Inside PepsiCo's snacks strategy

by Monica Watrous
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Frito-Lay snacks, PepsiCo, Cheetos, Lay's, Doritos
Versatility is the key to Frito-Lay's success in the snack market, according to PepsiCo's c.e.o.

PURCHASE, N.Y. — The secret to Frito-Lay’s success in the competitive snack market is its versatility, said Indra Nooyi, chairman and chief executive officer of PepsiCo, Inc.

Indra Nooyi, PepsiCo
Indra Nooyi, chairman and c.e.o. of PepsiCo

“The overall macro snacking category is probably growing somewhere in the 3% to 4% (range), and the reason Frito does as well as it does is because it takes occasions from all other macro snacking categories,” Ms. Nooyi said during a Feb. 10 earnings call with financial analysts. “Frito is able to go after crackers, able to go after sweet occasions through interesting products that comes from a salty heritage. We have a frying platform, we have a baking platform, different sort of baking platforms. And we leverage those platforms to go after all of those occasions.”

With a broad portfolio that includes such brands as Cheetos, Doritos, Lay’s, Cracker Jack, Rold Gold and Stacy’s, Frito-Lay follows a simple strategy of “grow the core and add more,” Ms. Nooyi said.

“We’re looking at the demand of consumers and wondering how we can serve that demand with a Frito-Lay option,” she said. “And whether it’s Cheetos, Fritos or it’s the chocolate-covered Lay’s that we offered or all the new products on slate for next year, I think we’re just going after other macro snacking occasions. And that’s why other companies are hurting and Frito-Lay is doing so well.

“And you combine that with our (direct-store delivery) system… we can really get tremendous advantage with customers.”

The business unit also has benefited from the addition of smaller packaging options to increase penetration in smaller household sizes.

Hugh Johnston, PepsiCo
Hugh Johnston, vice-chairman and c.f.o. of PepsiCo

“The objective was to get a package that smaller households would find attractive as the primary promotional package,” said Hugh Johnston, vice-chairman and chief financial officer. “In that regard, the strategy has actually been quite successful, and I think gotten our volume rebased in a good spot from the standpoint of how we’re managing the Lay’s business.

“More broadly in terms of Frito-Lay performance, you saw 1%, 3%, 7% last year in terms of volume, revenue and profit. If you look at Frito’s performance over the last four or five years, it has been remarkably consistent. Volume has been around 2%, revenue has been around 4%, and profit has been around 6%, plus or minus 1 point, for quite a few years. I think you can continue, even as we invest and make changes in Frito, you can expect to see that type of performance going forward.”

For the fiscal year ended Dec. 26, 2015, net income attributable to PepsiCo was $5,452 million, equal to $3.67 per share on the common stock, which was down 16% from $6,513 million, or $4.27 per share, for the prior year. Net revenue for the year fell 5% to $63,056 million from $66,683 million.

“I’m particularly pleased to note that we achieved these results in the face of a challenging macro external environment,” Ms. Nooyi said. “Over my several decades in business I have never seen this combination of sustained headwinds across most economies, combined with high volatility across global financial markets.”

Productivity gains and lower commodity costs helped PepsiCo achieve fourth-quarter income of $1,718 million, or $1.17 per share, up 31% from income of $1,311 million, or 87c per share, for the comparable period. Net revenue declined 7% to $18,585 million from $19,948 million.

PepsiCo posted organic revenue growth of 4% for the quarter and 5% for the full year.

Operating profit for the Frito-Lay North America segment advanced 6% to $4,304 million for the full year, driven by productivity gains and lower commodity costs that were partially offset by operating cost inflation and higher marketing expense. Net revenue for the segment was $14,782 million for the year, up 2% from the prior year.

“Frito-Lay North America once again delivered consistent results, while continuing to transform its package architecture in potato chips and its go-to-market system through further expansion of the (global enterprise system) program,” Ms. Nooyi said.

Quaker oatmeal products, PepsiCo
Quaker Foods North America operating profit for the year declined 10%.

Quaker Foods North America operating profit for the year declined 10% to $560 million, and revenue slipped 1% to $2,543 million. Weighing on results were impairment charges related to PepsiCo’s dairy joint venture, operating cost inflation, higher marketing expense and the lapping of a gain associated with the sale of a cereal business in the prior year. These factors were partially offset by productivity gains, lower commodity costs and favorable product mix.

“Quaker Foods North America began a turnaround in 2015, delivering positive organic revenue results for the first time in several years, and gaining value share across the breakfast categories of hot and ready-to-eat cereal and Aunt Jemima syrup and mix,” Ms. Nooyi said.

For the North America Beverages segment, operating profit advanced 15% to $2,785 million for the full year, as productivity gains and lower commodity costs offset operating cost inflation and higher marketing expense. Sales increased 2% to $20,618 million.

PepsiCo beverages
For the North America Beverages segment, operating profit advanced 15%.

“North American beverages had its best financial performance in recent memory, benefiting from the continuation of improved industry pricing dynamics, a broad product portfolio and continued positive innovation performance,” Ms. Nooyi said.

Performance in PepsiCo’s international markets reflected the positive impact of productivity gains and, in some regions, lower commodity costs, which largely were offset by macroeconomic challenges and the unfavorable impact of foreign currency exchange. Latin America posted an operating loss of $206 million, which compared with profit of $1,636 million the year before, and full-year sales of $8,228 million, down 13% from the year before. The Europe Sub-Saharan Africa segment saw operating profit fall 22% to $1,081 million and full-year sales decline 22% to $10,510 million. Operating profit for the Asia, Middle East and North Africa segment for the full year fell 4.5% to $941 million as sales declined 4% to $6,375 million.

Looking ahead to 2016, executives expect to achieve organic revenue growth of approximately 4%, excluding the impact of the 53rd week, and growth in constant currency core earnings per share of 8%, excluding the company’s deconsolidation of its Venezuela operations at the end of the third quarter of fiscal 2015. The company also expects to generate approximately $1 billion in productivity savings during the year.
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