PepsiCo (PEP -2.97%) shareholders had a lot to be thankful for in 2014. The snacks-and-beverages giant outperformed its chief beverage competitor, Coca-Cola (KO 0.15%), as well as the broader market. While PepsiCo's beverage business is still struggling, its fortunes are improving. Here's a look at what PepsiCo can do to strengthen its beverage portfolio while capitalizing on its snacks performance in 2015.
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Beverages bounce back
PepsiCo's beverage unit has dragged on the company's overall results for several years now, but green shoots of a recovery appeared in 2014. After its North American beverage revenue declined in 2012 and 2013, it finally showed 1% growth in 2014.
PepsiCo hasn't been alone in its struggle to grow its beverage business. In the last few years, Coca-Cola and Dr. Pepper Snapple Group (DPS) experienced declines in soft drink volume that dampened revenue. However, PepsiCo performed much worse; it ceded 3.1 percentage points in carbonated soft drink market share from 2008 to 2013, while Coca-Cola's share remained roughly flat and Dr. Pepper Snapple boosted its share.
PepsiCo's beverage business clearly has room for improvement, and last year's slight growth suggests that the company finally may be turning things around. There are reasons to believe that the seeds for more robust growth could be sown in 2015. For one thing, PepsiCo is striking partnerships with various distributors in the at-home beverage channel. The No. 2 soft-drink company entered the U.S. at-home market in 2014 with Bevyz, a countertop all-in-one drink dispenser. PepsiCo is also trying out a partnership with Sodastream, though that isn't going as well as hoped. If all else fails, PepsiCo may be able to strike a deal to appear on Keurig's new at-home carbonation system, due out later this year.
In addition to adding a new distribution channel, PepsiCo can add some life to its soft drink offering by launching a new mid-calorie soda. Coke Life was introduced to the U.S. last year after successful tests in Argentina and Chile. Although the drink is not a game-changer, Coke Life's mid-calorie, low-sugar formula is a good start to stemming the plunge in diet soda sales.
PepsiCo has already failed on several occasions to introduce a good mid-calorie diet soft drink, but a new sweetener could be the key to success. Bevnet reports that PepsiCo has an exclusive license for Sweetmyx, an artificial sweetener designed to taste better than Stevia and replace most of the sugar found in nondiet soft drinks. If the sweetener is able to do what the company hopes, then PepsiCo's beverage business may be back on the right track sooner than investors expect.
Snacking on profits
While Coca-Cola and Dr Pepper Snapple worry about the long-term viability of their current businesses, PepsiCo's results are bolstered by its thriving snacks business. PepsiCo's snacks division includes Frito-Lay -- one of the largest snacks businesses in the world -- and Quaker Foods. While the business has already reached maturity, PepsiCo's domestic snacks revenue is growing at a decent pace of 3% per year.
Despite continued success, PepsiCo must prepare now for what may lie ahead. Many of Frito-Lay's snack foods are unhealthy; the company needs to bolster its healthy snacks portfolio so that its snack products do not meet the same fate as its soft drinks. PepsiCo has already started to build out its good-for-you snacks, including whole-grain chips and oatmeal bites, but look out for more healthy product announcements in 2015 as the company modernizes its snack portfolio to play into recent health food trends.
If PepsiCo finds a way to grow its beverage business while diversifying its snacks business, then 2015 could be a banner year for the company and its shareholders.
