PepsiCo 2Q profit falls 2 pct on sales drop

MILWAUKEE - Soft-drinks and snack maker PepsiCo's second-quarter profit and sales dropped slightly as consumers continued limiting their purchases of soft drinks but bought more snacks as the company promoted larger bags of chips.

The Purchase, N.Y.-based maker of Pepsi and Gatorade has been cutting costs as it navigates through a weak economy. Consumers are limiting their purchases of soft drinks and switching to healthier juices and teas. PepsiCo said Wednesday its second-quarter profit fell 2 percent while sales dropped 3 percent, to beat analyst expectations.

To save even more costs, PepsiCo has been trying to buy its two biggest bottlers since April. But Pepsi Bottling Group and PepsiAmericas rejected the $6 billion deal, saying it undervalued them.

Analysts say PepsiCo must boost its offer to push the deal through, though PepsiCo hasn't done that yet. On Wednesday, CEO Indra Nooyi told investors on a call she would not discuss the ongoing talks, which she said haven't affected relations with the bottlers.

"Nothing has changed because of these discussions. These discussions remain between an independent committee and PepsiCo," she said.

Instead, Nooyi focused on how the company is positioning itself for growth in developing markets like China, India and Russia, and improving business in North America.

PepsiCo has been touting new products like juices and raising prices to offset commodity costs that remained high earlier in the year. It has also been luring cost-conscious shoppers with promotions or by giving them more product for the same price as before, such as a new 20 percent increase in package sizes in some brands like Doritos and Tostitos.

The bottom line is PepsiCo still must buy up its bottlers to ensure its future, said Christopher Shanahan, a research analyst with firm Frost & Sullivan. He said creating new products like juices will only increase sales so much. Cola sales won't carry the company, either, he said, since that market is shrinking.

"Their bread and butter is Pepsi and cola, and that is a declining market," he said. "The only way they can maintain profits in a market that's basically in decline is to backward integrate and absorb their bottlers."

In the most recent quarter, North and South American revenue from drinks fell 7 percent on a constant currency basis. North American beverage volume dropped 6 percent and sales of Gatorade continued to fall as consumers turned to cheaper alternatives. Still, the lower-calorie sports drink G2 posted double-digit volume growth.

The Frito-Lay business, with brands like Fritos and Doritos, posted a 3 percent rise in volume on the strength of its larger-size promotions, which it can do without raising prices since ingredient costs have moderated from last summer's highs.

For the three months ending June 13, PepsiCo said it earned $1.66 billion, or $1.06 per share, down from $1.7 billion, or $1.05 per share, a year earlier.

Excluding one-time costs for restructuring and other charges, the company said it earned $1.02 per share, beating Wall Street's estimate of $1 per share.

Revenue fell 3 percent to $10.59 billion from $10.95 billion, missing expectations of $10.99 billion.

International results were mixed, with declines in Europe but growth in Asia, the Middle East and Africa.

The stronger dollar dragged down profit and revenue both by roughly 8 percentage points. Companies that do business outside the U.S. are hurt when the dollar gains strength since those sales are translated back into fewer dollars.

The company reiterated its expectation that 2009 profit will grow by a mid- to high-single digit percentage over 2008 profit of $3.68 per share.

Shares fell 51 cents to end at $55.89 Wednesday.

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AP Business Writer Vinnee Tong contributed to this report from New York.

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