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

PURCHASE, N.Y. — The dramatic changes taking place in retail are not unique to the U.S. marketplace, said Indra K. Nooyi, chairman and chief executive officer of PepsiCo, Inc.

"...the retail disruption is happening globally," Ms. Nooyi said during a Feb. 13 earnings call. "It's not just a U.S. phenomenon. The success of the newly emerging retail channels is still a work in progress because none of them have really established a toehold in the U.S. But between the hard discounters, e-commerce, e-commerce of every kind, the pure play, the click and collect, the growth of dollar stores from a few years ago and, of course, the brilliant growth of Walmart, all of this has caused the retail industry to go through a fairly significant change because we are overbuilt in grocery in the country, and all of these alternate channels are now beginning to challenge all the square footage in the marketplace. So we are watching and waiting to see whether this disruption is just a low level of disruption that happens over many years or is this going to accelerate."

An advantage for PepsiCo is its direct-store delivery system, which reaches a broad range of retail outlets, she said.

PepsiCo Frito-Lay e-commerce
PepsiCo has invested in various e-commerce channels.

"Whether it's convenience store, food service, whether it's the big supermarkets or the big hypermarkets, we reach every one of them," she said. "So we are watching the traffic through these outlets. We are watching what kinds of products are being sold, what are people buying through e-commerce and what are people buying through brick-and-mortar. And more importantly, we're looking to see whether brick-and-mortar stores are really becoming the warehouse to pick for e-commerce, which breathes more life into them. So, this is an evolving story... and the outlook is not perfectly clear because the economics of many of these new digital channels is still being thought through. It's not perfectly clear that they're all going to make money." 

Internationally, she said, the company sees much of the same phenomenon.

"China, I think, is the cutting edge of digital sales in the grocery channel," Ms. Nooyi said. "We are seeing Europe now grow in terms of e-commerce and the hard discounters taking a much bigger presence there. And we're seeing the same thing in Latin America. So, I think China and the U.S. are cutting edge in terms of retail disruption. And we're going to have to watch and see how it evolves in the other markets. And our teams are all connected globally and thinking through the best strategy for us to play in this new retail environment."

PepsiCo - Doritos, Tostitos, Ruffles
Frito-Lay North America's revenue growth was driven by the Ruffles, Tostitos, Doritos brands.

Retail disruption has been a headwind for PepsiCo, which has responded by investing in various e-commerce channels, including online grocery, direct-to-consumer and pure-play, to drive top-line growth. 

"We are leveraging big data and predictive analytics to sharpen real-time marketing messages, dynamic merchandising and tailored offers," Ms. Nooyi said. "And we're increasingly collaborating with retail customers to make e-commerce a point of differentiation for PepsiCo. As a result, our e-commerce business is now approximately $1 billion in annualized retail sales, and we are well-positioned to capitalize on what is sure to be a dynamic future in this space." 

Late to the sparkling water party

Net income attributable to PepsiCo in the year ended Dec. 31, 2017, was $4,857 million, equal to $3.38 per share on the common stock, down 23% from $6,329 million, or $4.36 per share, in the previous fiscal year. Net revenue totaled $63,525 million, up 1% from $62,799 million.

For the fourth quarter, PepsiCo posted a loss of $710 million, which compared with year-ago net income of $1,401 million. Results were negatively affected by a provisional net tax expense of $2.5 billion associated with the recently enacted Tax Cuts and Jobs Act. Net revenue of $19,526 million was relatively flat from the prior-year period.

PepsiCo bubly pull quote

"We had particularly strong performance in the quarter at Frito-Lay North America, with organic revenue growth of 5%, led by impressive growth in variety packs, Ruffles, Tostitos, Doritos and dips," Ms. Nooyi said. "We also gained market share, both in salty snacks and in the more broadly defined macro snacks categories. The business performed well throughout the year, with strong brand activation and innovative new products propelling the top line, and productivity programs continuing to move margins up."

Meanwhile, the company's North America Beverages business has "tremendous room to improve," with organic growth down 3% in the fourth quarter, Ms. Nooyi said. To adapt to changing consumer tastes, PepsiCo is launching bubly, a brand of flavored sparkling water with no sweeteners, artificial flavors or calories. But, as Ms. Nooyi conceded, "I think we were late to the flavored sparkling water category."

"I wish we had launched bubly a couple of years ago," she said. "But the fact of the matter is we have a very good distribution system. Our customer relationships are excellent, and our customers are very, very happy we're launching bubly."

PepsiCo Bubly
PepsiCo is launching bubly, a brand of flavored sparkling water with no sweeteners, artificial flavors or calories.

The company's Quaker Foods North America segment "had very good performance" in the fourth quarter, she said.

"Hot cereals volume grew mid-single digits, and we gained share in our three key categories of hot cereals, bars and ready-to-eat cereal," Ms. Nooyi said.

PepsiCo's international performance was fueled by strong growth in Vietnam, Turkey, Thailand, Philippines, with positive results in Russia, China, Mexico and India.

"These are impressive results, particularly in light of the challenges posed by global mega trends impacting our industry, from macroeconomic and political volatility, the continued rebalancing of the economic world, to shifting consumer preferences and increasing demand for healthier products, to the disruption of retail caused by the rapid growth of e-commerce and the blurring of channel lines," Ms. Nooyi said.

Quaker Overnight Oats, PepsiCo
PepsiCo's Quaker Foods North America segment performed well in the fourth quarter.

Cautiously optimistic

Looking ahead to 2018, the company is cautiously optimistic, projecting full-year organic revenue growth in line with 2017 levels.

"We clearly are seeing the macro is improving," Ms. Nooyi said. "But for all the positives we're seeing... there's a whole bunch of headwinds. Retail disruption is one of them. Consumer preferences are shifting in interesting ways. On the one hand, there's a huge push toward health and wellness. On the other hand, they want to go back to products they know the best. But they're not consuming it in the quantities that they used to consume it in the past. So, it's an interesting dichotomy there.

"We talk about reinvesting back in the big brands, but a lot of the growth is coming from the small brands, so we have to launch those brands, too. So we are just making sure that any guidance we provide to you is sensible and something that we know for sure we can deliver. And that's why organic revenue growth at least in line with 2017 is a sensible guidance. Internally, we'd like to do more, but we want to be very, very cognizant of the headwinds around us, some of which we don't even understand at times because the consumer is not consistent."