Premium snacks fuel PepsiCo growth

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.