Reporting its Q3 2017 results yesterday, PepsiCo noted a 6% volume decline for its North America Beverages division.
PepsiCo CEO Indra Nooyi notes three factors for a quarter ‘below expectations’ in its US beverage business: a cooler summer, a marked slowdown in the C-store channel, and increased focus from the company on new lower calorie brands – at the expense of the key Pepsi and Mountain Dew trademarks.
A balancing act
With soda falling out of favor with consumers, PepsiCo has – like its competitors - been diversifying its portfolio with the launch of smaller, low calorie, brands: as well as lower and no calorie versions of its existing flagship products.
It’s a strategy that Nooyi says promises long-term success: “Our beverage transformation initiatives over the longer term have been very successful in shifting our mix to faster growing subcategories and providing more low and zero sugar options,” she said in yesterday’s Q3 earnings call.
But she admits that the balance was not right in Q3, where the company ‘underperformed the industry in carbonated beverages’.
“This summer, we directed too much of our media spending and shelf space to new low-calorie, much smaller brands at the expense of our Pepsi and Mountain Dew trademarks,” she said.
“While our plans for the summer were consistent with our continued and deliberate strategy to transform our beverage portfolio, clearly, we redirected some big brands space to these new products as opposed to focusing on new incremental space.
“We view both of these conditions as temporary and not structural, and we fully expect topline performance to improve in the coming quarters.
“We have a good handle on what happened, and we are making immediate adjustments to get the business back to growth. We are stepping up marketing spending on Pepsi and Mountain Dew, including our zero and low calorie products under these trademarks.”
Nooyi said, however, that other factors were the biggest contributor to the disappointing quarter: estimating a 70/30 split between the impact of the weather and C-store slowdown; and things the company could have done differently.
Gatorade Q3 volume declined, against a backdrop of two years of ‘terrific’ Q3 growth, because it is particularly sensitive to weather and changes in the C-store channel, said Nooyi.
Big brand innovations
PepsiCo will continue to innovate with low and no calorie products, but this will include a focus on the big brands, said Nooyi.
“We have more innovation directed at our biggest trademarks, including low and no calorie products that will hit the market starting early in 2018."
She emphasized the long-term success of the strategy of shifting the company mix to faster growing sub-categories and low and zero sugar options.
“Since 2010, we have increased our mix of non-carbonated beverages by seven percentage points. Over the decades, we have established and maintained leadership positions in many of the most attractive non-carbonated categories and we have successfully introduced many offerings to appeal to consumers' increasing demand for zero and low calorie offers.
“So make no mistake about it, we remain squarely on strategy and having made a few course corrections, expect North America Beverages to return to growth in the coming quarters.”