PepsiCo will stick with a three-pronged strategy to “transform and accelerate” growth in North America despite softer-than-expected second-quarter results in the region, which executives blamed on a more financially constrained US consumer driven in part by higher gasoline prices rather than flaws in the company’s turnaround plan.
The company reported on July 9 a 2% drop in year-over-year food sales in North America resulting in a 3.5% drop in operating profit for the segment in the second quarter that ended June 13. The beverage business in the region fared slightly better in the period with sales up 1% year over year resulting in an operating profit change that was not meaningful.
The company’s overall revenues were buoyed by strong international sales, including a 9% bump in Asia Pacific Foods, a 6% increase in EMEA and a 4% gain in Latin American Food. As a result, PepsiCo’s global organic volume increased at its highest rate since 2022 and net revenues were up 6.4% in the quarter over the same time last year.
The blame game: Is PepsiCo’s strategy or the economy behind the drop?
Despite strong companywide results, analysts focused much of the earnings call on Thursday on North America, questioning whether PepsiCo’s affordability, innovation and away-from-home strategy was delivering the recovery that management had promised earlier this year.
CEO Ramon Laguarta pushed back against a suggestion the company may need to “lean in further” on affordability or innovation to drive better volume growth or otherwise adjust the playbook.
He argued the strategy has already begun reversing declines in volumes and market share, even if the recovery slowed during the second quarter.
PepsiCo launched the strategy after its North American food business posted year-over-year declines of 2% and 3% in consecutive quarters. The segment returned to 1% growth in the first quarter after the company cut prices by as much as 15% in region and ramped up innovation. However, it slipped back 1% in the latest period, a result Laguarta argued reflected a weaker consumer rather than a reversal in the underlying trend.
“A category that was negative in volume now is positive in volume,” he said, adding, “we were losing share of volume, now we are gaining share in volume.”
He reinforced his case by pointing to notable gains within salty snacks.
The segment is “one of the few categories that is growing volume in the overall food space in the US,” and gaining share of volume in the region, he said.
Gas prices reshape consumer behavior
While Laguarta said the company’s three-part strategy was executing its intent, he also acknowledged the volume gains were not as much as expected.
“The consumer is worse than what we had anticipated and that is driven mainly by gas prices,” he explained, noting higher prices at pump hit sales at convenience and gas stores particularly hard.
“The impulse channels have been impacted where there is more of a correlation with the price of gas. Certain convenience stores and in some other independents, we are seeing a slowdown of the conversion of traffic to purchases,” he said.
“Will it change in the coming months?” he asked. “It all depends on the price of gas.”
PepsiCo will stay the course
While PepsiCo can’t control the price of gas, Laguarta said the company is addressing what it can – which includes following through on its previously outlined three-part strategy to invest in affordability, innovation and away-from-home offerings.
For example, PepsiCo is boosting affordability within c-stores by bundling its products in meal solutions in that channel, Laguarta said.
On the innovation front, Laguarta said PepsiCo Beverages North America is seeing “strong performance” within hydration, carbonated soft drinks, energy and away-from-home offerings.
“Gatorade delivered volume and net revenue growth and gained both value and volume share aided by the successful launch Gatorade Lower Sugar with no artificial flavors, sweeteners or colors and continued strength from Gatorlyte,” he said.
Propel delivered estimated annual retail sales of more than $1 billion, which includes the recent launch of Propel Clear Protein, according to the company.
Innovation within PepsiCo Foods North America also drove gains, including volume and net revenue gains in the quarter for portion controlled multipacks, which exceed $3.5 billion in annual net revenue, according to the company.
Reflecting on these gains, Laguarta stressed PepsiCo’s strategy is working.
“I wouldn’t question the strategic logic of the investments. There are tweaks we have to make commercially and there are obviously different circumstances in the US with consumer budget trade-offs” due to “recent inflation, especially gas prices,” but “we remained focused … on continuing the playbook,” he said.
“We don’t think we need any sort of reset,” he added.
