Last night’s revelation that PepsiCo has finally clinched the purchase of Quaker Oats with its resubmitted bid of US$13.4bn sent ripples through the food and beverage industries as speculation mounted concerning the fate of Quaker’s cereals and snacks division.
There can be little doubt that, ostensibly, Pepsi was primarily after the immensely popular Gatorade, which, with 84% of the US non-carbonated sports drink sector, dominates rivals and is still demonstrating fast growth. But nobody can ignore the fact that 60% of Quaker’s revenue is grossed though profitable but less dynamic sales of snack foods and cereals. So, what is Pepsi going to do with its new charges?
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There was much speculation that it would immediately begin divesting the food operations, that it even had buyers lined up prior to the bid, but now Pepsi’s executives are saying that the foods will enhance the company’s goal of become a leading food and beverage business globally. They will not spin them off – at least not in the short term.
It#;s enough to make the Coca-Cola directors, who staunchly refused to back Douglas Daft’s earlier approach to Quaker, spit. They ceded the deal to a lower bid and consequently beefed up the brands and market share of their main rival.
Pepsi already dominates the snacks market with Walkers Crisps and the Frito-Lay division, which will make it relatively easier for the company to assimilate the food brands than almost wholly beverage-based Coke, but it will also profit from the fact that Quaker’s highly praised management will initially be staying put to guide the convenience food operations.
And while Pepsi’s global distribution networks are not as finely tuned as Coke’s, it has far more scope to develop the Gatorade brand than Quaker, utilising its vending drinks machines and small stores networks to drum up an estimated extra 10% in sales. It has also recently developed Frito-Lay’s production capability, which can be used to add significantly to the business Quaker already established.
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By GlobalDataThere is also a bright future for the nutritious snacks developed by Quaker, facilitating Pepsi’s entry into the “on the go” mini-meal foods market. Chewy Granola and rice cakes are experiencing strong growth and oatmeal, which was successfully remarketed by Quaker as a cholesterol battler, enjoyed huge profit margins to produce 10% of the company’s revenue.
Focusing on the snack and convenience foods arenas, Pepsi could be forgiven for ditching the slow-growth cold cereals for which Quaker were probably best known. Nevertheless, despite acknowledging that they do not quite fit with Pepsi’s main focus, the company has revealed that it has decided that it has the capacity to continue running them on an even keel, and predict a conservative profit growth of around 4.5%.
It is expected that the non-snack food brands gathered up from the Quaker sale will gross nearly 10% of Pepsi’s sales, and 11% of its operating profit. With this kind of return, Pepsi can’t afford not to capitalise on all of its new food brands.
