Despite an increasingly challenging beverage environment, PepsiCo Inc. (PEP) managed to deliver a second-quarter earnings beat this morning.
Before Tuesday’s market open, the soda and snacks giant reported second-quarter earnings of $1.50 a share on revenue of $15.7 billion, compared to estimates for earnings of $1.40 a share on revenue of $15.6 billion.
Beverage companies such as PepsiCo and The Coca-Cola Co. (KO) have been struggling recently to boost sales of sugary, carbonated drinks as more and more consumers shift to healthier eating habits. PepsiCo has the upper hand, though, as it does not rely solely on beverages.
Still, most analysts on Wall Street didn’t expect PepsiCo to report a blowout quarter amid challenging conditions in grocery store aisles, namely increased discounting and the shift to healthier products.
In a note published on Monday, July 10, Susquehanna analyst Pablo Zuanic said he was cautious ahead of PepsiCo’s seco nd-quarter earnings release, noting in particular that Gatorade has been experiencing sluggish growth overseas. The company itself admitted Tuesday that industry conditions are seeing “profound” change.
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TheStreet talked with PepsiCo CFO Hugh Johnston about the company’s earnings and his outlook for the beverage and snacks industry. Here is an edited and condensed version of the interview.
PepsiCo CFO Hugh Johnston.
Q: On the earnings call, you and Indra [Nooyi, PepsiCo CEO] talked about evolving PepsiCo as there has been a lot of challenges out there in the packaged goods space. Also, e-commerce is becoming a bigger factor. What changes do you anticipate having to make at PepsiCo to com pete in this environment?
A: Change for PepsiCo is just a constant. Certainly the retail channels are continuing to evolve, the one that everyone likes to talk about is e-commerce, but I think it’s broader than that. I do think you’re seeing a lot of blending of what used to be independent channels, whether it was convenience stores vs. traditional grocery vs. food service vs. now the new online. You see all of the retailers playing in multiple spaces.
Certainly supply chains will continue to evolve, that’s something we’ve been particularly good at over the years. There is an initiative we call GES, which stands for geographic enterprise solution, and that initiative really is about making the supply chain faster, shorter and as a result of those things, making it less costly, as well. So, you’ll see that continue to evolve.
And certainly from the standpoint of marketing, as consumers move their attention from linear [powered devices] to multiple screens you’ll see us evolve our marketing to be where the consumer is. That’s something we’ve always done, going back to the early days of PepsiCo, it was all about billboards then radio and then TV. So, to me this is just a logical evolution of our marketing.
Q: We’ve talked a lot about in the past what acquisitions would be nice in the food space for PepsiCo. But, it almost sounds like PepsiCo will have to morph into a tech company in this new world.
A: I don’t know that I would go all the way to calling us a tech company. As technology evolves, and enables things to happen, whether it’s from a supply chain perspective or consumer perspective, we will be on the forefront of leveraging that technology within the food and beverage space. I think we’ll be an early adopter on those things.
Q: You noted on the call there has been an impact from the new soda tax in Saudi Arabia. Does that change how you’re thinking about addressing soda taxes in the United States?
A: Yes, the tax [in Saudi Arabia] forced up prices. I don’t know that it changes our strategy in terms of dealing with them. In general, we’re not in favor of discriminatory taxes on our products. We’re more than willing to pay our share of the public burden and pay our share of the taxes. We do think these taxes are discriminatory. We don’t think they’re terribly effective in achieving this state of public policy outcome, so we’ll continue to follow strategies we have been, which has been to manage with the facts and shine a bright light on what these taxes represent.
Q: We’ve seen data on Gatorade lately that shows sales slowing a bit. What are you seeing in the category right now?
A: Yeah, we’ve certainly had a few small new entrances, BodyArmour is obviously in the business, Powerade [owned by Coca-Cola (KO) ] has been around for awhile. Gatorade still has by far the largest market share. I think what you’ll see is Gato rade continuing to defend and grow market share in the core isotonic business, that’s the foundation of Gatorade. But then in addition to that, to grow Gatorade, we’ll continue to expand it into broader sports nutrition. And that can be in multiple forms, whether it’s in pre- or during-performance energy with chews, gels and liquids. It can be in the area of protein, enabling muscles to recover.
Q: Are you looking to build a portfolio of some of those emerging brands around Gatorade?
A: I think it will still be mostly Gatorade. Keep in mind we still have the Propel business which is a lower-calorie alternative for people who don’t necessarily want to consume calories while they’re working out. They want hydration purely for hydration’s sake and Propel is there to fulfill those needs. I think bet ween those two brands, we probably have the right portfolio to fill most of the consumers’ needs.
Q: We’ve been writing about how competitive things have gotten in grocery stores of late, with Kroger (KR) , ALDI, Lidl, Walmart (WMT) , what’s the mood in the aisles right now? Are there price wars?
A: Not really as relates to us. I do think there’s a lot of competition in retail, but there’s always been a lot of competition in retail for as long as I can remember. I think the thing we bring to retailers that they value most is, number one, because of the impulse nature of our products, they can drive basket size with PepsiCo products, whether it’s the Quaker products, the Gatorade products, the Frito-Lay products or the core beverage products. Number two, we are generating a large percentage of their growth overall and, obviously in a competitive environment, you tend to value growth. Number three, because of the nature of our products turning so q uickly in stores, we also generate good cash flow for them.
Q: Also, Indra mentioned on the call, sales online are growing “brilliantly” but they could be growing more if the products were designed better. What can you do to maximize that online opportunity?
A: Initially, we’ve taken a lot of steps to get our price points right and to get our packaging configurations right for the online channel. I think what you’ll see us do over time is shape our supply chain more explicitly for online and innovate specifically for online. There are certain characteristics that work better through online because of distribution so bulk density of the product, the online shopper tends to be a little healthier, a little more premium oriented.
Q: So, online exclusives?
A: I don’t know that I would go to online exclusives but you’ll just see products that work better for online. We want to sell omnichannel, we want to be where the consumer is, bu t we want to have products that work well in that channel.
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