A Focus On Healthy Drinks Results in Soda Sales Fall For PepsiCo
While cost-cutting and productivity initiatives helped PepsiCo (NYSE:PEP) beat the consensus estimate on earnings, a weak North American Beverages market resulted in a revenue miss, for only the second time in the last 15 quarters, by a small margin. We had mentioned in our earlier article, it would be imperative for the company to deliver a 3% organic growth in revenue to able to meet its target for the year. However, the metric increased by only 1.7%, prompting the company to lower its guidance for the year to 2.3%, from 3% earlier. A positive in the guidance provided by the company was that the foreign currency translations are expected to negatively impact reported net revenue growth and core EPS by 1 percentage point, from 2 percentage points previously. As a result, the company expects core earnings per share of $5.23, up from $4.85 in 2016.
Weakness In The North American Beverages Segment
PepsiCo’s chief executive Indra Nooyi stated that the company had neglected its core brands by focusing mostly on its low-calorie, healthier drinks, a contributing factor to a first drop in the quarterly sales in the company’s biggest segment in two years. An excessive amount of the media spending and shelf space was allocated to these new drinks, such as premium bottled water brand LIFEWTR and a sparkling lemonade named Lemon Lemon, at the expense of Pepsi and Mountain Dew. This resultant fall in revenue, from the increased shift in focus, has made the company believe that when new products are launched, the company should go for new shelf space, instead of diluting that of the core brands. The company also intends on upping its marketing spend on its core brands going forward.
Soda consumption in the US has been declining for the past 12 years, as consumers look toward healthier options. Hence, a focus on these beverages has been a necessary move for PepsiCo. As it adapts to changing consumer preferences, PepsiCo believes that healthier products will be key for long-term growth. In order to meet the evolving needs of customers globally, the company is shifting its beverage portfolio towards these healthier beverages and aims for two-thirds of its global beverage portfolio volumes to contain fewer than 100 calories from added sugar per 12-ounce serving, from 40% currently. However, while the focus on healthier products is imperative, given the evolving needs and preferences of customers, PepsiCo still garners a significant portion of its revenues from its beverages, and hence, is a segment that needs to be protected.
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