PepsiCo: ‘We’re going to identify new habits and consumption patterns – and tailor innovation accordingly’

By Rachel Arthur contact

- Last updated on GMT

Pic:getty/ipopba
Pic:getty/ipopba

Related tags: Pepsico, Innovation, coronavirus

PepsiCo saw a strong Q1: but as with any business faces a great deal of uncertainly around COVID-19. It says its strategy is to identify and plan for a ‘new normal’ – and tailor innovation accordingly.

PepsiCo saw net revenue growth of 7.7% in Q1 2020 (12 weeks ending March 21 2020) but says its 2020 financial outlook is no longer applicable.

One of the broad shifts it expects to see as a result of COVID-19 is a positive impact on snacks and foods – as people increasingly breakfast and look for snacks at home throughout the day – but a negative impact on beverages with channels such as convenience effectively cut off for an unknown period of time.

COVID-19 and consumers: Four stages of evolution

PepsiCo has broken down societal changes into four stages: helping it identify different ways to react to each stage. As a global giant, its notes that the impact and timing of these stages and its reaction will be different across its markets.

“As we move forward, we see many opportunities along with some risks associated with the dynamic changes in society and consumer behavior as a result of COVID-19,”​ said Ramon Laguarta, PepsiCo CEO. “And we expect these changes to varying scope and timing across different markets in our retail channels throughout the world.

“In developed markets, we see consumers moving through several emotional and behavioral changes as they adjust their lives to the new realities they face. We believe there are four stages to this evolution.

“The first is preparation and prevention; the second is confinement and cocooning; the third is a restricted recovery; and the fourth is a new normal. These stages have important implications for our business, both from a marketing and channel perspective.”

In developed markets, consumers are in the second phase, and this has impacted on beverages, said Laguarta.  

“Currently, in most developed markets, it’s moved beyond the preparation and prevention phase, and appear to be in the later stages of confinement, in which shelter in place and social distancing have become a new way of life. Consumers have shifted their consumption habits to more at-home locations, increase their usage of traditional large-format and e-commerce channels and increased their basket size. Conversely, they've also shifted away from immediate consumption channels such as convenient and gas and foodservice, which disproportionately impact the revenue and profitability of our US beverage business.”

Conversely, the snack and food business has seen growth – and Laguarta believes the company is well positioned to embrace this moving forward.

“With consumer spending more time at home, we've seen an increase in eating breakfast and a tendency to snack more during the day. The Frito and Quaker food businesses are well positioned to capitalize on these changes, and as a result, we've seen higher household penetration across a variety of our products.

“Given these countervailing impacts within channels and categories, our portfolio does have somewhat of a natural hedge. Although, the negative impact on beverages is more significant; and the positive impact [is] on snacks and foods.”

Uncertainty around timings

Laguarta says that one of the biggest difficulties for the company is knowing when each phase will occur, making it hard to adjust accordingly.

“We've adjusted our advertising, revenue management and go-to-market priorities across our businesses and channels,”​ he said. “We have privatized SKUs to maximize manufacturing capacity and supply chain efficiencies. And we're adjusting our promotions to capitalize on fewer shopping trips with larger basket size. The key uncertainty that we're facing is around timing and when consumers may shift back to restricted recovery and a new normal.

“With some exceptions, we largely expect consumers to eventually return to previous habits as they slowly exit confinement and cautiously settle into new normal. In the interim, we expect the continuation of increased purchasing patterns in large-format and - e-commerce channels and softness in immediate consumption channels.

“As behaviors evolve, we expect to see a gradual improvement in the convenience and gas channels as people return to work. While restaurants and venues that involve large gatherings, such as movie theaters or sporting events take longer to adjust.”

Developing and emerging markets

Developing and emerging markets are reacting to COVID-19 in different ways, with confinement and social distancing measures varying by country.

“From a category and channel perspective, we're seeing similar trends to develop markets in which our snacks and food businesses are more resilient and less discretionary than beverages, so there's more exposure to immediate consumption channels that are being significantly impacted by the current environment,” ​says Laguarta.

“However, and like developed markets, there is a relatively lower amount of disposable income generated by most consumers. While our categories have room for development and a long runway for growth, we do expect a deceleration in organic revenue across our developing and emerging markets as macroeconomic forces strain consumer purchasing in the coming months.

“In addition, the strengthening US dollar presents a formidable challenge in several key developing markets. Mexico and Russia are notable examples, where an economically pressured consumer will make revenue management actions difficult, while transactional foreign exchange headwinds will simultaneously create pressure on the cost structure of those businesses.

"While we have expectations and strong plans, there are many unknowns and uncertainties, how people will actually behave, what will be the pace of economic and our category recoveries be. And how will COVID itself behave going forward.”

Three ways PepsiCo is adjusting

So how will PepsiCo as a company navigate the coronavirus crisis? One of the ways is the introduction of a committee dedicated to re-mapping each area of the company, which will continue to meet throughout the year.

Laguarta highlights three examples of how it is adjusting.

The first is reinforcing the PepsiCo culture with a set of overarching principles of integrity and getting things done quickly. “We believe acting on these principles can enhance our standing with customers, consumers and employees.”

Building on that is a focus on being agile across businesses to accelerate revenue growth and improve value market share. “In order to do so, we formed a committee to lead the recent re-planning of each business, and this committee will meet biweekly for the rest of the year to monitor performance and continually make resource allocation adjustments as circumstances warrant,” ​explains Laguarta.

The third way is investment: although Laguarta acknowledges this can be tricky territory to navigate. “We'll continue to invest in key initiatives that will transform the operating capabilities of the company and make us stronger for the future; and make commercial investments in high-return activities that we believe will enable us to emerge from the crisis in a competitively advantaged position,” ​he said. “At the same time, we will aggressively challenge our cost structure holistically with a zero-based mindset and re-evaluate all other investments for the year.”

Opportunities: e-commerce up 45%

Laguarta sees opportunities in the crisis for those able to adjust quickly and related to the new normal.

“Importantly, as the crisis evolves, there will also be opportunities to engage consumers with our brands and user breadth and depth of our go-to-market systems to improve our position in the marketplace to win with customers.

“We will embrace these opportunities to develop an even more agile and resilient supply chain with more accurate and rapid forecasting and response capability, support the continued growth of e-commerce, where retail sales increased approximately 45% in the first quarter. Until our plans for economically sensitive channels, such as foodservice and convenience and gas, with an objective to improve our presence and build deeper relationship with our customers.

“We’ll identify and plan for lasting new habits and consumption patterns, and tailor our innovation and brand communication plans accordingly to achieve greater consumer awareness and engagement with our brands. Implement proactive long-term revenue management capabilities in developing and emerging markets to mitigate the impact of frequent foreign exchange evaluations.

"And finally, identify these locations for high-return-on-investment opportunities that can improve our market position or provide access to advantaged capabilities that can create value over time succeed in the new environment, but also remain cognizant that we should not make short-term decisions that may impact or disrupt our business or our brands over the long term.”

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