Cola wars heat up as PepsiCo makes big push

If the soda maker can successfully market Pepsi Next, it will help boost the company's sluggish soft drink sales.

By Trefis Feb 29, 2012 2:25PM
The cola wars are heating up again. In addition to an announcement that it will spend $600 million more in marketing, PepsiCo (PEP) is also planning new product offerings and a strategic review of existing products in 2012. 

PepsiCo competes with leading food and beverage companies around the world, including Kraft Foods (KFT), Coca-Cola Co (KO) and Dr. Pepper Snapple (DPS).

PepsiCo is launching its version of a mid-calorie soda called Pepsi Next, a can of which contains 60 calories. The idea is to appeal to consumers who refrain from buying the unhealthy colas but don't like the taste of the diet versions. It remains to be seen if Pepsi Next will cannibalize or boosts sales of Pepsi and Diet Pepsi. Either way, if PepsiCo is able to successfully market the new product, it will do the company a world of good as its soft drink sales have been falling for quite some time now.

Pepsico US CSD Market Share

PepsiCo, which announced its fourth-quarter and full-year earnings earlier this month, saw carbonated soft drink (CSD) volumes decline by mid-single digits for 2011. Dr Pepper Snapple launched Dr Pepper TEN, which contains only 10 calories, in October 2011. The product has so far received positive feedback, with the company reporting that the product helped boost its fourth-quarter sales.

PepsiCo also plans to offer consumers another option for Tropicana juice with a higher water content. The company feels that since consumers often add water to Tropicana to thin it down, it should provide an option that is already thinned. Moreover, higher water content will ensure lower calories, something the company can leverage to boost sales. Since the cost of raw materials, as a percentage of sales, is usually lower for beverages, we could see an increase in PepsiCo's gross margins if it is indeed able to increase beverage volumes considerably.

PepsiCo Fruit Juices & Energy Drinks Gross Profit Margin

It will be interesting to see how things pan out and how Coca-Cola and Dr Pepper Snapple react to PepsiCo's renewed push in the beverage space. Coca-Cola denies any increase in its marketing budget for the time being.

We maintain a price estimate of $71 for PepsiCo, which is about 10% above the current market price.

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