So much more than Coca Cola’s arch rival

As a dividend growth investor with a very strong “Buy and Hold Approach” I am always fascinated by businesses that have been able to provide their shareholders with outstanding returns for so many decades and still continue to make so many of them rich.

I see these companies playing in a separate league, each corporation being a true cash machine with a broad economic moat due to a global brands presence and very strong financial fundamentals. I see in that league enterprises like Nestlé, Unilever and Diageo, Colgate or Johnson & Johnson. And of course there are Coca Cola and PepsiCo playing in that league.

PepsiCo has been Coca Cola’s primary competitor for over 110 years. But that’s just one part of the story. Many people don’t know that PepsiCo generates more revenues from its food brands than from its beverages. In fact, PepsiCo is the world largest snack producer. That’s where the real growth of the company happens.

Today, PepsiCo tops Coca Cola in terms of revenues and market capitalisation.

Coca Cola on the other hand is the undisputed NUMBER ONE when it comes to (sparkling) beverages and has the higher profit margin than PepsiCo. Coca Cola also shows stronger financial fundamentals and is less leveraged.

Both – Coca Cola and PepsiCo – are just wonderful businesses. Both have very similar roots, starting with their iconic sparkling drinks. But today they have very different business models. Coca Cola is fully focused on beverages whereas PepsiCo combines food and beverages.

In fact, if you want to compare PepsiCo with another company, do that with Nestlé or Unilever rather than with Coca Cola!

A true diversifation success story

PepsiCo impressively shows how being “just the number two” with a much weaker market position and less pricing power than the Coca Cola Company can found the basis for the transformation into a unique business.

PepsiCo just HAD to be innovative and to try new things. It could not afford to solely rely on its beverages which had less brand appeal than Coca Cola’s. PepsiCo HAD to prosper under constant challenging conditions.

For instance, early in the sixties, Pepsi Cola expanded its product lines with the creation of DIET PEPSI and acquired Mountain Dew. In contrast, The Coca Cola Company introduced DIET COKE eighteen years later, in 1982.

PepsiCo shows an amazing growth story. Organically and especially through acquisitions.

Between the seventies and nineties, PepsiCo expanded its range with bolt-on acquisitions outside carbonate beverages and entered the restaurant business. Then, in 1997, it sold some businesses and spon out others into a new company which is today known as Yum Brands (with restaurant chains such as Taco Bell, Kentucky Fried Chicken and Pizza Hut) while also making multiple large scale acquisitions such as fruit drink producer Tropicana.

In 2001, PepsiCo merged with Oaker Oats and became a major player in the breakfast business, challenging companies like Kellog.

Today, PepsiCo has a unique expertise when it comes to meeting consumer preferences.  The company has such a huge product portfolio, PepsiCo litterally has the ability to serve the consumers around the clock with its products.

PepsiCo’s most popular brands include:

• carbonated (sparkling) beverages such as Pepsi, Diet Pepsi, Pepsi Max, Mountain Dew, 7 Up (PepsiCo owns the international rights, Dr. Pepper Snapple the US rights)
• non-carbonated (still) beverages like Gatorade, Tropicana, Aquafina, Brisk, Starbucks Ready to Drink Beverages (partnership with Starbucks)
• food brands such as Lay’s, Walkers, Doritos, Ruffles, Fritos, Cheetos, Tostitos and Quaker

Just think of being a contracting partner of PepsiCo. It can provide its customers with a sheer endless variety of beverages and food brands. It truly makes a lot of sense to be a business client of PepsiCo. And that’s a central element of ist huge economic moat.

PepsiCo’s diversified brand portfolio serves the company well. Its products meet diverse tastes and the business also has a great foodprint in the health spectrum.

PepsiCo is a high quality company with great catalysts for growth. For instance there are huge opportunities in emerging markets like China, Africa, India and Latin America. These regions have a large consumer population and very favourable economic growth rates.

PepsiCo’s diversification strategy shows an outstanding ability to take-over and integrate different companies. It was able to identify suitable acquisition “targets” and avoid to overpay.

What we can learn from that wonderful company

Studying the history of outstanding businesses has always been a great inspiration for me.

Today, PepsiCo seeks to transform itself into a health company.

PepsiCo shows how to adapt to consumer preferences and how to use profits from an existing business (beverages) in order to build a very successful second pillar (food business). It transferred its core competences and ample resources to new areas using its unique expertise to diversify.  For decades, PepsiCo has buit know how in various areas of the consumer staple sector such as beverages, restaurants, snacking, healthy products, breakfast.

The true growth happens in the food sector, but without the beverage business PepsiCo would never have been able to transform itself into such a unique company.

Each of us can quite easily build a second pillar providing cash inflows in addition to the salary of a day job or the income as an entrepreneur.

It’s pretty simple.

• Just save as much as possible from your salary (wich is your profit) and
• put that money to work (e.g. by investing in Index Funds resp. Exchange Traded Funds or individual stocks) and
• take advantage of your interests and special knowledge. For example if you have some knowledge about beer industry, why not investing a portion of your annual savings in Heineken, Carlsberg, Diageo and AB Inv?

There is a lot to learn from PepsiCo’s history and diversification strategy. My personal take aways are as follows:

• embrace change in order to thrive in a permanently challenging environment
• go your own way
• become a learning machine, constantly improving and acquiring new skills
• transfer your know how to new areas
• establish different sources of income and several growth drivers
• invest wisely and don’t overpay
• diversify and re-focus if necessary resp. appropriate

 

What about you, fellow reader, is there a company or founder that has been inspring you?

Disclaimer
You are responsible for your own investment and financial decisions. This article is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.