PepsiCo’s languishing beverage unit overshadows snack growth

NEW YORK: US consumers are putting fewer soft drinks in their grocery carts, forcing PepsiCo Inc to rely more heavily on its snack business to fuel growth.

The company’s North American beverage sales dropped 3% last quarter, a decline the company blamed in part on dialling back marketing of its biggest brands. Though PepsiCo was still able to top analysts’ earnings estimates – helped by cost cuts and stronger sales at its Frito-Lay business – the results left analysts and investors feeling underwhelmed.

“We see little reason to get excited,” Bonnie Herzog, an analyst at Wells Fargo & Co, said in a note. The North American beverage sales were “much worse than we expected”.

The results deliver an increasingly familiar story to PepsiCo shareholders: With many customers turning away from soft drinks – both to avoid sugar and artificial sweeteners – the company’s snack business is carrying more of the load.

Chief executive officer Indra Nooyi also has pushed PepsiCo into healthier food and pursued at least US$1bil annually in cost cuts, aiming to reinvest the savings in research and development.

But the pursuit of new products has brought some downside. PepsiCo hurt its core brands last quarter by shifting shelf space and marketing dollars away from its mainstay beverages, Chief financial officer Hugh Johnston said in an interview.

Its Gatorade lineup also was hurt by a slowdown at convenience stores, he said.

“The good news is, these are tactical issues,” Johnston said. “We know how to fix them. Basically, we’ll reshift our resources back behind our bigger brands a little bit, and we’ll see the business improve sequentially in the next couple quarters.”

On a call with analysts, Nooyi echoed this sentiment, saying the company is acting to correct its path.

“We have a good handle on what happened and we’re making immediate adjustments to get the business back to growth,” she said.

Investors took a skeptical view, sending the shares down as much as 2.7% to US$106.19 in New York. The stock had climbed 4.3% this year through Tuesday’s close. — Bloomberg