PepsiCo Bares Its Intentions With Its Latest Health Food Acquisition — The Motley Fool

Billionaire investor Nelson Peltz might not have had healthy snacks in mind five years ago when he recommended that PepsiCo (NASDAQ:PEP) spin off its beverage company. But he may ultimately be right in saying that the soda giant should concentrate on its Frito-Lay division.

PepsiCo’s planned acquisition of Bare Foods, a maker of baked fruit and vegetable snacks, shows that even management understands snacks are the path to growth, while soda remains in decline — though PepsiCo clings to the notion that both are better together than separate.

Bare Foods snack packages

Image source: Bare Foods.

Gobbling up snack food companies

Consumers continue to be more health conscious in their food choices, and that’s driving food companies to make big bets in the space by acquiring makers of healthier snacks. Last October, Kellogg spent $600 million to buy Chicago Bar Company, the maker of RxBar. Hershey bought the maker of SkinnyPop popcorn, Amplify Snack Brands, in December for $921 million. Even Campbell Soup moved deeper into snacking with its acquisition of Snyder’s-Lance for $6.1 billion.

The purchase of Bare Foods won’t be quite so transformative for PepsiCo as was Campbell’s acquisition of the pretzel maker (47% of the soup company’s annual net sales will now come from snacks). But it continues the fundamental shift in PepsiCo’s outlook that its “better for you” snack business should maintain a higher profile. PepsiCo’s Frito-Lay North America division brought in 29% of net revenue in the most recent quarter with Quaker Foods North America supplying another nearly 5%. North America beverages supplied 35% of net revenue.

As CEO Indra Nooyi said in announcing the purchase: “For nearly a dozen years, PepsiCo has been committed to Performance with Purpose, our vision of making more nutritious products, while also reducing added sugars, salt, and saturated fat. Bare Snacks fits perfectly within that vision.”

Pepsi will maintain Bare Foods’ current line of products, but will look to expand the offerings as well as the distribution. That’s much the same as what it did with Naked Juice earlier this year, releasing that brand’s first portfolio of products outside of juices and smoothies with a line of chilled snack bars.

Snacks are a strong growth opportunity

Sales in the snack-bar segment have grown 20% over the last five years, but slowed dramatically last year to just 1%, as other healthful foods that also provide convenience gained prominence.

The explosion of meal kits, for example, which give consumers portioned meals ready to cook, have cut into the grab-and-go snack business. Supermarkets have similarly expanded the availability of prepared healthy foods, in addition to buying up meal-kit companies or offering their own kits.

Mondelez International remains the snack industry leader with a 19% share of the market for sweet biscuits, snack bars and fruit snacks, according to Euromonitor, while PepsiCo’s Frito-Lay division owns the savory snack industry with a 39% share. Savory snacks have been a strong sector, growing by at least 2% annually every year for the past 15 years, and by 17% between 2012 and 2017.

Healthy snacks like those made by Bare Foods should fill a big niche as millennials drive the snack food market. Euromonitor International says snack bars and breakfast biscuits in particular will benefit from millennials’ rising purchasing power in the coming years, and it forecasts the segment will see retail sales growing by 5% annually through 2022.

The decline of soda as a beverage of choice will continue to weigh on PepsiCo. Soda still represents the company’s largest source of revenue, but the division’s sales fell once again last year. As the beverage giant continues to grow its snacks business, especially the better-for-you kind, it may yet prove Peltz was right.

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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