BUSINESS

PepsiCo's profit dips as company bolsters brands, positions for future

10/17/2012 07:23 EDT | Updated 12/17/2012 05:12 EST
NEW YORK, N.Y. - PepsiCo Inc.'s net income dipped 5 per cent in the third quarter as the snack food and beverage maker poured more money into bolstering its flagship brands and developing new products that position it for the future.

Still, profit for the company, which makes Frito-Lay chips, Tropicana juice and Quaker Oats, was above Wall Street expectations and Pepsi stood by its guidance for the year.

PepsiCo, the world's No. 2 soda maker, is trying to play catch up to bigger rival Coca-Cola Co. At a time when people in developed markets like the U.S. have grown more concerned about drinking sugary sodas, both brands have been relying more on sales of bottled teas, water and other drinks. But sodas remain a big business and Coca-Cola has grown its market share in recent years through aggressive marketing and innovative packaging.

As its share has dwindled, PepsiCo this year began working to raise the stature of its namesake cola and other key brands. The turnaround plan includes an advertising blitz with pop stars such as Nicki Minaj and athletes such as New Orleans Saints quarterback Drew Brees.

The company's push to build customer loyalty has yet to take hold. In its flagship beverages unit in the Americas, the company said sales volume fell 3 per cent in the third quarter; sodas declined 2 per cent and non-carbonated drinks decreased by 7 per cent. Without giving details, the company said the drop in the latter figure was partly because it got rid of less-profitable juice packages.

CEO Indra Nooyi said in a conference call with investors that areas in the North America beverages unit were a "work in progress."

For example, she said Gatorade volume was down in the high-single digits in part because of pricing actions. But she said the company didn't want to fall back into the trap of marketing Gatorade as a general hydration drink, as it did in 2004-2006, just to boost volumes.

"If we go back to that, we are again renting volume," she said. By instead positioning Gatorade as a drink developed specifically for athletes, Nooyi said PepsiCo will be able to charge higher prices over the long term.

The same was true of packaged bottled waters; Nooyi noted that there was a "hell of a price war" in the segment and that PepsiCo was moving away from simply chasing short-term volume spikes. PepsiCo's water brands include Aquafina.

Overall, PepsiCo's core operating profit for the period ended Sept. 8 declined 8 per cent, reflecting higher costs for ingredients, marketing and pension expenses.

PepsiCo, based in Purchase, N.Y., said it earned $1.9 billion, or $1.21 per share. That's compared with $2 billion, or $1.25 per share, a year ago. Earnings from core operations were $1.20 per share, better than the $1.16 per share analysts expected.

Total revenue fell 5 per cent to $16.65 billion, partly because of unfavourable currency exchange rates and the refranchising of its business in China and Mexico. That means that revenue in those countries is now recorded by PepsiCo's local partners. Analysts expected revenue of $16.96 billion.

When excluding the impact of exchange rates and other changes, revenue rose by 5 per cent. The increase reflected a 1 per cent jump in volume and 4 per cent bump in pricing.

PepsiCo expects costs for ingredients to moderate in the fourth quarter. But for the full year, the company still expects adjusted earnings to fall by 5 per cent.

PepsiCo's results come a day after rival Coca-Cola reported that its net income for the third quarter rose 4 per cent to $2.31 billion, or 50 cents per share, as revenue rose 1 per cent to $12.34 billion.

The Atlanta-based company said global sales volume rose 4 per cent, while sales volume in North America rose 2 per cent. Coca-Cola said the latter increase was driven by non-carbonated drinks such as Powerade, while soda sales were flat from a year ago.

Going forward, PepsiCo is developing products that cater to shifting tastes. Next year, for example, Nooyi said the company has launches planned for the rapidly growing energy drink segment.

She also noted that people still love the taste of cola, even if they have concerns about sugar and artificial sweeteners. As such, she suggested that the company is working on a diet cola with natural sweeteners.

Shares of PepsiCo rose 19 cents to $70.49.