PepsiCo’s Promise to Get Healthier Is Paying Off

February 15, 2017, 4:30 PM UTC

PepsiCo is a Big Food manufacturer that keeps getting bigger.

The massive food and beverage manufacturer finished 2016 with strong fourth-quarter results, due to particularly strong growth for the company’s North America operations, especially for the Frito-Lay and beverages portfolio. That helped offset the challenges that PepsiCo (PEP) and other international firms have faced as a stronger dollar has put pressure on revenue incurred from markets abroad.

In the home market, PepsiCo continues to outperform rivals. Chairman and CEO Indra Nooyi told analysts during a conference call that while the company represents less than 10% of retail food and beverage sales in the U.S., it drove 18% of sales growth for the category last year. That compared to a net decline in sales for all other food-beverage makers that generate $5 billion more—essentially the pool of Big Food manufacturers PepsiCo most aggressively competes with.

PepsiCo's new Tropicana Essentials Probiotics is a bet on the health and wellness space.
PepsiCo’s new Tropicana Essentials Probiotics is a bet on the health and wellness space.Photo courtesy of PepsiCo
Photo courtesy of PepsiCo

Nooyi touted efforts by PepsiCo to boost both marketing behind the company’s brands and also research and development. The pipeline of innovation from PepsiCo—including new Tropicana Essentials Probiotics, expanding the Sabra hummus brand into other food categories like salsa, and Quaker Breakfast Flats—are all helping PepsiCo boost sales in the U.S. Nooyi boasted that PepsiCo accounted for over 17% of innovation sales at U.S. retail, more than the next four contributors combined.

“When it comes to transforming our portfolio, we are making significant progress,” Nooyi said.

The transformation to make PepsiCo’s portfolio more healthy comes at a time when Big Food executives say they believe consumer-driven shift toward fresher, cleaner foods isn’t a fad—it is a permanent shift in spending. As a result, big brands are remaking themselves through reformulations or adding new products to tackle new food and beverage trends. The launch of Tropicana Essentials Probiotics, for example, was a move to tackle the rapidly growing functional juices category. New reduced sugar sodas from brands like 7Up are also on trend as consumers look to cut back on their sugar intake. This year, PepsiCo is poised to generate millions from the company’s new premium water brand LIFEWTR.

Though carbonated soft drink sales have been declining for 11 years in the U.S., the two largest soda manufacturers—PepsiCo and rival Coca-Cola (KO)—are both continuing to grow in their key home market. Coca-Cola earlier this month reported stronger North America results that were fueled by bottled water Smartwater, flavored water Vitaminwater, the dairy brand Fairlife, and energy drinks.

PepsiCo is seeing similar success in tilting the portfolio toward healthier beverage categories. Naked Juice is on its way to becoming the company’s next $1 billion brand, Nooyi claimed. Globally, the Pepsi cola trademark accounts for 12% of net revenue. But 25% of revenue comes from so-called everyday nutrition products that include bottled water and foods and drinks that are packed with grains, fruits and vegetables.

The pivot toward health isn’t always a smooth one. When asked about Diet Pepsi, Nooyi admitted that the company had “a bit of a hiccup” after the company changed the beverage’s formula to ditch aspartame—an ingredient that some consumers are wary of. PepsiCo later reversed course a bit by maintaining a classic Diet Pepsi sweetened with aspartame, keeping the new Diet Pepsi with sucralose and Ace-K, and renaming Pepsi MAX to Pepsi Zero Sugar to make it clear to consumers that the beverage had no calories. Pepsi Zero Sugar got a boost in marketing when PepsiCo featured the brand during this year’s Super Bowl.

“Our plan is to invest behind the zero sugar Pepsi roll out and make sure that it is the diet for the Pepsi portfolio,” Nooyi said. “It is a great tasting product and in fact, I’d say it is the best tasting diet in the market.”

Overall, PepsiCo on Wednesday reported total revenue jumped 5% to $19.52 billion, while per-share adjusted earnings rose 15% to $1.20. Wall Street analysts had projected $19.51 billion and $1.16, respectively. Looking ahead, PepsiCo’s 2017 targets of revenue of “about” 3% and per-share earnings of $5.09 came in a little lighter than expected. But Wall Street analysts say PepsiCo tends to issue cautious guidance targets and then increase them later in the year.

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