Premium snacks fuel Pep­siCo growth

Northwest Arkansas Democrat-Gazette - - BUSINESS & FARM - JEN­NIFER KAPLAN

Fac­ing stag­nant sales vol­ume, Pep­siCo Inc. Chief Ex­ec­u­tive Of­fi­cer In­dra Nooyi is turn­ing to a com­mon strat­egy to fuel growth: higher prices and lower ex­penses.

A com­pany fo­cus on premium prod­ucts, rather than old stand­bys, is show­ing up in Pep­siCo’s bot­tom line: It con­trib­uted to sec­ond-quar­ter earn­ings that topped Wall Street es­ti­mates, and the food gi­ant im­proved its an­nual fore­cast.

The ques­tion now is whether Nooyi can main­tain that mo­men­tum. By shift­ing to higher-end snacks and bev­er­ages, Pep­siCo is look­ing to thrive even if the amount of prod­uct it’s sell­ing doesn’t re­bound.

“As we do more premium, vol­ume is go­ing to be a less rel­e­vant met­ric,” Chief Fi­nan­cial Of­fi­cer Hugh John­ston said in an in­ter­view.

The premium seg­ment of the snack in­dus­try in­creased about 8 per­cent last quar­ter, while Pep­siCo’s Frito-Lay busi­ness was up about 3.5 per­cent, he said. That means there’s un­tapped growth as the busi­ness moves up­scale.

For now, in­vestors have a wait-and-see at­ti­tude. They gave a tepid re­ac­tion to the sec­ond-quar­ter re­sults. The shares fell less than 1 per­cent to close Tues­day at $113.74 in New York. The stock had climbed 9.2 per­cent this year through Mon­day’s close.

The seller of Dori­tos, Sabra hum­mus and Moun­tain Dew posted sec­ond-quar­ter earn­ings of $1.50 a share, ex­clud­ing some items. That ex­ceeded the $1.40 av­er­age of an­a­lysts’ es­ti­mates.

While the food-and-bev­er­age gi­ant ben­e­fited from higher prices on chips and other snacks, vol­ume didn’t in­crease in the Frito-Lay divi­sion. Against that back­drop, Pep­siCo con­tin­ued its cost­cut­ting ef­forts. The mea­sures aim to save at least $1 bil­lion an­nu­ally, which the com­pany is rein­vest­ing in re­search and mar­ket­ing.

Pep­siCo’s in­no­va­tions — de­fined as prod­ucts re­leased in the past three years — make up be­tween 8 per­cent and 9 per­cent of sales, John­ston said.

The lat­est re­sults fol­low a dis­ap­point­ing first quar­ter for Frito-Lay, when the unit saw its first vol­ume de­cline in North Amer­ica in about five years. The com­pany said at the time that the de­cline was tem­po­rary, hurt by the tim­ing of Easter and New Year’s.

On Tues­day, the Pur­chase, N.Y.-based com­pany raised its 2017 earn­ings tar­get to $5.13 a share, ex­clud­ing some items, from a pre­vi­ous fore­cast of $5.09.

Sales gained 2 per­cent to $15.7 bil­lion last quar­ter. That beat the av­er­age pro­jec­tion of $15.6 bil­lion.

Pep­siCo has em­pha­sized ex­pan­sion of its so-called ev­ery­day nu­tri­tion prod­ucts, which in­clude grains, fruits, veg­eta­bles or pro­tein. That cat­e­gory also en­com­passes wa­ter and unsweet­ened tea. Those prod­ucts helped fuel re­sults.

The com­pany has also fo­cused on a broader “guilt free” lineup that in­cludes drinks with fewer than 70 calo­ries — plus food with lower lev­els of sodium and sat­u­rated fat.

Pep­siCo and bev­er­age ri­vals Coca-Cola Co. and Dr Pep­per Snap­ple Group are work­ing to ex­pand their port­fo­lios be­yond sug­ary soft drinks.

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