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Pepsi, PEP, is diversifying into coconut water and nutritious snacks as the demand for soda is replaced by the demand for health drinks.
When you do online stock trading and investing, it is important to look out for changes in strategy employed by businesses.
Great businesses always react to the trends of the market and make decisions to succeed in their midst. Sometimes, that would mean diversifying from the main business or product into other and potentially more successful businesses.
PepsiCo (PEP) is rumoured to be buying All Market Inc. which owns the famous Vita Coco coconut water brand. This is a premium drink brand and has celebrities such as Demi Moore, Madonna and Matthew McConaughey investing in it. This could be a vital diversification option for the company to move beyond sales of aerated soda drinks in the health conscious market. But nothing is for certain since Pepsi offered only less than a billion dollars which was the asking price of All Market.
Diversification Essential for Soda Brands like PEP
The need to diversify is essential for soda brands since the demand for these beverages is reducing, with consumers seeking healthier alternatives and more organic drinks. In 2016 the soda industry experienced an annual decline for the 12th consecutive time. We’ve already seen Pepsi diversify to mineral water and other such products along with nutritious snacks. It acquired the KeVita probiotic drink manufacturer. This set the trend, with competitor Dr Pepper Snapple Group ($DPS) acquiring the Bai Brands antioxidant drink company for $1.7 billion in 2017.
Rival Coca-Cola ($KO) has borne the brunt of the declining soda demand, with its shares taking a beating in recent quarters on weaker-than-expected earnings. Pepsi had gained though, thanks to the healthier products in its portfolio. These healthier products make up 45% of its total revenues. Remember, Pepsi also owns Gatorade, Quaker Oats and Frito-Lay. It has put in motion plans to ensure its daily nutrition products outsell the other products in its portfolio by 2025.
By buying out Vita Coco, Pepsi would be able to enter the important natural coconut water market that is worth $2.5 billion, and of which Vita Coco accounts for 26% of the share. All Market had also sold 25% of its stake to Red Bull China owner T.C. Pharma for $665 million back in 2014.
If the deal does go ahead, it would make PepsiCo reasonably safe from the reducing soda demand. It’s a strategy Coca-Cola needs to follow too in earnest.
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