🔍Stocks in Focus

PepsiCo (NYSE: PEP) trails Coca-Cola (NYSE: KO) on Wall Street as taste for junk food turns

by
Nathan Crooks
Quantfury Team
pepsi

A decades-long rivalry between two soft drink giants is now playing out on Wall Street as some consumers shift to healthier eats. PepsiCo (NYSE: PEP) derives a substantial amount of revenue from its Frito-Lay division—known for junk food staples like Lay’s potato chips and Doritos—while archrival Coca-Cola (NYSE: KO) doesn’t have a snack food business. The different brand compositions are leading to diverging stock returns, with the market taste test favoring the red can at the moment over blue.

The changing tides emerged as a key theme in an earnings call with Pepsi executives earlier this week, after the company reported results for a stagnant third quarter that saw Frito-Lay sales volumes of “convenient foods” decline 1.5%. CEO Ramon Laguarta acknowledged a trend toward “health and wellness” after he was peppered with questions from analysts, but he said the company was shifting in that direction and well-prepared to take advantage of a younger generation’s move away from larger meals. 

“Consumers are changing their eating habits and they’re eating more calories in small portions throughout the day,” Laguarta said. “So, the concept of mini meals, the concept of replacing a big meal with a smaller meal, you can think about a Sabra hummus with a Tostitos and a banana.” The $1.2 billion acquisition of Mexican-American brand Siete Foods announced earlier this month will further help Pepsi with the changing tastes, he continued.

“We’ll continue to invest in our permissible portfolio,” Laguarta added, speaking about brands perceived to be healthier options including Sunchips, Simply, PopCorners and Smartfood.”You see our levels of sodium, our levels of fat are being reduced, and that’s creating a positive halo for all our brands.” He didn’t mention sugar or seed oils, which are increasingly seen as public enemies number one and two by wellness-focused eaters. The omission was subtle but significant, suggesting that Pepsi’s push into healthier snacks might not resonate with the most discerning of the cohort. Polling firm YouGov said in a recent report that self-described “health-conscious” snackers increased to 32% of the general population from 28% four years ago; they also lead in terms of spending growth.  

Markets don’t seem to be so sure about Pepsi’s product mix or growth prospects, healthy or not. The company, which cut its guidance for the fourth quarter, has seen its shares stagnate so far this year in a clear vote of skepticism when it comes to the munchies. Other snack food institutions including Oreo-maker Mondelez International (NASDAQ: MDLZ), Kraft Heinz (NASDAQ: KHC) and J M Smucker (NYSE: SJM) have had declines of 3.7%, 8.6% and 9.7%, respectively. Coca-Cola shares rose 15.8% over the same period—compared to the S&P 500’s gain of 22%—showing the power of a pure beverage play.

Amid the push into lighter fare, fans of Lay’s and Doritos needn’t worry. Pepsi is still all-in when it comes to the junk food game. The US snack food market will see total sales of $51.6 billion in 2024, and that should grow 3.3% annually through 2029, according to Statista. The global snack food industry is worth nearly $490 billion. “Potato chips will continue to be a big driver of the growth,” Laguarta said. “We will use the fall/winter season to put more investments behind Doritos and Tostitos. It’s the football season. There’s a lot of gatherings, and those brands belong very well in those gatherings.”

Expectations for snack food companies have been muted with household budgets under pressure as prices rise and the so-called “normalization” from a pandemic-fueled boom, but investors will want to keep an eye on further signs that consumers may be turning away from the sector altogether. As more health-conscious snackers shun processed foods and sugar, there could be more uncertainty ahead for the Cheetos-maker and its peers, even if upcoming promotions bring short-term gains.