• by Karlene Lukovitz , September 8, 2011

The U.S. and other developed markets have moved into "stagflationary" mode over the past six months, and the lack of growth has created a pricing dilemma for CPG companies, Hugh Johnston, PepsiCo's CFO, told attendees at a Barclays Capital investor conference on Sept. 7.

"While our brands are solid and our company is highly productive, this stagflation has made pricing a tricky balancing act," Johnston said. "Price elasticities have become steeper at the same time that [price increases] are required to cover higher input costs, and this is squeezing performance across food and beverage."

Given this reality, PepsiCo is focusing on pricing strategies -- as well as supporting its brands with marketing -- to clearly define and communicate their distinct positioning to consumers and drive innovation, Johnston said.

PepsiCo continues to adjust its pricing architecture to "meet the needs of the widening gap between value, middle and premium consumers" and "be responsive to generally higher price sensitivity across all consumers," he said.

Johnston and John Compton, CEO, PepsiCo Americas Foods, shared a number of points about pricing, packaging and marketing initiatives.

On the carbonated soft drinks/CSB front, using consumer insights, packaging innovation and PepsiCo's integrated bottling system to leverage occasion-based marketing -- to tailor pricing and packaging by brand, channel and consumption occasion -- has become an increasingly important strategic focus, according to Johnston.

Examples, he said, include using 16-ounce bottles to provide a 99-cent price-point option for on-the-go consumers in the convenience and gas store channel (PepsiCo is the leader in this channel); offering 1.5-liter, 99-cent bottles for mealtimes in smaller households (accounts distributing this size are seeing improved volume across the 1.5- and 2-liter spectrum); and focusing on 20-packs of 12-ounce cans for special occasions/celebrations. A 7.5-ounce can launched in March was designed to meet the "mealtime snack" needs of "light CSB" consumers, while also enabling a higher price per ounce, Johnston said.

Occasion-based marketing is being leveraged first in CSBs, but will also be deployed in teas, where a broader variety of sizes, configurations and prices will be seen, he added.

PepsiCo began implementing beverage price increases after July 4, and is continuing to roll these out in the third quarter, Johnston reported, adding that higher Gatorade pricing will go into effect in the fourth quarter.

Johnston also noted that the company is seeing success with more "bundling" of beverage and snack products (such as Hot Doritos and Pepsi Max in c-stores), supported by coupons and other marketing.

In the Frito-Lay snacks business, PepsiCo has also seen higher price elasticities -- meaning higher consumer resistance -- particularly in promoted prices as opposed to everyday pricing, according to Compton. This has made it more difficult to predict the effects of promotions, requiring PepsiCo to fine-tune promoted price points introduced in July. "All [boats] sort of rose during the summer when everyone was taking additional pricing into the marketplace, and I think the consumer can only afford so much," he said.

A few highlights from Johnston's remarks on PepsiCo's advertising and marketing initiatives:

• Asked how PepsiCo assesses the performance of advertising and marketing investments, Johnston cited improved brand equity scores as the primary metric, and increased product sales volumes/velocities as the second key metric.

• The "Summertime is Pepsi Time" campaign TV spots/videos pulled 1.4 million YouTube views within 36 hours, and Pepsi was a top-trending brand on Foursquare for five consecutive weeks. In total, 135 million U.S. consumers were exposed to the campaign via digital media, with "extremely high" engagement rates across Twitter and Facebook, he reported.

• The relaunch, starting in 2010, of TV ads for Pepsi Max, targeted to male Millennials, have sold 82% more cases than previous campaigns.

• The Sophia Vergara campaign for Diet Pepsi, targeted to Boomer and Gen X females, drove a six-point increase in communication awareness for the brand.

• Blue-can Pepsi's U.S. "X Factor" deal has not only taken integration to new levels (including making Pepsi part of the prize scenario, by giving the show's winner the opportunity to appear in a Pepsi commercial to air during the Super Bowl), but is being supported by significant increases in in-store display activity now and into 2012.