Blog: Katy AskewAnalysts call for PepsiCo to sell off Quaker

Katy Askew | 16 October 2014

With sales under pressure and margins precarious, PepsiCo should sell off its Quaker North America business, Jefferies analysts argued today (16 October).

The US cereal aisle is currently characterised by weak consumption trends. Consumers are losing interest in cereals and opting for alternate breakfast options that are either more convenient or offer functional health benefits - such as "naturally high in protein" staple, eggs.

Category majors such as Kellogg, General Mills and PepsiCo's Quaker have repeatedly argued that a focus on innovation and marketing can drive consumer excitement around the category. But to date, these efforts have failed to bear fruit - and investments in reinvigorating cereal offer frustratingly low returns.

So is now the time to cut and run?

In an investor note, Jefferies analysts make the case that PepsiCo should dispose of the troubled Quaker North America business and focus on its faster growth snacks arm. After all, it only generates 5% of group profits and has represented a drag on operating income growth of around 75 basis points since 2009.

The analysts highlight the low ROI offered by Quaker - and the fact that the company has struggled to maintain its market share in recent years. If PepsiCo were to sell up, it would reduce its exposure to the "secularly challenged" centre store, the analysts stress.

Indeed, in its most recent financial update, PepsiCo revealed that Quaker North America sales fell 3% in the third quarter. And, surprisingly perhaps given the challenges that the unit is grappling with, management was decidedly reticent about any plans in the offing to give Quaker a much needed shot in the arm during the analyst call to discuss the results.

Of course, only time will tell if a sale could be on the cards. But it could make a lot of sense for a company with considerable exposure to higher growth areas of the packaged foods market. 


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