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PepsiCo, Inc. (PEP): Can This Soda Giant Take On Yogurt’s Big Wigs?

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Yogurt is an increasingly popular food in The United States. The two big names are General Mills, Inc. (NYSE:GIS) Yoplait and Danone SA (ADR) (OTCMKTS:DANOY), which together control about 50% of the U.S. market. Can soda and snack giant PepsiCo, Inc. (NYSE:PEP) break into a market with such large and entrenched players?

PepsiCo, Inc. (NYSE:PEP)

Big and Getting Bigger

Bloomberg quotes Euromonitor International in pegging the domestic yogurt market at around $7 billion dollars. An average growth rate of about 8.5% over the past five years helps explain why PepsiCo is interested in the space. Although Euromonitor expects growth to slow to 5.9% annually over the next five years, that’s still well above the opportunity available from other product categories.

PepsiCo’s push into yogurt is keeping with its broader focus on introducing more “healthy” fare. The soda and snack giant has been focusing around such brands as Tropicana and Quaker Oats as consumers have started to worry more about their health. Bloomberg reports that healthy fare makes up 20% of the top line, with a company goal of reaching 30% by the end of the decade.

Not Just a U.S. Push

PepsiCo, Inc. (NYSE:PEP)’s yogurt ambition is global. At the annual meeting, the company noted that “We are also unlocking growth in new categories like dairy with our Wimm-Bill-Dann acquisition in Russia, our joint venture with Almarai in the Middle East and our Muller Quaker Dairy joint venture in the U.S.”

That said, it is the Muller yogurt brand that is about to see the biggest growth as PepsiCo puts its marketing muscle behind the brand in a nationwide roll out. Partnering with an experienced yogurt company is an important differentiation in this effort, since trying to build a product from scratch would be hard in a category that is relatively new to the company. It follows the successful model that Pepsi used with Sabra and dips.

Needed Growth

PepsiCo, Inc. (NYSE:PEP) has a long history of slow, but steady growth. However, that’s increasingly difficult to achieve with revenues of over $65 billion in 2012. While it expects soda and chips to grow around 5% over the long term, tapping into a product category growing at 5.9% is clearly enticing. And, since the category is new for Pepsi, growth in the initial years will be much greater than that if it succeeds.

A Tough Fight?

Danone and General Mills, however, both have large yogurt businesses against which Pepsi will have to compete. That said, Pepsi has a lot of clout in the grocery isle, with revenues more than twice as large as Danone and around four times the size of General Mills. So, shelf space shouldn’t be a big problem.

Pricing is a whole different ball game. Yogurt is often sold using generous sales and large discounts. That puts PepsiCo, Inc. (NYSE:PEP) into a cutthroat market. Fierce competition, however, isn’t new to Pepsi, either, since it has competed head to head with The Coca-Cola Company (NYSE:KO) for years. There’s good reason to believe the company can make a go of it if it adequately supports the effort.

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