PepsiCo on life in a fragmented beverage market: ‘We have to learn how to handle complexity'
While Pepsi is still nurturing several multi-billion dollar brands, the categories in which it operates are changing, said Nooyi as PepsiCo posted better-than-expected second quarter results.
“The marketplace is fragmenting. Forget Pepsi or Diet Pepsi or the cola category, any new category that’s expanding is becoming niche, more fragmented.
“And that’s why it was important for us to own the distribution system because once you have control over the distribution system, you can pump a lot of niche products through it, all our craft products, all of those are low-volume products. So we have to learn how to handle complexity, not walk away from it.”
In cola, people get incredibly fastidious about their products
Asked about the decision to bring back Diet Pepsi with aspartame following a high-profile reformulation of the brand last year, she said: “What we did not anticipate is that there is a group of consumers that absolutely loved the original Diet Pepsi. And in the cola category, in particular, because it's been optimized over years, people get incredibly fastidious about their products and don't want to have any changes.
“So we brought back the original Diet Pepsi in addition to keeping the aspartame-free product, so we could serve all consumers with the products that they love. I think that's going to be net positive for us.”
While a large percentage of Pepsi's beverage sales remain in the carbonated soft drinks arena, meanwhile, and Nooyi has in the past talked about how it is defeatist to talk about the cola category as if it is in terminal decline, she added:
"It is critically important that all of you change your frame of reference in the beverage market from cola to CSDs to LRBs (liquid refreshment beverages). It's been LRB for the last decade or so. And, I think the sooner we can shift our frame of reference, the better it is because just beating a category that is in secular decline, just beating that all the time is not a game to play, that's not a game that is going to guarantee good results."
Innovation
Much of her presentation was devoted to new products, including:
- Mountain Dew Black Label (initially released at colleges and universities): “A deeper, darker dew, made with real sugar and crafted with dark berry flavor and herbal bitters.”
- Aquafina Sparkling: “A new line of flavored sparkling water that provides a light and naturally sweetened hydration option.”
- Naked Pressed: “It provides a new take on fresh taste and the line comes in five varieties. It’s sourced from cold-pressed whole foods and vegetables and is non-GMO project verified.”
- 1893: “A blend of premium kola nut extract, real sugar and sparkling water.”
- Quaker Breakfast Flats: “Crispy baked snack bars that contain delicious ingredients that you can see, like oats, real pieces of food, crunchy nut, flakes and sunflower seeds.”
- Simply TOSTITOS Black Bean Chips: “Made from real black beans.”
ACQUISITION STRATEGY: "We intend to spend something on the order of $500 million a year in tuck-in acquisitions. As those good opportunities emerge, we look at them and we look at them through two lenses. One is a strategic lens around does it make sense relative to where we think the consumer is going and second is obviously a financial lens, is this good for our shareholders."
Hugh Johnston, chief financial officer, PepsiCo
PepsiCo is 'among the top drivers of our customers’ growth'
Grim sales of Diet Pepsi notwithstanding, PepsiCo has outperformed CPG rivals in the US in the second quarter, accounting for “more growth at retail than all other $5bn+ food and beverage manufacturers combined,” claimed Nooyi.
“We tend to be among the top drivers of our customers’ growth. In fact, in the United States, which is our largest market, in the second quarter, we were once again the largest contributor to food and beverage retail growth.”
Analyst: PepsiCo is doing the right things
Bonnie Herzog, managing director beverage, tobacco and convenience store research at Wells Fargo Securities, said she was impressed by PepsiCo’s strategy, adding: “PepsiCo management highlighted strategic imperatives to address the challenging environment including: (1) consumer-centric innovation; (2) consumer engagement, particularly with digital age consumers; (3) being a growth partner to retail customers; (4) flawless execution; and (5) focus on productivity.
“Broadly we think PepsiCo is doing a good job of achieving these objectives as its results continue to meet/exceed expectations despite the increasingly volatile global macro backdrop.”
Q2 results
For the second quarter, net income rose 1% to $2.01bn on revenues down 3.3% to $15.4bn, a figure negatively impacted by foreign exchange translation and the deconsolidation of Venezuelan operations. Organic revenue, however, grew 3.3%.
Organic revenues were up 4% at Frito-Lay North America and Quaker Foods North America, and up 1% in the North America Beverages segment.
