What's going on?

PepsiCo, the ginormous snack and beverage company, announced that it made much more profit than expected in its most recent quarter � and it wasn�t because it sold a lot more Pepsi�.

What does this mean?

PepsiCo has become as much a snack food company as a beverage company. It�s also spent a lot of time, money and effort developing �healthy� brands, like Sabra (hummus and other dips) and Pure Leaf Tea. In fact, carbonated drink sales (e.g. Pepsi) account for just 12% of PepsiCo�s revenue [tweet this] (the comparable figure is more than five-times that at Coca-Cola). People today are prepared to pay a premium for healthier products � and PepsiCo is cashing in.

Why should I care?

The bigger picture: Investing in innovation can reap rewards.
If PepsiCo was still focused on just selling sugary drinks, it would probably be facing sharply slowing revenues (total US soda sales have dropped for the 11th year in a row). Instead, it spent billions developing new products; in other words, it pursued innovation. PepsiCo is now being rewarded with annual revenue growth in excess of 4% (excluding the effect of currency valuation changes), which is a lot for a massive company that sells relatively standard products. But right now, investment by businesses (a proxy for �innovation�) is slowing. If more companies followed PepsiCo�s strategy, there would likely be more growth – both in terms of companies� revenues and for the overall economy.


For the stock: Lower commodity costs helped too � but that won�t necessarily last.
It wasn�t just �innovation� that helped PepsiCo. Lower input prices (i.e. for the raw materials, like wheat, that go into its food products) also contributed significantly to its better-than-expected profit. Of course, such price drops can reverse � which would put somewhat of a dent in PepsiCo�s future profit.