PepsiCo Locks In Taco Bell Drinks Deal for Another Decade

what happened

PepsiCo has agreed to keep supplying its drinks to Taco Bell until 2036, according to Barron's. The renewed contract applies to American restaurants, along with the Cantina and Live Más Cafe formats, plus locations in Canada, Britain, Ireland and Thailand. Shares rose 2.6% on Thursday.

The deal arrives at a difficult moment. Earlier this month PepsiCo cut its full-year profit guidance after North American beverage volumes fell 2% in the third quarter, and it now expects adjusted earnings per share to grow 2.5% to 3.5%, down from roughly 5%. The stock is still about 6% lower for the year through Wednesday.

The company has already lost several large foodservice clients. KFC will switch to Coca-Cola across its roughly 3,600 U.S. restaurants from January, and Marriott moved its global beverage contract to Coca-Cola in July. Joint projects with Taco Bell, such as Mountain Dew Baja Blast, which has grown into a billion-dollar brand, and plans for customized, functional and energy drinks aimed at younger buyers make the contract especially important.

why it matters

For investors, the renewal protects a key foodservice relationship but does not solve problems with demand, costs and competition from Coca-Cola. Overall sales and margins will matter more for the share price than any single contract.

market impact

PepsiCo: the renewal lowers the risk of losing foodservice clients, but weak overall sales still weigh on the stock.

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