PepsiCo preparing for change and redefining growth

by Keith Nunes
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PepsiCo beverages
PepsiCo’s North America Beverages units experienced flat operating income and flat sales during the quarter.
 

PURCHASE, N.Y. – With the backdrop of announcing PepsiCo’s second-quarter results, Indra Nooyi, chairman and chief executive officer of the company, provided her perspective on the significant challenges facing the North American food and beverage industry, including changing consumer preferences and a rapidly evolving retail environment.

It should be noted that Ms. Nooyi was not speaking from a position of weakness. While the company’s second-quarter results were not sterling, they did beat many analysts’ expectations.

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

Net income for the quarter ended June 17 totaled $2,105 million, equal to $1.46 per share on the common stock, up from $2,005 million, or $1.38 per share, in the same period a year ago.

Sales for the quarter rose 2% to $15,710 million, a slight increase compared with the second quarter of fiscal 2016 when sales totaled $15,395 million.

“Our results reflect the power and durability of our portfolio, its ability to deliver sustainable and well-balanced results despite ongoing pockets of macro and geopolitical challenges in a number of our key markets around the globe and an increasingly dynamic retail and consumer environment,” Ms. Nooyi said during a July 11 conference call with financial analysts.

PepsiCo products
PepsiCo's net income for the quarter totaled $2,105 million, up from $2,005 million in the same period a year ago.
 

The company’s Frito-Lay North America business unit had a strong quarter, with volume and organic revenue accelerating from the first quarter and the results reflecting a balance of volume growth, net pricing realization and margin expansion. The business unit’s operating income rose 6% during the quarter to $1,153 million when compared to the same period of the previous year, on sales that rose 3% to $3,678 million. PepsiCo’s Quaker Foods North America and North America Beverages units experienced flat operating incomes and flat sales during the quarter. 

The company was challenged in Latin America, where operating income fell 6%, and Asia, Middle East and North Africa, where operating income fell 19%.

“In Latin America, we continued to see very challenging macroeconomic conditions, geopolitical instability and high levels of inflation in key markets, including Brazil and Argentina, which are dampening consumer spending,” Ms. Nooyi said. “Similarly, we are experiencing macro challenges in a number of markets throughout our Asia, Middle East North Africa segment, including the significant currency devaluation in Egypt and the economic impact in a number of markets across the Middle East stemming from persistently low oil prices. … and we are dealing with the recently imposed carbonated soft drink tax in Saudi Arabia.

PepsiCo Latin America
PepsiCo was challenged in Latin America, where operating income fell 6%.
 

“So, we’re adjusting our business to address these challenges: we are pricing to cover the increased cost of doing business, we are going more aggressively after productivity to reduce our overall costs and we continue to transform our beverage portfolio to offer more noncarbonated options and reducing sugar levels across the portfolio.”

Despite the challenges, PepsiCo reaffirmed its guidance for fiscal 2017 of achieving 3% organic revenue growth and 8% constant currency earnings per share growth.

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