Pepsi earnings fizz on strong snack sales, better beverage performance
- PepsiCo's first-quarter earnings beat Wall Street expectations boosted by strong beverage and snack sales in developing markets, and a smaller decline in North American beverage sales than previous quarters, according to a company release. The soda maker's net income rose to $1.34 billion, or 94 cents per share, compared to $1.32 billion, or 91 cents per share, in the year-ago period. Revenue for the quarter jumped 4% to $12.56 billion, exceeding Thomson Reuters' forecast of $12.4 billion.
- North American beverage sales slipped 1%, reflecting growing consumer rejection of sugary soft drinks. Still, this performance was an improvement on its previous two quarters, where unit sales fell at least 3%. Sales at the company's Frito-Lay division rose 3.4%.
- Pepsi reaffirmed its 2018 financial outlook and expects full-year organic revenue growth to at least be in line with 2017's growth rate of 2.3%.
As the consumer tide continues to turn against soda and sugary beverages, PepsiCo is doubling down on snacking innovations. Much of this investment has gone into producing better-for-you versions of beloved power brands, such as its "Simply" line of 11 chip brands including Doritos, Lay's and Cheetos that are made without artificial ingredients. Last year, then-PepsiCo Senior Vice President of Research and Development Jonathan McIntyre told Bloomberg that the revamped assortment meets the criteria needed to be sold in Whole Foods, giving the CPG company greater access to health-conscious consumers.
PepsiCo has continued to roll out more nutritious snack products to try and brighten its health halo and gain a better foothold in the fast-growing better-for-you food segment. In February, the beverage company launched fruit, nut and veggie bars under its Naked brand. The expansion of the Naked portfolio beyond juice and smoothie products was a savvy one — the bars' non-GMO, preservative-free ingredients lists align with consumer demand for portable and clean label snacks.
Snacking has reached $33 billion in the U.S., and products centered around health claims have seen the strongest growth. Non-GMO claims saw an 18.2% uptick in sales for each of the past five years, and products made without artificial colors or flavors saw a 16.2% sales boost, according to Nielsen data.
But while Pepsi has found a lucrative path to growth through new and improved snack products, its beverage innovations have yet to offset the struggles of its soda division. The company has worked to improve consumer perception of its core soda brands by setting a limit of 100 calories per 12-ounce serving for two-thirds of its beverages, a goal it hopes to meet by 2025. Still, the beverage giant is fighting an uphill battle — soft drink consumption fell to a 31-year low in the U.S. in 2016, and analysts expect the trend to continue.
Wells Fargo analyst Bonnie Herzog wrote in her quick take that the earnings level hid some real problems for the soft drink giant's core business.
"Below-the-line items and solid growth in emerging markets masked deceleration in PEP’s North America Beverage (NAB) business," she said. "Raw materials and employee bonuses are pressuring profits, but NAB profits benefitted from lower advertising/marketing (which will be stepped up going forward)."
In the earnings report, CEO Indra Nooyi wrote that she sees the need to boost that market.
"We continued investing in and growing share in a number of faster-growing, future-facing categories. However, competitively we recognize the need to step up investments in core carbonated soft drinks, which we intend to responsibly do," she said in the earnings report.
In February, Pepsi tried to modernize its beverage portfolio by tapping into the fast-growing sparkling water space. Bubly, its all-natural, zero-calorie flavored sparkling water was likely launched to take some of the wind out of millennial-favorite and category heavyweight La Croix's sales. It's too early to tell if the brand will be able to hold its own in the crowded space, which grew 70% between 2011 and 2016, and is expected to hit $3.1 billion in sales by 2020, according to Euromonitor International. In the same month, the company also rolled out an at-home beverage system called Drinkfinity that allows consumers to customize a bottle of water to their tastes with interchangeable flavor pods. Whether these investments will help Pepsi evolve into a premium water powerhouse remains to be seen.
Sparkling water lifted Coca-Cola's Q1 earnings, with double-digit sales increases for Smartwater and Dasani products. As the war for better-for-you beverage dominance wages on between soda giants, Pepsi may need to bolster its lineup to remain competitive.
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