PepsiCo CFO Hugh Johnston tells analysts the firm believes its new sweetener innovations will be 'more evolutionary than revolutionary' and that work in this direction has delayed a beverage business review until 2014.
During a Q&A session that followed his address at the Consumer Analyst Group of New York (CAGNY) conference in Florida yesterday, a member of the audience asked Johnston why PepsiCo had pushed the review out to 2014.
In early 2012 the firm said the review – which covers issues such as direct-store-delivery – would take 12 to 18 months, but said during its FY 2012 results call last week that it would take 24 months in total.
“Could you take us through in more depth what kind of fundamental or strategic thinking has changed that have decided to push that out?” one analyst asked.
Johnston said that two things had evolved since early last year, with sweetener development the first, leading PepsiCo to believe it could “fundamentally change some of the elements of the core product offering in carbonated soft drinks”.
Optimal beverage business structure
Last week, PepsiCo CEO Indra Nooyi promised “disruptive innovation” to revamp an under-pressure Cola sector – where full-sugar products 20% of the firm’s North American beverage volumes – and said the company had promising new natural sweeteners and flavorings undergoing FDA review.
While he refused to elaborate further on competitive information, Johnston said that PepsiCo needed to see the sweetener piece “play out before we make a decision on exactly what the optimal structure would be for the beverage business going forward”, since sweetener innovation could unlock opportunities for significant value creation.
Secondly, despite sequential improvements in beverage business trading during 2012, Johnston said that PepsiCo wanted to “see how it plays out this year”.
In addition to seeing how operations played out this year, Johnston said: “We want to give it a bit more time with some of the strategies that we implemented around brand building…revenue management, price pack architecture…productivity.”
Another analyst suggested to Johnston that the depth and frequency of promotions in North American CSD’s – for instance, three for $10 – “doesn’t seem to really do much for building brand equity, for building the category growth, for improving your channel mix”.
‘Steak peaks and valley’: CSD price volatility
Neither was there evidence that it built long-term consumer share wins for retailers, he added: “So it is kind of a net loss for everybody. So how do we get to a lower level of frequency?”
Johnston admitted that high/low pricing in CSDs had been a challenge for a long time, with retailers using it as a traffic driver, but to a lesser extent over the past decade.
PepsiCo was fighting back with its ‘hybrid everyday value program’, Johnston said – also discussed by PepsiCo Americas Beverages CEO Al Carey six months ago at a Deutsche Bank conference – since the firm did not believe that an “everyday low price strategy is the right strategy for the category”.
“The pricing environment just got way too high/low over the last maybe five or six years. And what we started to do last year, and we are doing with a couple of very significant customers this year is to essentially have higher pricing on holidays and lower pricing every day, to start to level out some of those steep peaks and valleys.”
PepsiCo successfully adopted this approach with one customer last year, Carey said, and was rolling-it out with more to “send the right message from a brand-building perspective”.
Costs also fell dramatically, since PepsiCo was not selling 50% of volumes through nine weeks of the year, he added, due to renting extra warehouse space, extra labor charges, both of which it would cut in 2012 and would do so further in 2013.
“Frankly, you also get the consumer not expecting the deep, deep price cuts around the holiday timeframe. So again, put it in place last year with the one customer, it went well, we’ve got it in place with some big customers this year.”