PepsiCo, Inc. (PEP), Costco Wholesale Corporation (COST): Stock Up on Samplers

It wasn’t long ago that few had heard of Sabra Dipping Company, half of which is owned by PepsiCo, Inc. (NYSE:PEP).  Hummus is a spread/dip that is low in fat, high in protein, and even higher in market noise level because of increasing nutrition awareness.  But aside from being a healthy snack, many know about it because it gives itself away for free.  Pepsi is a global snack ruler because of it’s marketing power, and no marketing is more powerful than sampling.

Dipping in

Many of us enjoy snacking, and enjoy it even more when there’s no cash involved. Sabra gave away 10,000 packages (2 ounce samples) in U.S. cities. It’s a marketing technique that should be used more often but is generally risky for smaller companies. For PepsiCo, Inc. (NYSE:PEP) it’s nothing because its Frito-Lay division operates at a margin around 34%.

Estimated sales of Sabra eclipsed $315 million last year. It is the largest maker of hummus in the country, but competition in the healthy snack world is intense.  Refrigerated flavored spreads, the majority of which are types of hummus, brought in $530 million in 2012, an 11% jump from the previous year.

PepsiCo has mastered sampling. Take for example the team up with other companies such as Yum! Brands, Inc. (NYSE:YUM). If you’ve been to a baseball game recently, you’ve probably heard of the co-op withTaco Bell and the infamous “Doritos Locos Tacos” campaign.  Now, the casual investor may look past PepsiCo, Inc. (NYSE:PEP) because it ranks second in the cola department, but a little research shows it generates 61% of its $8.8 billion in free cash flow from Frito-Lay and other food brands. The same division generates 52% of revenue.  Sampling new snacks and more global brand exposure should help PepsiCo, Inc. (NYSE:PEP) continue its 41 consecutive years of dividend increases.

Sampling works even better in retail stores such as Costco Wholesale Corporation (NASDAQ:COST) and Whole Foods Market, Inc. (NASDAQ:WFM). These two are more than grocery stores–they’re food destinations. They use sampling to get their quality products into shopping carts.

No free lunch

Three years ago, a Minnesota man was arrested for taking too many free samples. So an investor may wonder if companies lose significant money on samples. And the answer would be no, generally these types of businesses aren’t worried about the product they give away.