Pepsi (NASDAQ: PEP) faces challenge to catch up with competitors

It’s been a rough 12 months for PepsiCo (NASDAQ: PEP) amid sluggish sales for its food and beverage products.

The stock has lagged its two main competitors, Coca-Cola (NYSE: KO) and Keurig Dr Pepper (NASDAQ: KDP). Pepsi shares have dropped 15% during the past year, compared to a 25% gain for Coke and a 17% gain for Keurig.

You’re probably familiar with Pepsi’s makeup. The food division, which includes Doritos, Cheetos and Lay’s, accounted for 58% of revenue last year. And the beverage division, which includes Pepsi, Mountain Dew and Gatorade, makes up the rest.

Pepsi’s overall revenue increased only 0.4% last year and dipped 0.2% in the fourth quarter. Yet on the bright side, Pepsi’s foreign business, which makes up 40% of total sales, delivered 6% organic revenue growth last year. Still, the company forecasts only a low-single-digit increase in organic revenue for 2025.

The pain of inflation, healthy foods

Pepsi, like other food makers, has suffered from inflation, which forced it to increase prices, pushing away budget-conscious shoppers. And it has suffered from consumers’ gravitation to more healthy foods. Pepsi plans to increase its healthy snack and beverage offerings to attract shoppers. 

To that end, the company bought Siete Foods, a healthy-oriented Mexican-American food brand, for $1.2 billion in January. And last year it purchased Sabra Dipping Co., a maker of Mideast style foods, such as hummus.

“We’re seeing more conversation in social media about health and wellness, and obviously, that’s impacting consumption of food and consumption of beverages,” Pepsi CEO Ramon Laguarta said in Pepsi’s latest earnings call. “We’re very well-positioned with our broad portfolio to cater to all these new realities.” 

The company agreed last month to acquire prebiotic soda brand Poppi for $1.95 billion. Poppi drinks are marketed as good for your gut. In addition, Pepsi has embarked on a variety of marketing campaigns that it hopes will boost beverage sales.

Efficiency, potential rebound

Meanwhile, the company plans to unite its food and beverage operations to increase efficiency. That would include dropping the practice of sending food and beverages in separate trucks to the same stores. It also has turned to smaller packs to make its products more affordable

So the question is can Pepsi engineer a rebound? Morningstar analyst Dan Su thinks it can, though he’s not looking for the company to hit it out of the park. He sees Pepsi generating 4% annual sales growth and a 16% average operating margin over the next decade.

Experts say Pepsi may be able to better withstand economic hard times than other companies. “Demand for snacks and beverages tends to remain resilient throughout economic cycles,” Su says. “A large end-to-end supply chain gives Pepsi better control over execution, helping to shield its operations from exogenous shocks.”

But keep in mind that there’s no guarantee for success.

The author owns Pepsi shares.