net pricing, planned cost reductions, and lower commodity costs. In fiscal 4Q15, the Frito-Lay North America and the North Americas Beverages segments were the only two segments that reported revenue growth. The Frito-Lay North America segment is expected to perform well in fiscal 1Q16 as well.

Notably, the Vanguard Dividend Appreciation ETF (VIG) has 3.7% exposure to PepsiCo.

Innovation

PepsiCo continues to introduce new flavors and products in its snack food segment. In February 2016, PepsiCo reintroduced the Ruffles All Dressed flavor to the US market. In February 2016, PepsiCo also launched Doritos Mix, which contains four different Doritos shapes and flavors in one bag. Rival Mondelez International (MDLZ) launched Good Thins, its first new snack brand, in April 2016, after more than a decade. The Good Thins snack combines real ingredients, like wheat, potato, and rice, with different flavors, without adding any artificial flavors, colors, cholesterol, partially hydrogenated oils, or high fructose corn syrup.

Aside from innovation, PepsiCo is also focusing on improving productivity. We’ll discuss this in the next part.

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