Food & Beverage

PepsiCo's CFO says weak beverage sales a 'toe stub' as it balances mix of old and new products

Key Points
  • Difficulties balancing new and old product promotion contributed to third-quarter weakness in Pepsi's North American beverage business.
  • Other challenges included flattening convenience store sales and a cooler-than-expected summer.
Pepsico CFO Hugh Johnston on earnings: North America is clearly a challenge
Pepsico CFO Hugh Johnston on earnings: North America is clearly a challenge

It's a tough balancing act.

Promoting new products while defending legacy products contributed to sales weaknesses for PepsiCo's North American beverage business in the third quarter, CFO Hugh Johnston said Tuesday.

"We've been shifting our portfolio of carbonated soft drinks into more innovative beverages. It's a balancing act as to how quickly the consumer will move. We probably moved too many resources ... into these new products and that cost us competitively for the quarter," Johnston told CNBC's "Squawk on the Street."

The North American beverage business, which includes Mountain Dew and Gatorade brands, generated revenue of $5.33 billion in the third quarter, compared with $5.52 billion the same period the year prior. Its operating profit dropped 10 percent, to $817 million from $904 million.

As a result of challenges faced by the unit, Pepsi is trimming its full-year organic revenue growth target to about 2.3 percent, its year-to-date growth rate, from a prior estimate of at least 3 percent.

Johnston called the sales drop a "toe stub" and noted that the balance between supporting its legacy brands with its new items is being honed, but the company does not view the two as mutually exclusive.

"We are excited about the innovation for the summer, and it hurt us, but that doesn't mean we are backing off," he said.

A cooler summer, which drove down demand for the historically popular Gatorade sports drink, along with flattening sales in convenience stores, further hurt North American beverage sales.

Johnston also addressed the increasingly challenging retail landscape, in which traditional retailers are pressured and consumers are moving online.

Pepsi will "skate where the puck is going to go," he said, quoting hockey legend Wayne Gretzky.

The company has also been investing in its e-commerce business, which is managed by roughly 200 e-commerce professionals and generates approximately $1 billion in annual sales.

Meanwhile, he noted, the perimeter of the traditional grocery store, where both soda and snacks such as Frito-Lay are sold, continues to perform well.

Outside of its North American beverage business, Pepsi delivered a strong performance.

Net revenue at Frito-Lay, which also includes Smartfood popcorn and Doritos chips, grew 3 percent, while Quaker Foods, which includes Quaker rice crisps and Quaker Life cereal, grew 1 percent.

It reported 5 percent growth in organic revenue in Latin America, 6 percent growth in Europe and Sub-Saharan Africa and 9 percent in Asia, Middle East and North Africa.