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  • PepsiCo Is Known for Sodas Such as Pepsi and Mountain Dew. But Almost 50% of Its Profits Comes From Something Else Entirely.

    PepsiCo Is Known for Sodas Such as Pepsi and Mountain Dew. But Almost 50% of Its Profits Comes From Something Else Entirely.

    The granddaddy of the colas is The Coca-Cola Company, with the Coca-Cola brand launching in 1886. The Pepsi-Cola Company, now PepsiCo (NASDAQ: PEP), wasn’t far behind with its own Pepsi-Cola drink in 1898. And the two have locked horns for cola supremacy ever since.

    Neither Coke nor Pepsi was able to take down its cola competitor. So it wasn’t long before these two companies upped the ante by developing comprehensive soda-brand portfolios. Nowadays, PepsiCo sells well-known sodas such as Mountain Dew, Pepsi Wild Cherry, Mug Root Beer, Crush, and Starry in addition to its eponymous Pepsi.

    PepsiCo built its portfolio by making several key acquisitions. Its 1964 acquisition of Mountain Dew was especially crucial to its present-day success. In the U.S. carbonated soft-drink market, Mountain Dew had 6.6% market share in 2022, according to Statista. I’d say that buyout worked out quite well.

    Pepsi’s Mountain Dew acquisition was huge. But a merger the following year was even more significant for the company and its shareholders.

    It has nothing to do with carbonated soft drinks. But almost half of Pepsi’s profits today are derived from a source that would have shocked the beverage company’s founders.

    When a beverage company dreamed bigger

    In 1965, Pepsi-Cola merged with Frito-Lay — a snack company with a portfolio that today includes Lay’s, Fritos, Doritos, Cheetos, Funyuns, Spitz, Cracker Jack, and more. This was a strong departure for a business formerly focused entirely on carbonated soft drinks. But it was a good move.

    Through the first three quarters of 2023, PepsiCo’s Frito-Lay North America business segment has generated revenue of $17.4 billion. That’s nearly as big as its Beverages North America segment’s revenue of $19.7 billion.

    In North America, Pepsi’s snack revenue nearly matches the revenue from beverages. But these snack foods actually have better profit margins. Frito-Lay’s operating income of $4.9 billion is better than operating income of just $2.2 billion for beverages.

    Not only is Frito-Lay’s operating income higher than beverages, it’s also accounted for 48% of PepsiCo’s total operating income year to date. In short, if Pepsi hadn’t pivoted to snacks nearly 60 years ago, it would be half the company that it is today.

    Why it matters for investors

    There are so many potential takeaways with an observation like this for PepsiCo. For starters, as one of the largest beverage companies in the world both then and now, Pepsi’s growth would have been more limited if it had stayed completely within its core competency. Expanding outside of it into an adjacent market with robust cross-promotion opportunities made a lot of sense.

    It’s similar to what Hershey is doing now, extending beyond candy and into snack items such as pretzels and popcorn.

    More broadly, companies that can expand beyond core competencies often make good investments; this trait is known as optionality. Many companies attempt to branch out and few do it well. But PepsiCo is one of the grand success stories.

    PepsiCo’s blend of beverage revenue and snack sales has an additional benefit for shareholders: It’s a potentially more reliable business because it has greater diversity.

    All other things being equal, I would choose PepsiCo stock over a pure-play beverage company because of this stabilizing quality. If headwinds blow in the carbonated soft-drink industry for whatever reason, PepsiCo has another part of the business that can help carry it through the challenges.

    That’s particularly good news for dividend investors. PepsiCo has raised its dividend for 51 consecutive years, making it a Dividend King. Many investors choose to invest in these companies for their predictable dividend payments. Having a diverse business makes it more likely that PepsiCo won’t get knocked off the list by a sudden shock to its business.

    And it’s all possible because the management team for The Pepsi-Cola Company — a beverage business — had the foresight to branch into an entirely different arena when it merged with snacking company Frito-Lay.

    Should you invest $1,000 in PepsiCo right now?

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    Jon Quast has no position in any of the stocks mentioned. The Motley Fool recommends Hershey and recommends the following options: long January 2024 $47.50 calls on Coca-Cola. The Motley Fool has a disclosure policy.

    PepsiCo Is Known for Sodas Such as Pepsi and Mountain Dew. But Almost 50% of Its Profits Comes From Something Else Entirely. was originally published by The Motley Fool

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  • The Woolly-Mammoth Meatball Is an All-Time Great Food Stunt

    The Woolly-Mammoth Meatball Is an All-Time Great Food Stunt

    On Tuesday, two men at a museum in the Netherlands lifted a black sheet off a table to reveal a cantaloupe-size globe of overcooked meat perspiring under a bell jar. This was no ordinary spaghetti topper: It was a woolly-mammoth meatball, created by an Australian lab-grown-meat company called Vow.

    The meatball, made using real mammoth DNA, supposedly smelled like cooked crocodile meat, and in press photos, it looked oddly furry, like it had been coughed up by a cat or rolled around by a dung beetle. Still, meat from a long-extinct behemoth that lived during the Ice Age—how could I not want to try it? Although some on Twitter were clearly grossed out, many others were also intrigued. “Bet it tastes better than Ikeas,” one user wrote.

