PepsiCo: 'Strong innovation across the beverage portfolio is contributing to improving performance'

By Beth Newhart

- Last updated on GMT

PepsiCo has made some big moves in beverages, committing to improving its NAB numbers Pic: ©GettyImages/Chotika Santadkarn / EyeEm
PepsiCo has made some big moves in beverages, committing to improving its NAB numbers Pic: ©GettyImages/Chotika Santadkarn / EyeEm

Related tags Pepsico financial report Pepsi Sodastream

PepsiCo has increased its presence in the bottled water category – the #1 beverage product in the US by volume – with sparkling water bubly and lifestyle brand Lifewtr. And PepsiCo says its wider beverage portfolio is also 'well positioned to compete and innovate on'.

Other recent launches include sugar-free Gatorade Zero, Mountain Dew Ice and the return of Mountain Dew Baja Blast; while the company has seen retail sales growth in Starbucks RTD coffee, Lipton RTD tea and the flagship Pepsi brand. 

“We like the construction of our portfolio right now", ​said PepsiCo vice chairman and executive VP and CFO Hugh Johnston in this week's earnings call for its Q3 2018 results. 

"It's been built over the better part of the last two decades. And we think it's well positioned to compete, well positioned to innovate on as we build on the platforms that have existed here for a long time,”​ 

Sequential improvement

The North America Beverages (NAB) division of PepsiCo saw an increase of 2.5% in organic revenue growth in its latest quarter.  Operating profits for NAB were down by 14% compared with Q2, attributed to increases in certain operating costs such as transportation alongside higher advertising and marketing expenses, and by 17% from 2017.

PepsiCo has increased the marketing and advertising budgets for NAB products by about 6% to keep up with its competitors and points to brand innovation as reason for its steady improvements.

Hugh F. Johnston, executive VP and CFO at PepsiCo, said “Our intention, generally speaking, is to be competitive on advertising and spending levels but not to accelerate beyond competition. Our goal is to win based on the quality of our advertising and the execution that follows that advertising rather than the level itself.”

“We want to compete on execution, we want to compete on the quality of innovation and we want to compete on the quality of our marketing. And we think we're well positioned to do that, particularly with our integrated system.”

Expanding portfolio reach

PepsiCo has made some big moves in beverages recently, indicating a commitment to improving its NAB numbers. It acquired SodaStream in August​ for more than $3bn, entering the at-home beverage market and responding to consumer demands for more healthy, sustainable drinks.

It’s also launched new water brands Lifewtr and Bubly, which are reportedly on pace to achieve more than $200m and $100m in measured retail sales in 2018, respectively. The company says this is helping boost its NAB unit and drive sales.

Outgoing CEO Indra Nooyi​ noted ​NAB had enjoyed “another quarter of sequential organic revenue performance improvement".

"Organic revenue growth of 2.5% is the best we have seen at NAB in eight quarters and was driven by retail sales growth in Starbucks ready-to-drink coffee, Lipton ready-to-drink tea, Gatorade, our water portfolio, Pepsi and Mountain Dew,"​ she said.

"Certainly, strong innovation across the portfolio is contributing to the improving performance.”

Future innovation strategies

PepsiCo hopes that its investments in these popular new brands will have a positive return in the next few years. It has also started increasing prices on certain products last month to help offset costs, and expects to see results from that in Q4.

“Commodity inflation, operating cost inflation, particularly in transportation costs, product mix and a stepped-up advertising expense each pressured our profit performance in the quarter. However, we expect that our recently implemented pricing actions will improve profit performance in the coming quarter,”​ Nooyi said.

The company also addressed the growing market for non-alcoholic cannabis beverages and whether it might explore the sector with related launches or acquisitions. Johnston said PepsiCo is wary of investing in products that are not yet federally legal, explaining that they “look at everything but certainly ​[have] no plans at this point to do anything.”

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