PepsiCo boosts marketing by $500 million to Combat Falling Volumes
That's just the start. The beverage giant plans to increase marketing spending by $1 billion in the future.
PepsiCo's fourth-quarter earnings call showed a dilemma facing the consumer goods industry. The giant, which sells Pepsi, Gatorade, and Doritos, saw annual profits increase to $9 billion thanks to a 9% price hike. The price increases had a downside. Overall organic volume dropped by 4%, stirring unease among investors about the sustainability of the whole thing. "I don't believe long-term a company can be successful by raising pricing and selling less," a beverage industry consultant told Bloomberg right before the call.
How does PepsiCo restart volume? The obvious solution would be to lower prices—but it's hard to imagine a reality where that happens en masse. Companies like PepsiCo have spent years and millions of dollars trying to measure elasticities to match price to demand. Frankly, it seems that many companies underestimated their market power—with COVID giving them cover to push through fifteen years of increases in three.
Pepsi management isn't just going to give that price back to consumers.
Instead, they're going to try to juice demand through marketing. The giant announced it increased marketing spending by $500 million last year, planning to double that number in the long term.
The consumer goods market functions by what's called demand-pull. Consumers drive the industry, with retailers wanting to sell things consumers want at the price they'll pay. Manufacturers are sort of on the outside. They produce and market the product but do not directly set consumers' shelf prices. That's reserved for retailers.
It creates a scenario where if PepsiCo lowers its price—there is no guarantee that retailers will reduce the price for consumers and boost sales. Note—generally, the math doesn't add up either. It takes huge volume surges to make up for the lost prices.
So if volumes are dropping, the most cost-effective way to regain it probably isn't through mass price decreases; it's through making consumers think your product is more valuable. And that's through advertising.
This means the big winner in all this isn't so much PepsiCo and other consumer goods giants. They of course love the higher prices.
It's the organizations that own the advertising networks.
If Pepsi decreases price, it will be done through targeted actions
These actions will typically be the addition of value packs and customized promotions.
"There will be some investments in trying to give more value to consumers in a very holistic way, through pack price, promotions," PepsiCo CEO Ramon Laguarta told investors.
Management thinks Frio-Lay's decline is temporary.
PepsiCo projects Frito business to return to profitable volume growth in 2024, despite a Q4 slowdown attributed to shifts from in-home to away-from-home consumption.
The shift impacts unit versus volume dynamics, with away-from-home portions driving growth in convenience stores and other venues at rates 2 to 3 times that of retail, affecting overall volume.
Distribution Costs are Up 40%
PepsiCo attributes the 40% increase in distribution costs over four years to inflation and strategic investments to boost distribution and growth.
PepsiCo has direct store delivery. That means it ships and stocks products directly to retailers. This costs a lot but is a competitive advantage in that it allows the company to control packaging.
Distribution costs typically hit the SG&A line of a consumer goods company, impacting both operational and net profit.
They said it:
CEO Ramon Laguarta on if the company is looking into any major acquisitions:
I would say we don't contemplate at this point any of the structural changes to our business. We continue to think that operating the business has advantages for us in terms of speed of execution and some other elements that -- as we see where the business is growing, in e-commerce, away from home and some other channels of the future, including direct-to-consumer, we think that that's going to create an advantage for us.
We are optimizing the portfolio. We're eliminating parts of the portfolio that were less profitable. We've referred to bottled water. We've referred to some multi-serve parts of the portfolio that were not that profitable.