PepsiCo's Bottling Model Underperforms, Refranchising Could Boost Margins, RBC Says

MT Newswires Live11-21 00:17

PepsiCo's (PEP) North American beverage business is losing market share and underperforming peers under its integrated ownership model, and the company may have to refranchise bottling operations to improve margins, RBC Capital Markets said in a note Wednesday.

The firm expects refranchising to cause potential short-term challenges, including operational disruption and near-term earnings dilution, but believes it is a necessary step for long-term growth.

"Our field work suggests a very clear performance difference between PepsiCo's owned territories and independent bottlers," RBC analysts said in the note. "While we understand the 'messiness' of refranchising, we think it would be a positive for [PepsiCo Beverages North America], its bottlers, and investors over the long term."

RBC said that Coca-Cola's (KO) success in transitioning to a refranchised bottling system underscores the advantages of focusing on brand management while delegating distribution to bottlers. Coca-Cola gained carbonated soft drink market share, while PepsiCo has lost share annually, according to the note.

RBC has a sector perform rating on PepsiCo's stock with a price target of $176.

Price: 156.90, Change: +0.18, Percent Change: +0.11

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