While seeing revenue and volume growth in its international markets, PepsiCo's Frito-Lay, Quaker, and beverage businesses struggled with slow revenue growth and declines in volumes. Volumes declined for Frito-Lay North America, PepsiCo Beverages North America and Quaker Foods North America by 3%, 4% and 20%, respectively.
Since 27% of PepsiCo’s net sales come from Frito-Lay, PepsiCo will "need to increase investment in promotional discounting beyond their initial plans to improve their volume trends," financial service firm TD Cowen shared in a recent whitepaper. TD Cowen’s retail tracking data found that Frito-Lay's salty snacks sales dropped 0.7% in the 12 weeks, ending June 1, for a decline of 50 basis points.
TD Cowen now expects a stock price target of $190, down from its previous estimate of $200. PepsiCo stock dropped following the release of the quarterly results. PepsiCo stock was trading at $161.36 at 10:08 ET on July 11, compared to $163.59 at the closing bell the previous day.
‘Some parts of the portfolio need value adjustment’
Last year, PepsiCo — like many CPG companies — increased prices on a number of its products to stay ahead of inflations and supply-chain expenses and raised prices by 5% in Q2 2024.
Laguarta acknowledged some pricing and promotions might be needed for Frito Lay products, but he pushed back on broad price cuts.
"Some parts of the portfolio need value adjustment. Some parts of the portfolio do not. ... We need some new entry price points and probably some new promotional mechanics that do not expect the consumer to invest so much cash in a purchase of salty [snacks]. So, there are adjustments that we have to make for certain consumers — some parts of the portfolio. I do not think the overall portfolio needs a reset. This is going to be about granularity. It is going to be about good execution of that granularity. ... There is some value to be given back to consumers after three or four years of a lot of inflation,” Laguarta said.
A recall of Quaker Oats products continues to impact PepsiCo, which "detracted approximately 60 basis points from [the company's] total organic revenue growth rate in the second quarter," the company shared in prepared remarks. PepsiCo expects its Quaker Oats supply chain to be “almost 100%” back by Q4 2024, Laguarta said on an investor’s call.
Clean-label, functional products provide to provide 'a good runway'
PepsiCo’s Gatorade business continues to cede market share to category newcomers, such as PRIME, but its other beverages are growing. The Mountain Dew brand is “back to growth,” after making the fan-favorite Baja Blast flavor a permanent addition to its portfolio, Laguarta said on an investor call.
PepsiCo continues incorporating more zero-sugar products into its portfolio, including Gatorade, soft drinks, tea and coffee, he added. Previously, PepsiCo committed to 67% of its beverage portfolio having 100 calories or fewer from added sugars per 12-ounce serving by 2030, as part of its PepsiCo Positive (pep+) corporate strategy.
“The zero part of the portfolio is booming. If you think about consumer trends, clearly, we know where they are going. We know that internationally, and we know that is going to eventually happen here in the US,” Laguarta said on an investor call.
Additionally, PepsiCo is seizing opportunities in the better-for-you and functional energy drink category, Laguarta noted on the investor call. Earlier this year, PepsiCo’s Rockstar brand released Rockstar Energy Focus, a functional energy drink with lion’s mane and 200 mg of caffeine per 12-ounce can.
“We are able to provide energy in a consumer-friendly way, including price ... but I would say functionality [and] clean labels, I mean a lot of the things that the category has been working on — that should be a good runway for that segment of the category. It has been value-creating for a lot of us that participate in it, including retailer partners and the brand owners,” Laguarta said on an investor call.
PepsiCo to focus on ‘productivity initiatives, ... disciplined commercial investments’ in second half of 2024
PepsiCo saw net revenue growth for Q2 2024, ending June 20, come in at 0.8%, down from 2.3% in the first quarter of 2024. Similarly, organic revenue growth dipped in Q2, coming in at 1.9% and 2.3% for the year, down from 2.7% from the previous quarter.
PepsiCo now expects organic revenue growth to come in at approximately 4% for the year, which was previously forecasted for at least 4%. Additionally, the company expects to increase core constant currency earnings per share (EPS) by at least 8%, in line with previous guidance.
“During the second quarter, our business delivered net revenue growth, strong gross and operating margin expansion and double-digit EPS growth, remaining agile despite facing difficult net revenue growth comparisons versus the prior year, subdued category performance within North America convenient foods and the impacts associated with certain product recalls at Quaker Foods North America,” Laguarta shared in a press release.
He added, “For the balance of the year, we will further elevate and accelerate our productivity initiatives and make disciplined commercial investments in the marketplace to stimulate growth. These investments will focus on surgically providing optimal value propositions within certain portions of our North America convenient foods portfolio, amplifying our advertising and marketing initiatives and leveraging our go-to-market distribution capabilities to enable more precise marketplace execution.”
