PepsiCo: Marketing Spend Up; Job, Agency Cuts

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As had been widely expected, PepsiCo on Thursday reported that it will significantly up advertising/marketing this year -- by $500 million to $600 million, with particular focus on 12 of its largest beverages and snack brands and the North American beverages business. This will be accompanied by a significant workforce reduction, a major consolidation of agencies, and other cost-reduction initiatives.

The plan includes eliminating 8,700 jobs across 30 countries, or about 3% of PepsiCo’s global workforce. PepsiCo hires between 10,000 and 20,000 employees per year, so actual head-count will continue to grow.

A “simplified” organizational structure will reduce management layers and give regional managers greater authority.

PepsiCo also confirmed that Massimo D'Amore, president of its Global Beverages Group, will retire this month. The company recently named former Frito-Lay chief Albert Carey to run the business, reported Reuters.

Cost-Reduction Initiatives, Financial Targets

In moves described as designed to redirect spending to “consumer-facing” investments and increase marketing ROI and accountability, PepsiCo will reduce its current approximately 300-agency roster by 50%, and institute joint-performance metrics and a pay-for-performance model with its remaining agency partners.

Other cost-reduction initiatives will include consolidating manufacturing, warehouse and sales facilities and leveraging new technologies, processes and best practices across operations and global businesses.

In total, PepsiCo projects that its plan will reduce costs by $1.5 billion between 2012 and 2014 ($500 million in each year) – on top of $1.5 million in cost cuts already announced – while implementing strategies designed to drive up core beverage brand sales in particular, and regain market share from Coca-Cola. Productivity improvements are projected to reduce costs in the North American beverages business alone by $500 million to $600 million over the next three years.

Profit is projected to decline 5% in 2012, during the transition (costs will include a one-time restructuring cost of $910 million), but subsequently show annual percentage growth in the high single digits. Shareholder returns through dividends and share repurchases for 2012 are projected at $6.3 billion, a $700-million increase over 2011.

Achieving these goals while facing a projected $1.5 billion in increased commodities costs in 2012 (7% inflation), other higher costs and a more intense competitive environment required “tough choices,” PepsiCo Chairman and CEO Indra Nooyi said, referring to the workforce reduction.

Marketing Initiatives

PepsiCo’s plan will result in a 15% increase in global advertising/marketing investment for 12 of its largest brands, including Pepsi, Mountain Dew, Lay’s, Gatorade, Tropicana,  7Up/Sierra Mist, Lipton, Doritos, Quaker, Cheetos, Mirinda and Sunchips.  Advertising/marketing spending will be increased from 5.2% of net revenues to approximately 6% of net revenues by 2015.

Nooyi, who has faced criticism from some analysts and shareholders who are questioning whether the company’s investments in “better-for-you” brands/products have come at the expense of core brands, acknowledged that the North American beverages business had lost dollar share in 2010 and, while it had since seen improvement, PepsiCo is “not happy with the pace” of the improvement. (In terms of volume share of the total North American liquid refreshment beverages market, PepsiCo lost 0.2% in share in 2011, compared to a 0.1% share gain by “the competition,” she reported.)

Nooyi stressed that PepsiCo actually did not reduce its advertising/marketing spending on the overall North American beverages business over the past five years; rather, she said, it had been spread out over too many brands and too many agencies. “Non-working A&M” had “squeezed out working A&M,” she said.

Once spending is focused on a limited number of core brands, “a 15% to 20% increase in visible dollars is going to feel like a hell of a lot more” in the North American business, Nooyi said.

Going forward, PepsiCo also will be assessing its brands based on their core/non-core natures and their performance, and will be reducing its overall number of brands, focusing on those that are underperforming and also “under-related” to the company’s core missions. (Globally, the company currently has 400+ brands.)

Among the major marketing initiatives coming: What Nooyi described as the first truly global campaign for Pepsi, planned for this summer.

This year also will see results from investments in research and development, including the launch of products using a new, natural, zero-calorie sweetener that will represent a “breakthrough,” and a new “dispensing” machine. (Capitalizing on growth opportunities in the foodservice sector is one key priority for PepsiCo, and Coca-Cola has been pushing to leverage its new Freestyle vending machine to gain share in that space.)

Investment in R&D will continue going forward, but be focused against specific goals in three types of innovation: “refresh, reframe and breakthrough.” In general, innovations and insights will be more efficiently shared across global businesses, and the emphasis will be on creating innovation “platforms” rather than isolated brand/product innovations, said Nooyi, noting that products and insights from developing markets are being leveraged in North America.

‘Healthier’ Products Still Key; No Company Split-Up Planned

Nooyi also stressed that PepsiCo will continue to invest in its “healthier portfolio,” as well as core/traditional brands, because the healthier products are critical to positioning the company for growth in the years ahead. “This is an ‘and’ game, not an ‘or’ game,” she said. “We have to focus on both.”

“Good-for-you” brands’ share of total revenue has risen from 17% to 20% over the past five years, Nooyi  reported.

The question of whether PepsiCo should split into two companies, beverages and snacks, was one part of the total operating review of the business just completed by management, the board and external advisors. The conclusion was that value is maximized by remaining one company, for several reasons, Nooyi said.

These include cost leverage/economies of scale in operations (a breakup would result in an estimated $800 million to $1 billion in added costs) and snacks/beverages synergies that represent significant go-to-market and cross-category expansion advantages on a global basis, Nooyi said. In emerging markets in particular, the ability to grow snacks would be “much reduced” without beverages, and require a much larger investment, she said.

In fact, one key execution strategy is focusing on driving more combined snacks/beverages purchases.

Q4 and Full-Year Financials

PepsiCo’s earnings-per-share increased 5% (to $0.89) in the fourth quarter, and 3% (to $4.03) for full-year fiscal 2011. Core EPS grew 9% (to $1.15) in Q4 and 7% (to $4.40) for the year.

Q4 net revenue increased 11%, to $20.2 billion, and full-year net revenue increased 15%, to $66.5 billion. Net income grew 4% (to $1.42 billion) in Q4 and 2% for the year. Core net income increased 8% in Q4 and 5% for the year.

Worldwide snacks volume grew 8% in Q4 and 8% in the full year. Worldwide beverage volume grew 3% in the quarter and 5% for the year.

The company took a $383 million charge in Q4 related to the restructuring plan and reported that it will take $425 million in charges in 2012, as well as $100 million in charges between 2013 and 2015.

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1 comment on "PepsiCo: Marketing Spend Up; Job, Agency Cuts".

1. Paula Lynn from Who Else Unlimited
   

   commented on: February 10, 2012 at 10:22 a.m.
   That translates into 8700+ more people plus families that will not be able to afford Pepsi and their other overpriced products, let alone other things.

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