PepsiCo gets another boost from salty snacks
PepsiCo Inc. is giving investors a window into the mercurial mind of U.S. consumers, who say they want to be healthier — just not at the expense of their favourite salty snacks.
The company’s latest results highlight the juxtaposition. On one hand, shoppers are pursuing healthier beverages and trying to cut down on sugar. That’s sending overall soda consumption to its lowest level in more than 30 years and fuelling an expensive decadesold battle for cola market share between Pepsi and arch-rival Coca-Cola Co. But as diners forgo fizzy drinks, they’re still chomping down on high-calorie potato and corn chips with no signs of a slowing appetite.
That dichotomy has boosted Pepsi, which is relying on its Frito-Lay unit to fuel growth as it grapples with a soda slump. The company beat analyst estimates for profit in the most recent quarter, largely on the strength of Frito-Lay, which produces well-known brands like Cheetos and Tostitos.
The results sent Pepsi’s shares higher, closing Tuesday at $112.89 — up 4.76 per cent — but put Pepsi under increasing pressure to fix its beverage business, particularly its namesake soda brand. “Frito-Lay has been a powerhouse, but they’ll have a problem if it slows down,” said Ken Shea, an analyst at Bloomberg Intelligence. “No business is bulletproof.”
The fickle tastes of U.S. consumers have flummoxed packaged-food giants in recent years, sparking an industrywide sales slump that has evaporated billions in revenue. Longtime powerhouses have lost sales to upstarts and struggled to gain traction when they launch competing products. In this changing landscape, a sugary yogurt from a new company might be a hit, while the old standby from the century-old giant falls out of favour.
For Pepsi, the trends are playing out on the two sides of its food and beverage portfolio. The company generates more than half of its revenue from food, and Plano, Texas-based Frito-Lay continues to dominate the chip aisle, with old favourites like Ruffles and Doritos. Profit in that unit was up 5 per cent in the most recent quarter. That helped Pepsi beat pershare profit estimates by 9 cents in the second quarter.
Profit in the company’s North American beverage unit, meanwhile, was down 16 per cent. The results were hit by higher transportation costs and heftier prices for aluminum resulting from tariffs, said chief financial officer Hugh Johnston. A bigger advertising budget was also part of the equation as it tries to compete with rival Coke, the market leader in cola.
Coke has been spending heavily on marketing and gaining traction in the ongoing cola war. Diet Coke and Coca-Cola Zero Sugar have both helped fuel growth, despite being produced with artificial sweeteners, thought to be out of step with modern tastes.