PepsiCo Renews Partnership With Taco Bell for 11 More Years. Here’s What Investors Need to Know.

Pepsi will continue to be poured at Taco Bell restaurants, as will specialty drinks Mountain Dew Baja Blast and Kickstart Orange Citrus.

That's because the company behind those beverages, PepsiCo (NASDAQ:PEP) , announced Thursday that it signed an 11-year extension to its existing collaboration with Taco Bell. PepsiCo will continue to be the exclusive provider of soda and other liquid concoctions at the ever-popular fast-food restaurant's outlets. Here are the particulars of the new deal, at least the ones the beverage and snack giant was willing to provide.

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Ringing the Bell

The pact, which will be in force through 2036, covers all U.S. Taco Bell locations, as well as outlets of the brand extensions Taco Bell Cantina and Live Más Cafe. This also applies to Taco Bells in Canada, the U.K., Ireland, and Thailand. The popular and exclusive PepsiCo products served at the restaurants, especially the beloved Baja Blast, will remain, as will company standards such as Pepsi and Mountain Dew.

PepsiCo did not provide the financial particulars of the new agreement.

The timing of the Taco Bell extension is ideal. Only last week, another longtime partner, KFC, opted to oust PepsiCo as its exclusive beverage purveyor in favor of that company's eternal rival, Coca-Cola (NYSE:KO), effective at the start of next year. Interestingly, both Taco Bell and KFC are operated by the same restaurant conglomerate, Yum! Brands (NYSE:YUM), a business spun off from PepsiCo in 1997 (hence the legacy beverage supply arrangements).

In PepsiCo's press release on the renewed Taco Bell deal, the company quoted its president of the Global Away From Home unit, Anne Fink, as saying that "Some of PepsiCo's best foodservice innovations have come from partnerships that challenge us to think differently, and Taco Bell has always brought that energy."

Innovators wanted

What's interesting to me about both developments is that they seem to share a single theme. It's stronger in the PepsiCo Taco Bell announcement, which features the word "innovation" and its variations eight times, including the quote above. The real value in the new arrangements seems to be the exclusive drinks that the beverage partner has either helped introduce, or can introduce, in the future.

Baja Blast, co-developed by PepsiCo and Taco Bell, was a real departure for the pair, a new, distinctive, and exclusive offering that set the latter apart and enhanced its appeal. In fact, in the Taco Bell renewal announcement, PepsiCo took pains to mention that Baja Blast -- for which it holds the registered trademark and a host of other intellectual property rights -- is now a billion-dollar brand. Taco Bell surely doesn't want to lose that mojo.

KFC and PepsiCo made a similar plunge into special drinks with the 2019 rollout of Sweet Lightning. The gold-colored soft drink with the peach flavor didn't make anywhere near the splash Baja Blast did, not least because its introduction came shortly before the onset of the coronavirus pandemic and its deleterious effect on the restaurant business. Sweet Lightning is still on the menu at KFC, at least for now, as are other drinks that are essentially cream additions to standard offerings.

It feels to me, then, that KFC and Taco Bell both chose the beverage company they believed was most innovative. For the former, it was the powerhouse Coca-Cola, while the latter opted to stay with the partner that helped develop its smash-hit exclusive drink.

Wins and losses

Without knowing the financial details of the Taco Bell extension, it’s tough to gauge how much it'll affect PepsiCo's fundamentals. It's undoubtedly encouraging by comparison, at least, since the Mexican-themed fast-food slinger’s U.S. sales are much higher than KFC’s.

Nevertheless, as KFC remains a major presence on this continent’s quick-dining scene, I'd imagine PepsiCo was eager to sign the deal after losing that business. So the Taco Bell extension might not be more lucrative than the legacy arrangement. Given what we know, I'd rate the new pact as a clear victory for PepsiCo, if not a major game changer.

And that's something that would concern me about the company. With flat-lining organic sales in its crucial North America beverage and snacks operations, it needs bigger wins. Sure, it has a high-yield dividend that pays out at 4.4% these days, but I don't think that's enough to support or increase its share price alone. I'd give PepsiCo stock a miss, despite Thursday's indisputably good news.

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool recommends Yum! Brands. The Motley Fool has a disclosure policy.