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PepsiCo Relies on Innovation for Future Sales Growth: Here’s How

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Jul. 13 2016, Updated 1:08 p.m. ET

Focus on innovation

PepsiCo (PEP) is developing new products across its snack and beverage business to address changing consumer tastes and preferences. In the company’s 2Q16 conference call, CEO Indra Nooyi stated that the company’s new products contribute ~9%, or over $5 billion, of its annual sales. PepsiCo’s research and development costs increased 5% to $754 million in fiscal 2015.

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New products

PepsiCo is aware of the growing consumer demand for healthier snack and beverage options. According to PepsiCo’s CEO, the company’s “guilt-free products” deliver ~45% its net revenue.

The First Trust Consumer Staples AlphaDEX ETF (FXG) has a 0.8% exposure to PepsiCo. In March 2016, PepsiCo launched Quaker Breakfast Flats, which are crispy baked snack bars that contain ingredients such as oats, real pieces of fruit, nuts, flax, and sunflower seeds. The product contains less than 200 calories and no artificial flavors or added colors.

PepsiCo has expanded its Simply line with the introduction of Simply Tostitos Black Bean Chips made from real black beans. This is a Non-GMO (genetically modified organism) Project Standard compliant product. PepsiCo has also introduced Tostitos Simply Organic Chunky Medium Salsa and Tostitos Simply Organic Black Bean and Corn Salsa. Both varieties are certified as organic by the USDA (United States Department of Agriculture).

PepsiCo is also addressing consumers’ interests in craft, niche, and premium products. PepsiCo’s leading sports drink brand Gatorade launched the G Frost flavor lineup, further expanding the brands’ presence in sports hydration.

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In March 2016, PepsiCo launched Mountain Dew Black Label, a soda drink “crafted with dark berry flavor, real sugar, and herbal bitters.” In April 2016, PepsiCo launched Aquafina Sparkling, a new line of flavored sparkling water. Additionally, the company’s Naked Juice brand launched a line of cold-pressed juices. PepsiCo’s innovation also includes 1893, a blend of kola nut extract, real sugar, and sparkling water. 1893 is available in two flavors: Original and Ginger Cola.

Rivals’ innovation efforts

PepsiCo’s rivals Coca-Cola (KO) and Dr Pepper Snapple (DPS) are also expanding their portfolios through internal development and strategic acquisitions. Coca-Cola’s purchase of a 16.7% stake in Monster Beverage (MNST) in 2015 helped it gain a strong exposure to the energy drink market. Coca-Cola has recently acquired stakes in Suja Juice, Aloe Gloe, and Chi Limited, a Nigerian dairy, juice, and snack company.

Dr Pepper Snapple enhanced its presence in the sports drink market by purchasing a stake in BA Sports Nutrition, the makers of BodyArmor. We’ll discuss analyst ratings for PepsiCo’s stock in the next part of this series.

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