Company Trend Analysis - 'Shrinkflation' To Boost Pepsi Profits - SEPT 2017

BMI View: While the threat of taxation from governments on food and drink products with high sugar content are a growing concern in the industry, Pepsi has viewed it as an opportunity to adjust its portfolio. This is done in two ways, 'shrinkflation' and premium, healthy beverages, both of which will drive revenue but also higher profitability as consumers switch out of traditional carbonated soft drinks and are willing to pay more for healthier products.

Alongside consumer taste preferences shifting away from carbonated soft drinks, there has been a movement among governments to implement taxes on sugary drinks, ostensibly as a means to reduce obesity while generating additional revenue. Instances of diabetes are increasing in many developed markets according to our Pharmaceuticals & Healthcare team, causing early loss of life (disability-adjusted life year) and this is forecast to continue between 2017 and 2030. This has led to public debate, plans to introduce soda taxes and the actual implementation of these taxes in markets such as Mexico, the UK, South Africa, Saudi Arabia, France, Hungary, Ireland and various cities in the US including San Francisco, Cook County and Philadelphia. With momentum building in the past two years for these taxations, non-alcoholic drinks companies have been forced to adapt to this new reality. In practice, PepsiCo has taken two approaches to the issue of soda taxation and is actually turning it into an advantage.

First of all, the company is reducing the size of its products in a practice known as 'shrinkflation'. For example, in Philadelphia, PepsiCo replaced its 2 litre bottles and 12 pack of cans with smaller products,

Population Health Concerns Prompting Sugar Taxation Policies
Diabetes, Total, Per '000 Persons DALYs
Source: World Health Organization, BMI

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