PEP | EXPANDING INTO SNACKS AND BREAKFAST?

This week there have been rumors that PepsiCo (PEP) is looking at taking a minority stake in Chobani.  Despite the notion that PEP might be better broken up, the current business model seems to be working as good as any in the consumer staples space.

 

The Chobani rumor might be an indication about what the company is thinking going forward and what its next move might be to add another growth platform.  We believe that PEP could benefit from more exposure to snacking and or breakfast.  To that end, PEP could accomplish its push into snacking and breakfast by acquiring General Mills (GIS).

 

We know, it’s dilutive in the near-term, but acquiring GIS is a long-term play. Besides, Chobani is no longer as meaningful in the Greek yogurt market as it was 3-5 years ago when they were the trendsetter. The bigger competition, such as Dannon and Yoplait have improved their products and caught up with Chobani.  It makes more sense for PEP to dive a little deeper into snacking and acquire GIS, who has a strong global yogurt franchise in Yoplait.   

 

Chobani is not going to be cheap; with comps like Annie’s out there, this deal will most likely be dilutive albeit to a much smaller degree. This deal would be so small for PEP that the dilution would probably be undetectable.  Chobani has slightly over $1bn in sales making them a top three player in the Greek yogurt market. This is a highly contested market with major manufacturers like General Mills and Danone plowing millions into marketing and promotion at the shelf. Given this level of competition this isn’t a category for the faint of heart, you want a global team that has the knowledge to navigate changing consumer trends. With GIS, PEP would be buying into a global powerhouse that has decades of experience within yogurt and across the food category.

 

The rumors about PEP (and KO, although they have denied it) wanting to get into yogurt are also a bullish sign for our long call on GIS.  General Mills’ yogurt business is one the company’s strongest and best performing brands. Yogurt is not just for the breakfast occasion it truly is becoming a snack for all day-parts.

 

In addition, GIS has an undervalued cereal franchise that stands at the top of the market. Although the majority believes it to be struggling, cereal has merely reached a point of maturity. The innovation and marketing that GIS and other industry leaders have executed over the last 6-12 months are just now starting to pay dividends. We believe the companies will continue to see positive trends in the category as calendar year 2016 plays out.

 

PEP would also be buying into a stellar and growing natural and organic franchise. Representing roughly $600mm in sales, General Mills’ natural and organic brands consist of; Annie’s, Food Should Taste Good, Lärabar, Cascadian Farm, Liberté, Immaculate Baking, Mountain High and Muir Glen. These are strong brands within their respective categories and GIS is always looking at other acquisition to grow this portfolio.

 

Both GIS and PEP have strong brands that have transcended time.

PEP | EXPANDING INTO SNACKS AND BREAKFAST? - CHART 1 PEP Replace

 

In fact bringing the two companies together would create a very powerful company in the Consumer Staples space.

PEP | EXPANDING INTO SNACKS AND BREAKFAST? - CHART 2 PEP Replace

 

While it’s unlikely that PEP will buy GIS the opportunity is intriguing:

  • PEP could accelerate GIS brand growth internationally
  • Easy to marry each respective foodservice teams and dominate the industry in both front-of-house and back-of-house.  Foodservice is a $700bn industry projected to grow at a 4.2% CAGR over next 4 years
  • General Mills’ products would be a great healthier addition to Pepsi vending machines (Lärabar, Nature Valley, Bugles, Gardetto’s, Food Should Taste Good etc.)
  • Combination would make it even easier to work with retailers and distributors, would be a one stop shop for many items across the store creating efficiencies for all
  • Focus on healthy mornings: Items purchased and consumed together, paring items for deals in store (ex: buy a box of cheerios, get $1 off Tropicana)
  • A lot of the same culture and goals, brand building, innovation, productivity, execution and investment in their brands.  Seems like PepsiCo’s management has the fire in them to guide GIS’s portfolio in the right direction
  • Buying the “Better-for-you” company
  • A brand for every occasion

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


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