PepsiCo: North America Beverages Continue Decline in Q1

PepsiCo’s snack business helped offset declining performance from its beverage brands during the first quarter of 2018, according to financial results released by the company earlier today.

Net revenue during Q1 increased by 4.3 percent to $12.5 billion, slightly above analyst estimates of $12.4 billion. Organic revenue also outpaced growth projections of 1.68 percent by expanding 2.3 percent during the quarter, and is expected to grow at that same rate for the full year.

However, revenues in the North America beverages unit were down 1 percent. Organic volume for beverage were also down 3 percent, and the total operating profit for the unit fell 22 percent.

Reported sales growth of 3 percent for Frito-Lay North America helped to shore up underperformance in the beverages sector.

During a call with investors, PepsiCo chairman and CEO Indra Nooyi called the performance of North American beverages over the last three quarters “worrisome” for the company, pointing to loss of shares in the carbonated soft drink market as weighing negatively against most parts of the business, which she said “are performing well.”

“The overwhelming driver is that, despite moderately increasing our media on trademark Pepsi over the past three years, our share of voice has fallen dramatically relative to our key competitor, who has substantially stepped up their media spending on colas over the past two years,” she said. “

In response, Nooyi said Pepsi would step up its media spending around the Pepsi trademark, beginning with the new Pepsi Generations marketing campaign. “We’ll go toe-to-toe and increase our spending in colas, in particular, but we’re going to remain very responsible on pricing,” she said.

PepsiCo CFO Hugh Johnston praised the early performance of sparkling water line Bubly, which debuted in February, as “exceeding our expectations.” In other positive news within beverage, retail sales for organic probiotic line KeVita were up 50 percent in Q1, while Starbucks-branded RTD coffee drinks increased 3 percent during the period.

Nooyi voiced optimism that Gatorade would rally, even while acknowledging that the sports drink brand has seen reduced market share in the category from growing competitors such as BodyArmor. “Whenever we have a competitor that’s trying to build distribution through pricing, there’s a point or two that we might lose, but we always gain it back,” she said. “[Gatorade is] still the strongest franchise in sports nutrition, bar none.”

This summer, the company will launch a new line extension called G Zero, the first sugar-free product released under the Gatorade banner.

The company paid a lower tax rate in the quarter — 18.7 percent, compared to 22.7 percent in the same period last year — following the passage of the Tax Cuts and Jobs Act (TCJA) in December.

While PepsiCo’s main rival Coca-Cola is on track to complete its re-franchising of its regional bottling partners by the end of this year, Nooyi indicated the company was still in discussions about the future of its bottling operations. She noted that the company was reviewing its options, which include potentially running operations as a standalone division or independent public entity, or reach agreements with individual franchisees.

“We want to make sure we just don’t engage in financial transactions for the sake of financial transactions, but whatever we do is really setting the company on a sustainable path,” said Nooyi.