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MarketScreener Homepage  >  Equities  >  Nasdaq  >  PepsiCo    PEP

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Pepsi Needs a Win With Gatorade -- WSJ

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07/27/2019 | 02:48am EST

Mango soda and Bubly seltzer are cute, but sports drinks are key to the company's future

By John D. Stoll 

It is shaping up to be a refreshing summer for the soft-drink business.

After watching the fizz bubble out of storied soda brands in recent years, executives have boosted ad spending, shrunk packages and introduced fresh flavors. Taste Mango Pepsi yet? What about those nifty little coffee-infused Cokes making waves in Europe?

Coca-Cola Co. shares touched record highs this week after it reported sparkling quarterly results. At PepsiCo Inc., a similar hot streak has been a tonic for Ramon Laguarta, who took over as chief executive in October facing questions about the company's ability to quench changing thirsts.

The sweet taste of success is tinged by this reality: Whizbang innovations and marketing schemes provide an immediate pop, but it costs big money for the hits to keep on coming. If a business wants to win the long game, its leaders need to find a way to keep its tentpole brands dispensing cash or the time, talent and money for growth projects will dry up.

For Mr. Laguarta, and his rivals at Coke to a lesser extent, the shrinking sports-drink market is the hazard to watch out for. Once a robust driver of growth in an otherwise ho-hum sugary-beverage industry, sales at Pepsi-owned Gatorade and Coke-owned Powerade have declined for two consecutive years, according to research firm Euromonitor International. Sports fuels are increasingly seen as unhealthy and inferior to electrolyte-rich organic concoctions such as ROAR, kombuchas, coconut waters or myriad other options crowding grocery aisles.

Mr. Laguarta is laying Gatorade comeback plans that will be closely watched by the company's investors and executives in other industries. The brand, purchased by Pepsi in 2001, delivers $7.5 billion in annual revenue, or more than 15% of the company's beverage sales, according to Euromonitor. A successful turnaround of such a significant chunk of Pepsi's operation would deliver a potential blueprint to other companies struggling with aging megabusiness units.

The folks running Budweiser, for instance, would kill for a fix-it plan right about now. Mainstream beers, not unlike sports drinks, are jockeying for a place in a market increasingly dominated by smaller craft labels or lower-carbohydrate options. Other household names outside of the beverage business -- Harley-Davidson motorcycles, Hershey bars or Domino's Pizza -- are also struggling with their place in these disruptive times.

Nik Modi, an analyst with RBC Capital Markets, says the recent resurgence at a brand like Coca-Cola provides hope. "Everyone thought Coke was dead for the last 14 years," Mr. Modi told me shortly after the Atlanta company posted 4% quarterly sales gains in its core soda business. "I've seen time and again where brands that we thought were gone suddenly re-emerge."

It typically costs more to throw in the towel on a tarnished icon than invest in a comeback. It takes several years and billions of dollars to build a powerhouse. That is why turnaround artists will purchase the remnants of a Pabst Blue Ribbon, Twinkies or Barnes & Noble even after another gives up on them.

A brand doesn't need to be on death's door for its future to be in question.

A brewer like Anheuser-Busch InBev is dabbling in new recipes ranging from exotic to organic, but to grow it needs vibrant mainstays like Bud and Bud Light to provide the resources needed to pay down debt and fund experimentation and acquisitions. Over at Harley-Davidson Inc., executives are turning attention to electric, sporty or adventure bikes, but that effort won't work if the billions in annual revenue from its trademark Hogs, trikes or low-riding Softails disappear.

At Gatorade, revenue growth has stalled, but it remains the biggest player in a global sports-drink market that delivered $18 billion in annual sales for three consecutive years, according to Euromonitor. Nearly every football celebration in America seems to involve a shower for the winning coach from the brand's big orange coolers. In a tweet posted last week, the Kansas City Chiefs professional football team listed 11,000 gallons of Gatorade as among the essential items being packed for three weeks of training camp on a Missouri college campus.

"Gatorade is clearly a big brand for us," Mr. Laguarta said during a conference call earlier this month.

