Motley Fool Money – Episode: "Pepsi, Poppi, and the Creosote Bush"

Release Date: March 17, 2025
Hosted by Dylan Lewis, Ricky Mulvey, and Mary Long

1. Introduction

In this episode of Motley Fool Money, host Dylan Lewis engages in an insightful discussion with Motley Fool analyst David Meyer. The conversation delves into recent retail sales data, consumer spending trends, the impact of tariffs, and PepsiCo's strategic acquisition of the prebiotic soda company, Poppi. The episode provides investors with a comprehensive analysis of current market conditions and corporate strategies affecting the consumer goods sector.

2. U.S. Retail Sales and Consumer Spending

The episode begins with an examination of the latest retail figures released by the U.S. Census Bureau. For February, retail sales increased by 0.2% compared to January, falling short of the expected 0.6% growth.

Dylan Lewis (00:28):
"We have a fun one this Monday. We got some retail numbers, not so much fun."

David Meyer (00:55):
"Yeah, so you're exactly right. 0.2% growth expectation was 0.6% though. So they were expecting after January's decline, they were, economists were expecting a pick back up in February. It did happen, just not to the extent that they wanted."

Meyer highlights that the subdued growth aligns with ongoing concerns about tight consumer spending. Recent surveys, including the University of Michigan Consumer Survey, indicate a decline in consumer confidence, primarily driven by fears of rising inflation in the latter half of 2025. Both the CEOs of Dollar General and Walmart echoed these sentiments, noting that lower-income consumers are purchasing fewer goods and seeking better value for their money.

3. Tariffs and Inflation Concerns

The discussion transitions to the role of tariffs in exacerbating inflationary pressures. Tariffs have introduced additional costs for retailers, who are likely to pass these costs onto consumers, further straining purchasing power.

David Meyer (02:38):
"There were two, basically two of the same quotes. One from the CEO of Dollar General, one from the CEO of Walmart who said their low end consumers are extended, they're buying smaller quantities in the back half of the year. Their money's not going as far as they want."

Meyer emphasizes the uncertainty tariffs and trade wars introduce, making it challenging for businesses to plan effectively. He also points out that retailers like Best Buy are considering price increases, which could be detrimental in a market where consumers are already cautious with their spending.

4. PepsiCo's Acquisition of Poppi

A significant portion of the episode is dedicated to PepsiCo's recent acquisition of Poppi, a prebiotic soda company, for nearly $2 billion. This strategic move underscores PepsiCo's commitment to diversifying its beverage portfolio and tapping into the growing market for healthier soda alternatives.

a. Background on Poppi

David Meyer (04:37):
"Actually, no. The worst part of it is I'm actually a soda drinker from Motley fool have and said I have a problem. We've discussed this in the past. I was chided and berated for how many diet Mountain Dews I used to drink. I don't drink as many anymore."

Meyer admits unfamiliarity with Poppi but expresses interest in trying the product, highlighting its position in the market as a more natural and health-conscious alternative to traditional sodas.

b. Analysis of the Acquisition

David Meyer (07:22):
"That is incredible. Like they have done a good job of one, designing their product, marketing their product, making it available."

Meyer praises Poppi's market penetration, noting that capturing 2.7% of the carbonated beverage market within five to seven years is impressive. He attributes this success to effective product design, marketing strategies, and distribution channels.

Dylan Lewis (07:24):
"But it was like 2018."

David Meyer (07:22):
"That, that is incredible. Like they have done a good job of one, designing their product, marketing their product, making it available. Maybe it's not a surprise that Pepsi is buying them because they can, they, Pepsi can actually push this trend forward given the amazing amount of distribution that they have as well."

The acquisition allows PepsiCo to leverage its vast distribution network and substantial marketing budget to further propel Poppi's growth, positioning it strongly against competitors like Coke.

c. Strategic Implications for PepsiCo

Meyer draws parallels between PepsiCo's strategy and venture capital investment, suggesting that large corporations like PepsiCo often acquire innovative startups to enhance their product offerings and stay competitive.

David Meyer (08:14):
"They cannot develop new products. They just have amazing stable of brands. So they let the. In some sense it's almost like, it's almost like the pharmaceutical industry where you let smaller folks do the innovating and you buy them later."

He further explains that PepsiCo's support can help scale Poppi beyond its current market presence, ensuring sustained growth and market relevance.

d. Market Reaction

Following the announcement, Pepsi's shares saw a modest increase of about 2%, reflecting market approval of the acquisition. Given Pepsi's substantial market capitalization of approximately $200 billion, the $2 billion acquisition is seen as a strategic but not overly disruptive investment.

David Meyer (08:14):
"With a 2% market up, right, if, if it's 1% of the market cap, right, and it's now 2% and the market is as 2% up, essentially the market likes this acquisition. I think I do too."

Meyer concurs with the positive market sentiment, indicating confidence in the acquisition's potential to enhance PepsiCo's growth trajectory.

5. Investment Considerations

The conversation shifts to the investment viability of mature companies like PepsiCo and Coca-Cola. Meyer describes these companies as "extremely mature" with growth rates aligning closely with GDP figures.

David Meyer (11:51):
"It's extremely mature. They're like GDP plus 1 to 2% type growth. The, the way that investors need to think about them is not, hey, I'm, I'm looking for this company to grow. It's completely on a total return basis, right. I'll get a little bit of capital appreciation, let's call it that, GDP growth plus 1 or 2. I'll get some dividend yield, I'll get some repurchase of, of shares."

He advises investors to approach such investments with expectations centered on total returns—comprising modest capital appreciation, dividend yields, and share repurchases—rather than seeking significant growth.

6. Conclusion

The episode concludes with Meyer's affirmation of the acquisition's strategic merit and its alignment with market trends favoring healthier, innovative beverage options. While acknowledging the maturity and steady performance of large beverage corporations, Meyer underscores the importance of understanding the investment nature of such entities—focusing on total returns rather than high-growth prospects.

Dylan Lewis (13:10):
"David, I'll raise a can to you. Thanks for joining me today."

David Meyer (13:13):
"Thanks for having me. This is awesome."

Key Takeaways:

• Retail Sales: February saw a modest increase in retail sales, signaling cautious consumer spending amid inflation fears and economic uncertainties.

• Consumer Confidence: Surveys indicate declining consumer confidence, especially among lower-income groups, leading to reduced spending and increased price sensitivity.

• PepsiCo's Strategy: The acquisition of Poppi reflects PepsiCo's strategy to diversify its beverage portfolio and invest in health-oriented products, leveraging its distribution and marketing capabilities to scale innovative brands.

• Investment Outlook: Mature companies like PepsiCo offer stability and total returns through dividends and share buybacks, making them suitable for investors seeking steady income rather than high-growth investments.

For investors, understanding these dynamics is crucial in making informed decisions within the consumer goods sector.