PepsiCo’s Snacks Help It Overcome Weak Soda Sales
PepsiCo (PEP) is getting a big hand from consumers’ ongoing desire for snacks.
The food and beverage giant on Tuesday reported quarterly financial results that showed once again how its snacks business, which includes items like Cheetos and Doritos, is bolstering its performance at a challenging time for much of its beverage business, specifically its carbonated drinks. PepsiCo’s results came in better than expected for the fourth quarter even as the company conceded it still has work to do on the beverage side.
PepsiCo has benefited from a lot of new product introductions on the food side and a steady stream of innovation. But doing the same on the beverage side has proved more challenging. On an organic basis, meaning net of currency movements and of mergers and acquisitions, revenue rose in all of its segments except for its biggest one: its North American beverages unit. There, a unit whose products include Pepsi cola, Gatorade and Tropicana, sales fell 3% to $5.9 billion and operating profit tumbled declined 23%. (The Frito-Lay snack business’ organic sales were up 5%, while Quaker Foods North America unit was unchanged.)
Like Coca-Cola (KO), PepsiCo has been working hard to refresh and update its beverage business at a time consumption of soda in the U.S. has tumbled to thirty-year lows. Coke recently announced a major relaunch of its Diet Coke products, and just last week, PepsiCo unveiled its ‘bubly’ sparkling water to take on National Beverage Corp’s marketing leading LaCroix. Indeed, PepsiCo Indra Nooyi acknowledged some of these moves should have taken place earlier. “I wish we had launched Bubly a couple of years ago,” she told analysts on a conference call after PepsiCo results were posted.
Still, the company has launched a number of new products in the recent past include LIFEWTR bottled water, and finance chief Hugh Johnston told the analysts that more product updates would be coming among others to its Gatorade sports drink line that has struggled of late. The focus for the beverage business is ‘brand building’ he added.
Nooyi also seemed to dismiss the threat from the recently announced acquisition of Dr Pepper Snapple by the owner of Keurig Green Mountain in a $21 billion deal. Asked about it on the conference call, Nooyi said, “I’m sure there is some towering strategic logic, but we are still searching for it.”
PepsiCo’s fourth-quarter revenue was unchanged at $19.5 billion from a year earlier, a hair above Wall Street forecasts for $19.4 billion. This year, PepsiCo expects revenue growth similar to last year, when when organic revenues rose 2.3%.
“We are broadly impressed with Pepsi’s ability to deliver bottom-line results despite the dynamic retail environment and their continued underperformance in the beverages,” Wells Fargo analyst Bonnie Herzog said in a research note.