Pepsi Grapples With Fickle Consumer Cutting Back Sugar, Not Salt

PepsiCo Inc. is giving investors a window into the mercurial mind of U.S. consumers, who say they want to be healthier — just not at the expense of their favorite salty snacks.

The company’s latestresults highlight the juxtaposition. On one hand, shoppers are pursuing healthier beverages and trying to cut down on sugar. That’s sending overall soda consumption to its lowest level in more than 30 years and fueling an expensive decades-old battle for cola market share between Pepsi and arch-rival Coca-Cola Co. But as diners forgo fizzy drinks, they’re still chomping down on high-calorie potato and corn chips with no signs of a slowing appetite.

That dichotomy has boosted Pepsi, which is relying on its Frito-Lay unit to fuel growth as it grapples with a soda slump. The company beatanalyst estimates for profit in the most recent quarter, largely on the strength of Frito-Lay, which produces well-known brands like Cheetos and Tostitos.

The results sent Pepsi’sshares higher — up the most in more than five years — but puts Pepsi under increasing pressure to fix its beverage business, particularly its namesake soda brand.

“Frito-Lay has been a powerhouse, but they’ll have a problem if it slows down,” said Ken Shea, an analyst at Bloomberg Intelligence. “No business is bulletproof.”

The fickle tastes of U.S. consumers have flummoxed packaged-food giants in recent years, sparking an industrywide sales slump that has evaporated billions in revenue. Long-time powerhouses have lost sales to upstarts and struggled to gain traction when they launch competing products. In this changing landscape, a sugary yogurt from a new company might be a hit, while the oldstandby from the century-old giant falls out of favor.

For Pepsi, the trends are playing out on the two sides of its food and beverage portfolio. The company generates more than half of its revenue from food, and Plano, Texas-based Frito-Lay continues to dominate the chip aisle, with old favorites like Ruffles and Doritos. Profit in that unit was up 5 percent in the most recent quarter. That helped Pepsi beat per-share profit estimates by 9 cents in the second quarter.

Profit in the company’s North American beverage unit, meanwhile, was down 16 percent. The results were hit by higher transportation costs and heftier prices for aluminum resulting from tariffs, said Chief Financial Officer Hugh Johnston. A bigger advertising budget was also part of the equation as it tries to compete with rival Coke, the market leader in cola that continues investing in advertising.

Coke, which does not have a broad snack portfolio to rely on, has been spending heavily on marketing and gaining traction in the ongoing cola war. Diet Coke and Coca-Cola Zero Sugar have both helpedfuel growth in the start of the year, despite being produced with artificial sweeteners, an ingredient thought to be out of step with modern tastes.

After Diet Coke saw volume drop 4.3 percent in the U.S. last year, Coca-Cola in January launched the biggest-ever makeover for its original zero-calorie brand, releasing its classic Diet Coke and four new flavors in taller, skinnier cans, spurring the American rebound. New flavors made up about a third of the brand’s growth, according to the company. The redesign spawned growth in North America for the first time since thefourth quarter of 2010.

Pepsi, which also makes Gatorade and has worked to produce more low-sugar beverages, acknowledged Tuesday that it’s struggling with its namesake soda. And fixing the performance of the beverage unit is a top priority for Chief Executive Officer Indra Nooyi.

“We’re maniacally focused on getting this business back on track,” she said on an earnings call. “We know exactly what needs to get done and we’re doing it.”

— With assistance by Karen Lin

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