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PepsiCo needs emerging market focus to repair margins: US investment firm

By Ben Bouckley , 28-Nov-2012

A US-based investment firm insists that PepsiCo needs to focus on its most profitable brands and emerging markets such as China to bolster margins and regain ground on Coke. 

In an article for investment site Seeking Alpha, entitled ‘Avoid PepsiCo: A Story of Low Growth, High Competition’, Missouri-based Qineqt affirmed its neutral rating on PepsiCo and said that The Coca-Cola Company currently offered better growth prospects.

(Missouri-based Qineqt comprises a team of investment professionals, including a former hedge fund manager, trader and analyst at a top-tier $10bn hedge fund.)

Qineqt expressed scepticism about PepsiCo’s portfolio revamp to offer healthier alternatives to calorie-rich drinks, citing the launch of 60 calories per 12oz can Pepsi NEXT (Pepsi Cola has 150).

“This move towards the healthy alternative might have a negative impact on the company’s financials, as it might not be able to focus on its existing profitable brands,” Qineqt said.

‘Low growth, high competition’

The company noted that Pepsi Cola had lost its second slot to Diet Coke in terms of market share (in 2010), and said that recent top line growth averaging 8% per year was insufficient.

“Due to rising competition and increasing commodity prices, margins of PepsiCo do not display a satisfactory image,” the investment company said.

“PepsiCo needs to focus on its most profitable brands and markets to compete effectively and regain the second slot,” Qineqt added.

Gross, EBIT and Net margins all fell between 2007 and 2011, Qineqt said, while according to its calculations, PepsiCo’s return on equity (ROI), which peaked at close to 40% in 2009, had since slipped to 33% in 2011.

China is ‘growth engine’

Although PepsiCo’s revenues fell 5% year-over-year in Q3 2012 to $16.65bn – due to rising commodity prices and intense competition – the firm achieved 5% organic growth due to a 4% price increase and 1% volume increase.

“Going forward, to improve its operations and results, we believe the company needs to focus on emerging markets,” Qineqt’s analysts wrote.

“In Q3 2012,, the company achieved 11% organic growth in emerging markets. To focus on China and other markets in the region, the company has plans to invest $2.5bn in China.”

Last week, PepsiCo opened a new $40m+ research center in China to boost regional sales, and aims to make snacks and beverages that suit regional tastes. The firm emphasized that China was critical to its global strategy as its “growth engine”.

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