Gatorade Still Weak Link At PepsiCo

Gatorade Continuing struggles in the Gatorade business contributed to a 2.3% decline in overall PepsiCo profits for its second quarter.

The company outperformed analysts' earnings expectations, but fell short of revenue expectations due to currency swings.

Net income declined by $1.06 per share, to $1.66 billion, and net revenue declined 3.2%, to $10.6 billion. Year-to-date, net income declined 1.8%, to just under $2.8 billion, and net revenue declined 2.2%, to $18.9 billion.

PepsiCo Americas Beverages net revenue fell 9% (7% on a constant currency basis) in Q2, as did its operating profit. Year-to-date, revenue for the division declined 10.2% and operating profit fell 12%.

Americas Foods saw 1% revenue growth and 4% operating profit growth in Q2. Year-to-date, division revenue rose 2.1% and operating profit rose 5.5%.



PepsiCo International revenue fell 3.9% for the quarter, while operating profit declined 1.4%. Division year-to-date revenue declined 1.6%, and operating profit fell 2.4%.

The company reaffirmed its full-year 2009 guidance for both net revenue and core EPS of mid- to high-single-digit constant currency growth over its 2008 core EPS of $3.68.

Gatorade Refocusing on Core User

PepsiCo confirmed that, although the new, lower-calorie G2 (for "off the field hydration") continues to realize double-digit volume growth, the overall Gatorade franchise continued to experience decline in Q2. The company did not quantify the losses, although analysts probed for specifics during the quarterly conference call.

After PepsiCo's acquisition of Gatorade in 2000, the brand showed consistent growth until declines began in Q3 2007. Beverage Digest estimated that in this year's first quarter, Gatorade's sales volume dropped 13.7% and its share of total sports drink volume dropped 6.3 points, to 73.7%. Meanwhile, Coca-Cola's less expensive competitive sports drink, PowerAde, gained 23.6% in sales volume, and its share rose 6.1 points, to 25.1%.

Some industry experts have speculated that a much-streamlined bottle design that visually emphasizes the "G", which debuted in January, has also hurt Gatorade's sales by making the brand unrecognizable on shelves. However, PepsiCo executives have said that the designs have been well received by the target audience.

During the quarterly call, PepsiCo chairman/CEO Indra Nooyi said that during the years prior to 2007 when Gatorade was growing at a clip of 12% to 18% per year, it had attracted many "casual" drinkers. Particularly since the recession, these casual drinkers have been attracted away by less expensive alternatives, including tap and bottled water, she said. (Coca-Cola has been heavily marketing its Vitamin Water, as well as PowerAde.)

Nooyi said that the Gatorade strategy calls for transitioning casual sports beverage drinkers to new products to be launched next year, while preserving the pricing and "integrity" of the brand by focusing on its core audience of athletes. PepsiCo has to "be very careful not to cheapen the Gatorade brand by going down to private-label pricing, as some have chosen to do," and positioning back to the core audience is the correct strategy for the long-term health of a still exceptionally strong brand, she emphasized.

Noting that there are "just two players," CFO Richard Goodman said that Gatorade is "holding if not gaining share of the core athlete." According to Nooyi, 56% of usage occasions are now going to tap and bottled water, and just 2% to other isotonics. "We're not losing to other isotonics," she said, and the core athletic user "remains extremely loyal to Gatorade; the cutback in consumption is extremely small."

Gatorade is currently suing Coca-Cola over Coke's claims in ads that PowerAde is a "more complete sports drink" than Gatorade.

Nooyi reported that the goals for improvements in the brand's core metrics are on track, and that if GDP improves in 2010, the category should return to growth mode, albeit growth of 0.5% to 1%.

In line with the goal of marketing to create more Gatorade occasions for the core athlete, the brand's recent "What's G?" campaign included 16 athletes from 10 different sports defining what Gatorade means to them. Spots featuring rap artist Lil' Wayne appeared during this year's Super Bowl and Rose Bowl. (50 Cent is one of Vitamin Water's celebrity endorsers.)

Now, during the summer months, Gatorade is looking to drive sales by returning to its successful partnership with Michael Jordan. The brand is commemorating Jordan's induction into the Naismith Memorial Basketball Hall of Fame this fall with a limited-edition Jordan Thirst Quencher series featuring three new flavors and six bottle designs showing key -- that is, "G" -- moments from Jordan's career. Jordan's "Be Like Mike" campaign, launched in 1991, was a major slam-dunk for the brand.

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