Over the past decade, total returns in the five major packaged foods companies — Kraft Heinz, General Mills, Kellanova, Hormel, and Conagra — have averaged 35%. That gain — just 3% per year — badly lags the overall market.
Notably, those returns also are worse than those of the two major soft drink companies. Investors in PepsiCo have better than doubled their investment; Coca-Cola shareholders are up about 130%. Not even Kellanova — which is being bought out by Mars at a premium, and as a result has outperformed packaged food peers over that stretch — has matched those returns.
The outperformance of Pepsi and Coke does make some sense. The Coca-Cola brand is generally ranked as one of the 10 most valuable in the world. PepsiCo’s snacking business, anchored by Lay’s and Tostitos, has been a long-term winner, and remains much less exposed to private label competition relative to other categories.
But at the same time, there are challenges shared by the majors in both food and beverage.
Soda consumption in the U.S. has been in long-term decline. Health considerations likely will cement that trend.
Broadly speaking, both packaged food and beverage companies have products in their portfolios that many parents don’t want their children to consume.
So far, both Coke and Pepsi have been able to manage around those declines. Coca-Cola’s massive, long-term effort to refranchise its bottling operations, which came to an end in 2017, has improved return on capital. Both companies have used portion sizes and pricing to boost revenue and margins per case and drive overall earnings growth.
Yet there almost certainly is a limit to those efforts. At some point, the broader trends working against soda consumption will likely start to hit growth for the beverage majors — just as they have for their counterparts in packaged foods.
Of course, those food companies already have spent years aiming to manage changing consumer tastes. In the 2010s, Campbell moved aggressively into healthier foods, most notably through the $1.55 billion acquisition of Bolthouse Farms in 2012. Kellanova built out a plant-based business and spun out its cereal brands into a separate company, a move which may have eased its path to a tie-up with Mars. Kraft Heinz has launched new versions of legacy brands, such as the low-sugar Capri Sun “Healthy Waters” product.
This week, PepsiCo made a similar step, agreeing to acquire prebiotic soda manufacturer Poppi for $1.95 billion (PepsiCo also expects $300 million in tax benefits from the purchase). The price seems huge, as reports suggest Poppi’s revenue only recently cleared the $100 million mark.
Despite the price, this seems like a potentially smart move for Pepsi.
Data from Tracksuit suggests Poppi’s awareness has jumped 13 percentage points in the past year, reaching 33%.
Despite that, penetration remains low: Zappi reports that only 22% of consumers have even tried prebiotic soda. Pepsi’s marketing and distribution heft can quickly ramp up that figure, driving strong growth for years to come.
But the deal also is interesting from a strategic perspective. This isn’t Pepsi’s first move into healthier offerings: the company acquired Muscle Milk in 2019 and home soda maker SodaStream the year before. Poppi, however, represents a more aggressive move that is not necessarily meant to complement the core beverage business — but to ward off a competitor that could potentially replace it.
In that way, the Poppi deal echoes moves packaged food companies have been making for years, like General Mills’ purchase of organic food manufacturer Annie’s a decade ago. And the acquisition – alongside Coke’s launch of its own prebiotic brand, Simply Pop – might suggest that, for the first time, the majors see real threats to the legacy soda business from within.
That’s precisely the situation packaged food companies have been dealing with for the last ten years. As the performance of that sector shows, it’s a difficult situation to manage. After all, having a globally recognized brand means that consumers have deep, entrenched sentiment. That’s a wonderful asset in a category that is growing — but a liability as perceptions change. It’s not hard to wonder if Pepsi’s deal for Poppi is an acknowledgment of that change — and a sign that the soft drink industry is heading toward the same challenges that have dogged the food industry over the past decade.
Vince Martin is an analyst and author whose work has appeared on multiple financial industry websites for more than a decade. He has no positions in any securities mentioned.
The Food Institute Podcast
How are macro-economic factors and changing consumer preferences impacting the natural grocery sector? City National Bank’s Justin D’Affronte steps in as guest host as he speaks with Mother’s Market CEO Dorothy Carlow about inflation, tariffs, consumer preferences, and more.
