Snack innovation buoys PepsiCo's third-quarter performance

by Keith Nunes
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Snacks are a source of strength for PepsiCo.
  

PURCHASE, N.Y. — Snacks continue to be a source of strength for PepsiCo, Inc. During the third quarter of fiscal 2017, the company’s Frito-Lay North America and Quaker businesses generated positive returns. Hampering results during the quarter was PepsiCo’s North America Beverages business.

Indra Nooyi, chairman and chief executive officer of PepsiCo, said Frito-Lay North America had another quarter of strong results, with a balance of volume growth, price realization and operating margin expansion.

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

“We feel very good about the business with innovation, pricing, execution and market share performance all on target,” she said. “We are particularly pleased with the continuing strength in organic sales growth, which is being fueled by effective price-pack management and innovation backed by great marketing.”

Examples of successful innovation she cited included Cheetos Paws, Jalapeño Cheetos, Simply, Mac n’ Cheetos, and spicy varieties of the company’s Ruffles brand chips.

PepsiCo saw double-digit growth in premium and better-for-you brands.
 

“And beyond our largest trademarks, we saw impressive double-digit net revenue growth in premium and better-for-you offerings such as SunChips, Smartfood popcorn and Miss Vickie’s, and in our variety multipack that provide a great assortment of our top brands in convenient single-serve packages,” she said.

The innovation was one reason Frito-Lay North America sales during the quarter rose 3% to $3,792 million and operating profit rose 5% to $1,208 million.

PepsiCo’s Quaker Foods North America business unit also had a positive quarter based on the performance of such portable breakfast concepts as Breakfast Flats, Breakfast Squares and Overnight Oats Cups. Business unit sales rose to $578 million from $571 million a year earlier, and operating profit ticked up 2% to $146 million.

Quaker is benefitting from portable breakfast innovation.
 

“At Quaker Foods North America, we are pleased with the sequential acceleration in organic volume, organic revenue and core operating profit performance, and we continue to feel positive about the trends in the business,” Ms. Nooyi said.

Weather and promotional missteps hampered PepsiCo’s North America Beverages unit during the quarter. Sales for the quarter fell 3% to $5,332 million and operating profit fell 10% to $817 million.

Low temperatures during the summer and a slowdown in the convenience store category challenged the company’s Gatorade business and was cited as one reason for the beverage businesses poor performance during the quarter. Additionally, Ms. Nooyi said the company made some marketing mistakes.

The company will be stepping up marketing spend on Pepsi and Mountain Dew products.
 

“ … We underperformed the industry in carbonated beverages,” she said. “This summer, we directed too much of our media spending and shelf space to new low-calorie, much smaller brands at the expense of our Pepsi and Mountain Dew trademarks. While our plans for the summer were consistent with our continued and deliberate strategy to transform our beverage portfolio, clearly, we redirected some big brand space to these new products as opposed to focusing on new incremental space.

“We view both of these conditions as temporary and not structural, and we fully expect top-line performance to improve in the coming quarters. We have a good handle on what happened, and we are making immediate adjustments to get the business back to growth. We are stepping up marketing spending on Pepsi and Mountain Dew, including our zero- and low-calorie products under these trademarks.”

Internationally, PepsiCo’s Latin America and Europe Sub-Saharan Africa businesses performed well, generating increases and sales and operating profit. The Asia, Middle East and North Africa business saw sales decline during the quarter, but operating profit rise 1%.

During the quarter ended Sept. 9, PepsiCo’s net income rose 8% to $2,144 million, equal to $1.49 per share on the common stock.

Sales for the quarter rose 1% to $16,240 million.
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