Big, but not flashy. Many have paid more attention to the overnight success of Pepsi's Bubly, a rival to flavored-seltzer giant LaCroix. Bubly has achieved a $300-million annual revenue rate since launching a little more than a year ago, and executives expect it to hit $1 billion in the short term.

Bubly is cute, but Gatorade is critical. Pepsi doesn't break out financial performance of individual units, but Euromonitor's estimates suggest Pepsi sells $25 worth of Gatorade for every $1 in Bubly it peddles.

To maintain its outsize contribution, Mr. Laguarta needs to look beyond Gatorade's heritage as an athletic elixir. It already has a foothold as a hangover cure, a sweet treat in children's lunchboxes and something to keep construction workers cool on a summer day.

Barclays analyst Lauren Lieberman said Mr. Laguarta's challenge will be to figure out this identity crisis: Does the neon-colored liquid and lightning-G have a future in competing in the booming health-and-wellness market and being accepted as a guilty pleasure? Leslie Bonci, a sports dietitian working for those Gatorade-guzzling Kansas City Chiefs, says that marathon runners and quarterbacks may need a drink loaded with sugar and electrolyte-rich salts, but she thinks too many people who drink Gatorade treat it like an alternative to soda.

The athletic crowd is gravitating toward sports-drink upstarts like BodyArmor, made popular by retired basketball star Kobe Bryant and marketed as a healthier alternative to Gatorade that is favored by younger sports figures. Coca-Cola bought a stake in BodyArmor, shortly after launching sugarless Powerade Zero.

Both of Coke's moves caught Pepsi's attention, and are guiding the company's formula for a sports-drink revival.

Gatorade Organic, introduced in 2016, has seen little traction. Consumers don't see the Gatorade-plus-organic formula as credible, Ms. Lieberman said. Gatorade Zero, a sugar-free drink introduced in 2018, has fared far better and has already reached $500 million in sales.

Pepsi this summer is launching Bolt24, a water infused with watermelon and sea salt that could better compete with BodyArmor. The new healthier drink is a clear attempt by Mr. Laguarta to catch a different kind of lightning in a bottle.

Write to John D. Stoll at john.stoll@wsj.com

Corrections & Amplifications Gatorade Organic was introduced in 2016. An earlier version of this story mistakenly said the drink was introduced in 2018. (July 26, 2019)

Stocks mentioned in the article
ChangeLast1st jan.
ANHEUSER-BUSCH INBEV -1.07% 69.99 Delayed Quote.-2.70%
BARCLAYS PLC -1.87% 171.5 Delayed Quote.-2.72%
BARNES GROUP INC. 1.09% 65.59 Delayed Quote.4.71%
HUDSON'S BAY COMPANY 0.00% 10.9 Delayed Quote.10.32%
LACROIX 0.00% 28.5 Real-time Quote.3.64%
LONDON SUGAR 0.84% 406.7 End-of-day quote.13.07%
ORANGE -0.53% 13.06 Real-time Quote.0.08%
PEPSICO -0.60% 142.42 Delayed Quote.4.91%
THE HERSHEY COMPANY 0.64% 153.415 Delayed Quote.3.98%
VIBRANT GROUP LIMITED -7.69% 0.12 End-of-day quote.-3.23%
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Financials (USD)
Sales 2019 66 777 M
EBIT 2019 10 608 M
Net income 2019 7 479 M
Debt 2019 24 939 M
Yield 2019 2,64%
P/E ratio 2019 27,1x
P/E ratio 2020 24,3x
EV / Sales2019 3,37x
EV / Sales2020 3,26x
Capitalization 200 B
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Mean consensus HOLD
Number of Analysts 24
Average target price 140,30  $
Last Close Price 143,38  $
Spread / Highest target 8,10%
Spread / Average Target -2,15%
Spread / Lowest Target -19,8%
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Managers
NameTitle
Ramon Luis Laguarta Chairman & Chief Executive Officer
Hugh F. Johnston Vice Chairman, Chief Financial Officer & EVP
Rene Lammers Chief Science Officer
Daniel Lucius Vasella Independent Director
Dina Dublon Independent Director
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