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PepsiCo profit dips; more ads, new products on tap

CANDICE CHOI, AP Food Industry Writer
Wednesday, 17 Oct 2012 | 12:14 AM ET

NEW YORK -- PepsiCo Inc.'s net income dipped 5 percent in the third quarter as the snack food and beverage maker poured more money into bolstering its flagship brands and developing new products that position it for the future.

Still, profit for the company, which makes Frito-Lay chips, Tropicana juice and Quaker Oats, was above Wall Street expectations and Pepsi stood by its guidance for the year.

PepsiCo, the world's No. 2 soda maker, is trying to play catch up to bigger rival Coca-Cola Co. At a time when people in developed markets like the U.S. are more concerned about drinking sugary sodas, both companies have been relying more on bottled teas, water and other drinks. But soft drinks remain a big business and Coca-Cola has built its market share in recent years through aggressive marketing and innovative packaging.

As its share has dwindled, PepsiCo this year began working to raise the stature of its namesake cola and other key brands. The turnaround push includes an advertising blitz with pop stars such as Nicki Minaj and athletes such as New Orleans Saints quarterback Drew Brees.

PepsiCo said it should take about a year for the efforts to start paying off. In the meantime, the company said sales volume for its flagship beverages unit in the Americas fell 3 percent in the third quarter. Sodas declined 2 percent, in part because a shift in the calendar, although the company noted that its market share improved.

Non-carbonated soft drinks decreased by 7 percent; without giving details, the company said the drop was partly because it got rid of less-profitable juice packages.

CEO Indra Nooyi said in a conference call with investors that areas in the North America beverages unit were a "work in progress."

For example, she said Gatorade volume was down in the high-single digits in part because the company wouldn't lower prices and some retailers stopped carrying the drinks as a result. But Nooyi said PepsiCo didn't want to fall back into the trap of marketing Gatorade as a general hydration drink, as it did in 2004-2006, just to boost volumes.

"If we go back to that, we are again renting volume," she said. By instead positioning Gatorade as a drink developed specifically for athletes, Nooyi said PepsiCo will be able to charge higher prices over the long term.

The same was true of packaged bottled waters; Nooyi noted that there was a "hell of a price war" in the segment and that PepsiCo was moving away from simply chasing short-term volume spikes. PepsiCo's water brands include Aquafina.

Overall, PepsiCo's core operating profit for the period declined 8 percent, reflecting higher costs for ingredients, marketing and pension expenses.

PepsiCo, based in Purchase, N.Y., said it earned $1.9 billion, or $1.21 per share. That's compared with $2 billion, or $1.25 per share, a year ago. Earnings from core operations were $1.20 per share, better than the $1.16 per share analysts expected.

Total revenue fell 5 percent to $16.65 billion, partly because of unfavorable currency exchange rates and the refranchising of its business in China and Mexico. That means that revenue in those countries is now recorded by PepsiCo's local partners. Analysts expected revenue of $16.96 billion.

When excluding the impact of exchange rates and other changes, revenue rose by 5 percent. The increase reflected a 1 percent jump in volume and 4 percent bump in pricing.

PepsiCo expects costs for ingredients to moderate in the fourth quarter. But for the full year, the company still expects adjusted earnings to fall by 5 percent.

PepsiCo's results come a day after rival Coca-Cola reported that its net income for the third quarter rose 4 percent to $2.31 billion, or 50 cents per share, as revenue rose 1 percent to $12.34 billion.

The Atlanta-based company said global sales volume rose 4 percent, while sales volume in North America rose 2 percent. Coca-Cola said the latter increase was driven by non-carbonated drinks such as Powerade, while soda sales were flat from a year ago.

Going forward, PepsiCo is developing products that cater to shifting tastes. Next year, for example, Nooyi said the company has launches planned for the rapidly growing energy drink segment.

She also noted that people still love the taste of cola, even if they have concerns about sugar and artificial sweeteners. As such, she suggested that the company is working on a diet cola with natural sweeteners.

Shares of PepsiCo fell 20 cents to close at $70.10 Wednesday.

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