Through The Fly's Eyes: PepsiCo

from Catherine Horner of Theflyonthewall.com












Pepsi Hopes New Sports Drinks Will Boost Their Performance

So far this year, shares of Pepsi Co. (PEP) have increased 5.9%, sales have advanced 10% to reach $9.61B, and net income rose 13% in the second quarter to $1.56B, or 94 cents a share -- 5 cents higher than analysts' expectations. Since 2002, Pepsi has grown 8.4% and has made many large-scale acquisitions, the most recent of which is their $13.4B purchase of Quaker. Many expected Quaker's name brand products, such as their star sports drink Gatorade which generated $3.1B in annual sales, to only add to Pepsi's already thriving food and beverage enterprise. However, almost a year after the deal closed last August, Pepsi is struggling to sustain the Gatorade label's high growth rates.

It's no surprise that Pepsi is facing heavy competition from Coca-Cola (KO) -- Coke's Powerade is one of struggling Gatorade's main competitors. However, Powerade is just one in a large pack of competitors -- the sports beverage market is becoming increasingly competitive. And while Gatorade's 2Q slump is partially the result of unusually strong sales of 29% in 2Q of 2006, Pepsi is still anxious to demonstrate that it can reverse slowing sales.

So what game plan is Pepsi drawing up to try and get ahead in the sports beverage race? The company recently announced plans to launch two new water-based beverages and relaunch its enhanced-water beverage SoBe Life Water. One of the new beverages will be a take on Pepsi's own Propel fitness water while the other, a low-calorie beverage with electrolytes, will be marketed to athletes as a non-workout drink, according to a report in The Wall Street Journal. But how will these new sports drinks help slipping sales for Gatorade? Morgan Stanley, was cited in The Journal report as stating that the new electrolyte beverages would aid the Gatorade franchise because it would result in athletes and consumers choosing a Gatorade affiliate on "non-sweat occasions" instead of opting for a competing drink.

While it continues its efforts to better Gatorade's performance, Pepsi will also continue to increase its range of health-oriented products. The company has boosted R&D to improve fortification and similar technologies and has also began acquiring companies, such as Stacy's Pita Chip Co. and Naked Juice Co., that focus on healthy snacks and drinks. These moves seem to be paying off, as strong snack and beverage sales abroad helped achieve the company's 13% increase in Q2 profits after which, Pepsi increased its earnings estimates for 2007 to $3.35 a share from $3.30. Looks like Pepsi has a certificate of health for the time being.