Monday, December 19, 2005

Pepsi’s China Potato Farming

The Wall Street Journal carried a feature article this morning discussing PepsiCo’s efforts at growing its own potatos in China for the local production of Lay’s potato chips.

What struck me were the last two paragraphs. After describing the agony PepsiCo has gone through to produce enough potatos in China to drive Lays’ market share to 40%, the piece noted that Wal-Mart (in China) complained about shortages of Lays on its shelves. The article finishes with these lines,

“….The chip-production goal has been increased again to meet rising demand. Mr. Shi’s shoulders slumped.

“We’re under a lot of pressure from the sales guys,” he said. “It’s growing too fast.”

This reinforces my thesis that the best way to buy successful growth companies is to buy those who have already demonstrated successful growth. That is because sustained profitable growth is so hard to achieve.

Isn’t it interesting that a world-class company like PepsiCo, with so many resources available, has to struggle, as the article depicts, just to introduce and grow the Lays potato chip brand in the world’s most populous country? You would think this would be child’s play. But evidently it is not.

PepsiCo has only attained a cumulative 20% total return for the past five years. By comparison, the S&P500 is slightly under a 0% return for the same period. That means that PepsiCo has had an average out-performance of only 4% over the S&P for the last 5 years. Clearly, it is by no means currently successful at turning whatever top-line revenue growth it has into consistently-superior total returns.

However, my portfolio strategy has selected a host of companies over the years which have consistently performed much better than PepsiCo. Thus, my preference for owning companies that have actually demonstrated consistently-superior performance over time, rather than those who one would believe should be able to do so. And the wisdom of my strategy’s approach is evident in the portfolio’s consistently superior returns over time.

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