Soft drink rivals send out commodity cost warnings

Reporting its end of year results last week, PepsiCo was most vocal about the cost situation. Moving into 2011, Indra Nooyi, PepsiCo CEO, said the company is mindful of “high levels of cost inflation for the coming year, driven by broad and pronounced commodity inflation.”​

Cost inflation impact ​

In a Q&A session with investors, Hugh Johnson, PepsiCo CEO told JP Morgan analyst John Faucher that the company is looking at $1.4 - $1.6bn in cost inflation. That is 8 to 9.5 per cent growth in commodity costs.

Its ability to pass these higher costs onto consumers may be restricted as Nooyi also warned of high unemployment in key developed markets and “a potentially difficult competitive pricing environment, particularly in beverages.”​

This may be a major factor behind the PepsiCo decision to lower its 2011 earnings forecast to 7 to 8 per cent from a previous forecast of low double-digit growth.

Morningstar analyst Philip Gorham said PepsiCo faces a struggle to maintain profitability. The acquisition of lower margin bottlers is key to this problem but the commodity price situation is not helping.

Gorham said: “Following the closure of the deals, Pepsi has become more exposed to commodity costs, and with the costs of sweeteners at multiyear highs, margin pressures are likely to remain until consumers become willing and able to bear the burden of rising costs. We think that is unlikely to occur while unemployment and gas prices remain relatively high.”​

Meanwhile, Coca-Cola Company is also coming under pressure because of the commodity cost situation.

Following publication of its full year results, Coca-Cola CFO Gary Fayard told investors: “We expect the full year 2011 impact of increased commodity cost on our total company results to range between $300 million and $400 million.”​

2010 results ​

As for the 2010 financial results of the two soft drink giants, both published figures more or less inline with expectations. PepsiCo published revenue growth of 37 per cent, largely driven by bottler acquisitions but also influenced by strong volume growth in emerging markets.

It outperformed Coca-Cola in China in Q4 where the soft drink and snack maker is outspending its rival.

But the company published weaker figures in the domestic North America market. Volumes at home were up 1 per cent compared to 3 per cent growth reported by Coca-Cola.

Shares in PepsiCo dipped on the publication of its results while Coca-Cola’s shares rose slightly following its earnings announcement.