Soft drinks, oatmeal weigh down PepsiCo

by Monica Watrous
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PURCHASE, N.Y. — In an otherwise bright quarter for PepsiCo, Inc., challenges remain for what the company identifies as “areas that need some attention.”

During a July 24 call with financial analysts to discuss second-quarter earnings, Indra Nooyi, chairman and chief executive officer, addressed weaknesses in the company’s North American Beverages and Quaker North America businesses.

“We’re making good progress in North American Beverages to accelerate innovation, improve our market-based execution and drive productivity to improve our competitiveness and profitability,” Ms. Nooyi said. “The fact remains that the beverage category in the U.S. has its challenges, especially around carbonated soft drinks.”

PepsiCo has ramped up innovation efforts by investing in various technologies related to processing, packaging and ingredients. An example is last year’s launch of Pepsi Next mid-calorie colas. Anticipating the decline of the carbonated soft drink market three years ago, the company set out to deliver on consumer preferences for the texture and taste of cola without the high sugar content or artificial sweeteners.

“We will continue to invest in breakthrough integration and new technologies that have potential to reframe the beverage category, by removing some of the compromises that consumers face with regard to calories and ingredients,” Ms. Nooyi said. “In addition, as we have said in the past, we are also exploring every possible alternative, including structural alternatives, to further improve our margins and returns to this business.”

A different set of problems faces the Quaker North America segment, where operating profit dropped 14% during the quarter.

“This is a business with great brands, high margins, high returns on capital, and it generates a lot of U.S. cash flow,” Ms. Nooyi said. “There’s a lot to like about this business.”

However, while the international Quaker business continues to perform “exceedingly well,” the brand in North America has fallen short.

“A good deal of this business lives in the center of the store and the center of the plate, and that makes it a challenge to grow, especially as consumers increasingly seek convenience,” Ms. Nooyi said. “To be sure, we’ve made good progress in this business with improved marketing and execution, and we’ve had some recent innovation wins.”

The Real Medleys brand of single-serving oatmeal cups, for example, has been expanded to multigrain fruit and nut bars.

“While we’re still in the early innings of capturing the full potential of this business in North America, we are focusing on driving innovation that truly excites consumers, and for us, it’s a work in progress, and we have the right resources and talent dedicated to getting this business on a firmer footing.”

All challenges considered, PepsiCo remains confident in its ability to achieve financial goals for 2013 and beyond.

“The fact that PepsiCo continues to perform well, even as it addresses these opportunities, speaks to the power of our portfolio,” Ms. Nooyi said. “We have the product and geographic breadth to participate and thrive in categories and markets that are growing, and that gives us the flexibility to address all opportunities in a sensible responsible way, without disrupting our overall financial results.”

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