PepsiCo’s Profit Dips Amid Turnaround Push

PepsiCo's net income dipped 5 percent in the third quarter, as the food and beverage maker poured more money into bolstering its flagship brands and developing new products that cater to shifting consumer tastes.

PepsiCo’s Profit Dips Amid Turnaround Push
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The company , which makes Frito-Lay snacks, Tropicana juice and Quaker Oats, stood by its guidance for the year and profit came in above Wall Street expectations.

As part of a turnaround push that began this year, PepsiCo is working to raise the stature of its key brands, such as its namesake cola and Gatorade sports drink. The company, based in Purchase, N.Y., is betting that this will help cultivate customer loyalty and make the products more resilient to competition and price hikes.

In its flagship beverages unit in the Americas, however, the company said sales volume fell 3 percent during the period; sodas fell 2 percent and non-carbonated drinks such as water fell 7 percent.

Operating profit also fell as a result of higher costs for ingredients and stepped up marketing. After losing market share to Coca-Cola n recent years, the company has been staging a marketing blitz with pop stars and athletes to burnish its Pepsi brand.

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

For example, she said Gatorade volume was down in the high-single digits in part because of pricing actions. But she said the company didn't want to fall back into the trap of marketing the sports drink 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 marketing Gatorade specifically as a drink developed 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.

In addition to strengthening its pricing strategy, PepsiCo is developing drinks and snacks that position it for the future. Next year, for example, Nooyi said the company has launches planned for the rapidly-growing energy drink market.

She also noted that people still love the taste of cola, even if they have concerns about sugar and artificial sweeteners. As such, she said PepsiCo is looking at the launch of a "differentiated core product" toward the end of next year, suggesting the company is working on a diet cola with natural sweeteners.

In the company's Frito-Lay North America unit, volume edged up by 1 percent, and Quaker Oats saw a 2 percent increase. But the operating profits of both units were pressured by higher costs for ingredients and marketing. Volumes for the Latin America foods division and the Asia, the Middle East and Africa unit saw double-digit gains.

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

For the period ended Sept. 8, PepsiCo 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 unfavorable currency exchange rates and other structural changes, the company said its revenue rose by 5 percent in the quarter. The increase reflected a 1 percent jump in sales volume and 4 percent bump in pricing.

For the full year, PepsiCo still expects adjusted earnings to fall by 5 percent.