PepsiCo’s shift of shelf space and marketing dollars away from its core Pepsi and Mountain Dew brands, to healthier brands including Lifewtr, contributed to a sizable 3% revenue decline in its North American Beverages (NAB) business in this year’s third quarter, the company acknowledged in reporting results today.
The company’s North American beverage volumes declined by 6%. Global beverage volumes declined by 1%.
In presenting the results, CEO Indra Nooyi acknowledged that PepsiCo erred by shifting too much support away from the core carbonated beverages brands, but characterized sales and operating profit declines as a “toe stub” that will be addressed by restoring more promotional resources to those brands.
“We directed too much of our media spending and shelf space to new, low-calorie, smaller brands,” she said, but “the issues are temporary, and we believe that we have taken the necessary actions to improve the performance of this business beginning in Q4.” The company is stepping up marketing spending on Pepsi and Mountain Dew, including the zero and lower-calorie products under those brands, as well as reallocating and securing incremental shelf-space, and tweaking brand messaging on packaging, and in point of sale and traditional and social media, she said.
Nooyi said that the business’s performance was also negatively affected by a relatively cool summer, in comparison to the last two years’ summers, resulting in a “marked slowdown” in sales in the convenience store segment that negatively affected sales of Gatorade, in particular. That brand accounted for one-fifth of Q3 volume, she noted.
But Nooyi also stressed that the company will continue its declared strategic focus on realizing two-thirds of its worldwide beverage volumes from products with lower or no sugar and fewer than 100 calories per 12-ounce serving by 2025.
“Our beverage transformation initiatives over the longer term have been very successful in shifting our mix toward the faster-growing [beverages] subcategories and providing more low- and zero sugar options,” and the company will continue to offer more of those options, she said. “Since 2010, we have increased our mix of non-carbonated by 7 percentage points. Over the decade, we have established and maintained leadership positions in many of the most attractive non-carbonated subcategories.”
PepsiCo’s North American snacks business saw a 3% sales increase in the quarter, driven largely by “bold” flavors of brands including Ruffles and Cheetos, said Nooyi.
Nooyi stressed that all operating sectors aside from NAB delivered results in line with or ahead of expectations.
“Despite the challenges in our NAB business, the PepsiCo portfolio overall generated revenue, operating profit and earnings per share growth,” she stated. “Although we have moderated our full-year organic revenue growth outlook, we are now on track to exceed the full-year earnings per share target we set at the beginning of the year.”
Organic revenue rose 1.7% in the third quarter and 2.3% year to date. Full-year EPS is now expected to be $45.23, 10 cents higher than previously expected.