PepsiCo's strong snack sales fail to offset its poor beverage performance
- PepsiCo reported net revenue of $19.53 billion for the fourth quarter of 2017, beating analyst expectations of $19.39 billion, according to a company release. These results were flat compared to the year-ago period.
- Sales in the company's Frito-Lay division rose 5%, boosted by strong demand for salty snacks such as powerhouse brands Cheetos and Lay's. The company's North American beverage business, which includes Mountain Dew and Gatorade, fell 6% as consumers continue to turn away from sugary drinks. PepsiCo CFO Hugh Johnston, PepsiCo's chief financial officer, told Bloomberg part of this decline may be due in part to the company's focus on new beverage concepts, rather than core brands.
- PepsiCo also announced a net loss of $710 million — the result of a $2.5 billion, one-time charge related to the new U.S. tax law. The company also said it plans to give $1,000 bonuses to employees who manufacturer, sell and deliver its products, according to The Wall Street Journal. It anticipates earnings growth of 9% this year, and boosted its share buy-back program from $12 billion to $15 billion. In addition, PepsiCo said it would terminate less than 1% of its U.S. corporate jobs as part of its multi-year cost-cutting program.
PepsiCo's North American beverage business continues to struggle, even as it invests in further product innovation. The company has shifted its strategy to healthier drinks such as sparkling water and kombucha, which have proven to be bright spots in the industry as consumers reject soda and other sugary drinks.
Last week, the snack and beverage giant rolled out a line of sparkling water called Bubly. The zero-calorie, all-natural drink is undoubtedly meant to take some of the wind out of category heavyweight La Croix's sales, and expand the company's health halo in the beverage space. Bubly's brightly colored and playfully designed cans, which feature smiles and signature greetings on the tab like "hiii" and "Hey u" are also clearly meant to capture millennial spending power.
The move is a savvy one, as water has eclipsed soda as America's most popular beverage. But is PepsiCo too late to be a competitive player in the space? La Croix and Nestle's Perrier and San Pellegrino brands will be fierce rivals, but consumer demand for premium waters shows no sign of slowing down — which could give Pepsi room to grow.
Still, this doesn't solve the company's soda problem. Soft drink consumption fell to a 31-year low in the U.S. in 2016, and analysts predict this trend will continue. PepsiCo has worked to improve the perception of its sugary drinks by improving their nutrition and setting a limit of 100 calories per 12-ounce serving for two-thirds of its beverages — a goal it hopes to reach by 2025. But as PepsiCo's Johnston told Bloomberg, the company may need to put further investment into reviving its struggling core drink brands.
While R&D in its beverage business has yet to spark meaningful growth, changes to PepsiCo's snack brands are paying off. Experiments with on-trend innovations and reformulations to existing snacks to be better-for-you, such as organic Doritos, have opened the company's products to new growth channels and more health-focused consumers. A general uptick in snacking in the U.S. also has benefited the company. The individual snacking category has reached $33 billion in the U.S., according to Nielsen. Products that were free from artificial colors and flavors saw a 16.2% boost in sales during each of the past five years. Snacks with no or reduced sugar claims saw an jump of 11.3%.
But PepsiCo may be taking its snack innovations in the wrong direction. Earlier this month, the company received widespread backlash after CEO Indra Nooyi said it was developing snacks specifically for women. Nooyi gave an example of chips that wouldn't leave flavor dust on consumers' fingers and had a quieter crunch — attributes she said women consumers were looking for.
The company refuted specific claims that it was creating "Doritos for women," but that didn't stop the hashtag #LadyDoritos from trending on Twitter, along with accusations of sexism. It seems unlikely that this PR misstep will be a significant blow to snack sales, but PepsiCo would be wise to ensure it has a solid marketing plan once these unnamed women-focused products do come out — or risk further negative sentiment and consumer defection to rival brands. With soda sales still struggling, PepsiCo can ill afford to have problems appear in its strong stacks division, too.
Still, Pepsi could reap positive consumer perception thanks to the $1,000 bonuses it will pass on to its front-line employees — a gesture made possible by recent corporate tax cuts. Hostess also has pledged to give $1,250 bonuses to all of its bakery and corporate employees, and will treat them to a year of free snacks. Passing on benefits always looks good, and more Big Food manufacturers would be wise to make similar moves.
- PepsiCo PepsiCo Reports Fourth Quarter and Full-Year 2017 Results; Provides 2018 Financial Outlook
- Business Insider Pepsi beats amid strong demand for snacks
- Bloomberg PepsiCo Leans on Snacks to Top Estimates as Beverages Fizzle
- CNBC PepsiCo defies industry headwinds, topping earnings and revenue expectations
- The Wall Street Journal PepsiCo Posts Flat Sales, Plans to Trim Jobs
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