- PepsiCo reported Wednesday that its net third-quarter revenue was up by 1.3% to $16.24 billion, which was below analysts' estimates of $16.31 billion. Beverage sales were down by 3.4% to $5.33 billion, partially offset by gains in the snack segment.
- The company reported that Q3 sales of Frito-Lay, Doritos and Cheetos were up by 3.2% in the quarter ending Sept. 9, while Quaker Foods' revenue grew by 1%. PepsiCo also updated its 2017 targets and expects full-year organic revenue growth to match its year-to-date growth of 2.3%.
- “Overall, our businesses performed well in the third quarter in what continues to be a challenging environment,” Chairman and CEO Indra Nooyi said in the report. “Each of our operating sectors delivered results in line with or ahead of our expectations, with the exception of North America Beverages (NAB), where revenues declined following two consecutive years of very strong third-quarter growth. Despite the challenges in our NAB business, the PepsiCo portfolio overall generated revenue, operating profit and earnings per share growth. Although we have moderated our full-year organic revenue growth outlook, we are now on track to exceed the full-year earnings per share target we set at the beginning of the year.”
It's a difficult economic climate for soda manufacturers right now, although PepsiCo does have its snacks and Quaker Foods segments to help offset the declines. As U.S. consumers turn to healthier drink options, soda sales have been declining, and PepsiCo's signature beverages are no exception. Beverage manufacturers have responded to this trend by putting out smaller containers at higher per-ounce prices, which has helped to fill the gap. However, considering the rising popularity of bottled water, which is now America's most popular beverage, soda companies have to innovate and diversify in order to keep sales from slipping.
In a Wednesday interview with The Wall Street Journal, Pepsi finance chief Hugh Johnston said the company had been following the healthier trend, concentrating in the last quarter on marketing and increased shelf space for its premium LIFEWTR and sparkling Lemon Lemon lemonade. LIFEWTR's distinctive bottle has been a showcase for up and coming artists, releasing a new series of designs last month featuring drawings from the Council of Fashion Designers of America. Meanwhile, Lemon Lemon launched with a series of high profile picnics over the summer in New York, Paris and Toronto.
These efforts weren't enough to make up for drops in sales for sodas including Pepsi and Mountain Dew, as well as signature sports drink Gatorade.
“We’re on a multiyear journey to move people to healthier products, to lower-calorie options,” he told The Journal. “You’re always sort of managing your pacing. How quickly will consumers change their habits? We just got ahead of our skis a little bit.”
Soda innovation was attempted — but maybe not promoted — over the summer. On the beverage front, Pepsi introduced a cinnamon flavor for its signature cola brand, called Pepsi Fire. There were also three premium varieties of Mountain Dew introduced at the Coachella music festival.
PepsiCo's Gatorade has also added recent innovation, rolling out three varieties of a new USDA-certified organic version called G Organic ahead of schedule last year. Sports drinks have been a strong performer for PepsiCo, but competition continues from Coca-Cola products and other, simpler beverages such as coconut and aloe water.
A brighter spot for PepsiCo is its international sales, which generate about 40% of the total. Performance is particularly strong in Asia, the Middle East and North Africa, at 9% growth in organic revenue, followed by 6% growth Europe and Sub-Saharan Africa, and 5% growth in Latin Amerca. The company can be expected to target market and advertising to those areas, where sodas continue to draw consumers.
Bonnie Herzog, managing director for equity research for beverages with Wells Fargo Securities, said that despite the uptick in third-quarter revenue, there was "little reason to get excited" about the company's latest results given increasing costs and North American beverage results that were "much worse than we expected."
"We believe PEP will likely deliver its revised FY17 EPS guidance based on productivity savings/cost cutting, but see few positive catalysts that could drive the stock meaningfully higher in the near-term," she added.
PepsiCo could boost its profits and earnings with acquisitions, but the company has not made a large deal since its $13.4 billion purchase of Quaker Oats in 2000. This spring, Nooyi said at a conference that the company looked at many manufacturers — but has yet to see the right kind of opportunity for expansion. However, while competitors buy up trendy sparkling water and juice brands, the time may be nigh for PepsiCo to make a deal.