    Disappointingly, the meatball was not made for consumption. Because it contains proteins that haven’t been eaten in thousands of years, the scientists who made it aren’t sure it would be safe. It was a marketing ploy cooked up by a creative agency that worked with Vow. I eventually realized that I wanted the meatball for the same reasons I wanted the Doritos Locos Taco, KFC’s Double Down Sandwich, and Van Leeuwen’s ranch-flavored ice cream: sheer, dumb novelty. This was stunt marketing 101 applied to the future of food, and I was the sucker falling for it.

    Food marketers have made an art of using stunt foods to draw attention to brands and court new audiences. Starbucks’s unhinged Unicorn Frappuccino begged to be Instagrammed; Buffalo Wild Wings chicken coated with Mountain Dew–infused sauce pandered to anyone who has ever experienced the late-night munchies. Typically unexpected, funny, or edgy, stunt foods are “pure marketing,” Mark Lang, a marketing professor at the University of Tampa, told me. They work because they’re bonkers enough to break through the noise of social media and get people talking, he said. But so far, they have caught our attention by twisting familiar items. Lab-grown meat, and all the permutations of protein it makes possible, is pushing us into a new era of stunt marketing, one involving foods people may have never tried.

    George Pappou, Vow’s CEO and founder, told me that the meatball was meant to “start a conversation about the food that we’re going to eat tomorrow being different from the food that we eat today.” Although the stunt drew attention toward Vow—I am writing this, and you are reading this, after all—the company doesn’t have any products on the market yet, only plans to introduce lab-made Japanese quail to diners in Singapore later this year. So what did it accomplish, exactly? “I don’t think of this one so much as a stunt as a demonstration,” Lang said. “It’s an exaggeration of the physical capabilities of new science.”

    Because lab-grown meat is still meat, just without animal husbandry and slaughter, it’s often held up as the future of sustainable, ethical carnivory. Beef or chicken made in this way probably won’t be widely available at your grocery store anytime soon, but according to an estimate by McKinsey, the industry as a whole could be worth $25 billion by 2030. Lab-grown meat—or “cultivated” meat, as the industry likes to call it—is made by growing animal cells in a large tank until they form a sizable lump of tissue. Then it’s seasoned and processed in much the same way as conventional meat, forming foods such as patties, nuggets, and meatballs. Vow’s meatball was grown from sheep cells that were engineered to contain a short mammoth DNA sequence, sourced from publicly available data. As a result, the cells produced the mammoth version of myoglobin, a protein that contributes to the metallic, “meaty” taste of muscle.

    Theoretically, this process can be used to create meat from any animal whose cells are readily available or whose DNA has been sequenced. Think of DNA as essentially an IKEA manual for building tissue. Even animals whose sequences are incomplete can be partly resurrected: Gaps in the woolly-mammoth DNA were filled in using sequences from elephants, like using Billy-bookcase instructions to build a Kallax shelf. Growing the mammoth meat, in a relatively small amount, was “ridiculously easy and fast,” Ernst Wolvetang, a scientist who worked with Vow, told the Guardian. The same could eventually be said of any type of cultivated meat if the industry can surmount the significant cost and efficiency-related challenges involved in scaling up.

    Imagine the stunts that could be possible then: nuggets for every dinosaur in Jurassic Park, even human meatballs. Already, a few companies besides Vow are pursuing more exotic fare: The New York–based Primeval Foods plans to release cultivated lion burgers, ground meat, and sausages, followed by meat from giraffes and zebras, founder and CEO Yilmaz Bora told me. Diners are always looking for something new, so food “must go beyond the current beef, chicken, and pork dishes and come without the expense of nature and animals,” he said.

    Using stunt marketing to raise awareness about the potential of cultivated meat isn’t a guarantee that people will want to eat those products if they ever become widely available. Sometimes the creations are too gross to even consider seriously, such as Hellmann’s “mayo-nog” or Oscar Mayer’s “cold dogs,” which were, uh, hot-dog-flavored ice-cream weiners on a stick. Yet unlike these stunts, people don’t have the same frame of reference for a meatball made of cultivated mammoth meat. “The risk is that it’s off-putting,” Michael Cohen, a marketing professor at NYU, told me. Or enticing.

    If the mammoth meatball made you think They can do that?, then perhaps it will have done some good. If not, then it was, at the very least, a valid attempt to engage with the science. “The meatball thing was a very well-crafted marketing activity for a product”—lab-grown meat as a category—“that I think is going to have very low adoption,” Lang said. A majority of Americans have “food neophobia,” a reluctance to adopt new foods, he said; many don’t even eat seafood. Still, in the past five months, the FDA granted its first two approvals to lab-grown chicken products, clearing a regulatory pathway for even more cultivated goods. If the technology is ever able to scale, perhaps foods like mammoth meatballs will no longer be seen as a stunt. Eventually, they might just be dinner.

    Yasmin Tayag

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