The forefather of colas is The Coca Cola companywith the introduction of the Coca-Cola brand in 1886. Today The Pepsi-Cola Company PepsiCo (PEP 0.27%), was not far behind with its own Pepsi-Cola drink in 1898. And the two have been fighting over Cola supremacy ever since.
Neither Coke nor Pepsi could defeat their Cola competitor. So it didn't take long for these two companies to up the ante by developing comprehensive soda brand portfolios. Today, in addition to the Pepsi of the same name, PepsiCo also sells well-known sodas such as Mountain Dew, Pepsi Wild Cherry, Mug Root Beer, Crush and Starry.
PepsiCo expanded its portfolio through several key acquisitions. Particularly crucial to today's success was the acquisition of Mountain Dew in 1964. According to Statista, Mountain Dew had a market share of 6.6% in the US carbonated soft drink market in 2022. I would say the buyout worked out quite well.
Pepsi's acquisition of Mountain Dew was huge. Even more significant for the company and its shareholders, however, was a merger the following year.
It has nothing to do with carbonated soft drinks. But nearly half of Pepsi's profits today come from a source that would have shocked the beverage company's founders.
When a beverage company had bigger dreams
In 1965, Pepsi-Cola merged with Frito-Lay – a snack company with a portfolio that today includes Lay's, Fritos, Doritos, Cheetos, Funyuns, Spitz, Cracker Jack and more. This was a strong departure for a company that previously focused solely on carbonated soft drinks. But it was a good move.
In the first three quarters of 2023, PepsiCo's Frito-Lay North America division generated sales of $17.4 billion. That's almost as much as the North America Beverages segment's sales of $19.7 billion.
In North America, Pepsi's snack sales are nearly equal to its beverage sales. But these snacks actually have better profit margins. Frito-Lay's operating profit of $4.9 billion is better than its beverage operating profit of just $2.2 billion.
Not only is Frito-Lay's operating income higher than beverages, it also accounted for 48% of PepsiCo's total operating income year to date. In short, if Pepsi hadn't switched to snacks almost 60 years ago, the company would be half the size it is today.
Why it matters for investors
There are so many potential conclusions for PepsiCo from such an observation. As one of the largest beverage companies in the world then and now, Pepsi's growth would have been lower if the company had remained entirely focused on its core competency. Expanding beyond that into an adjacent market with robust cross-promotion opportunities made a lot of sense.
It's similar to what Hershey This now goes beyond candy and extends to snack items like pretzels and popcorn.
More broadly, companies that can expand beyond their core competencies often make good investments; This feature is called optionality. Many companies try to branch out and few do it well. But PepsiCo is one of the great success stories.
PepsiCo's mix of beverage revenue and snack sales has an additional benefit for shareholders: It is a potentially more reliable company because it has greater variety.
All other things being equal, I would choose PepsiCo stock over a pure beverage company because of this stabilizing quality. If for some reason the carbonated soft drinks industry faces headwinds, PepsiCo has another business unit that can help overcome the challenges.
This is particularly good news for dividend investors. PepsiCo has increased its dividend for 51 consecutive years, making it the dividend king. Many investors choose to invest in these companies because of the predictable dividend payments. Because the company is diverse, a sudden business shock makes it more likely that PepsiCo won't be knocked off the list.
And it's all possible because the management team at The Pepsi-Cola Company – a beverage company – had the foresight to move into a completely different field when it merged with snack company Frito-Lay.
Jon Quast has no position in any of the stocks mentioned. The Motley Fool recommends Hershey and recommends the following options: Long January 2024 $47.50 calls on Coca-Cola. The Motley Fool has a disclosure policy.