PepsiCo's Beverage Profitability Rises 21%, Despite 6% Volume Slump
PepsiCo's Beverage Profitability Rises 21%, Despite 6% Volume Slump
"We've been a bit more aggressive than in the other businesses regarding volume optimization."
North American Beverages are king over at PepsiCo. The division in charge of soda, tea, and energy drinks posted a 21% rise in operating profit to $970 million. The surge in profitability was contrasted by a 6% volume decline, marking a calendar year of such drops. The enterprise has raised prices by double digits for seven consecutive quarters, making the volume declines unsurprising. As a company, PepsiCo reported a 9% surge in organic revenue this quarter, tallying a year-to-date growth of nearly 12%.
The decline in volume paints only part of the picture because this decline is intentional. Or at least that's what management is saying.
"There are two big variables we're trying to optimize," Chairman and CEO Ramon Laguarta told investors earlier this week. Consumer interaction, which is measured through units sold and overall business margin. "In both cases, units are growing much faster than volume."
Laguarta is describing the holy grail of manufacturing: a switch from volume to value. For instance, instead of selling a 12-pack of 12-ounce sodas at $5.98, the company aims to sell a 10-pack of 7.5-ounce sodas for $5.78. This tactic nearly doubles the price-per-ounce, allowing Pepsi to elevate margins and pitch a "healthier" alternative to consumers. "We've been a bit more aggressive," he admitted, "than in the other businesses regarding volume optimization."
Beyond boosting margins, this strategy has the ancillary benefit of shrinking PepsiCo's manufacturing base and cutting fixed costs. Reduced facilities mean no need to hit high-volume targets to offset fixed production overheads. It's a play for higher profitability per transaction—a move reminiscent of auto manufacturers who shifted to pricing based on value after shuttering several plants post-Great Recession.
PepsiCo's state of the consumer:
Consumers are becoming more selective, opting for value channels; however, key indicators show resilience. The convenience store channel, typically affected by gas prices and consumer income stress, reported a 5% increase in beverage revenues and an 8% rise in food sales for Q3.
Food service, another leading indicator, continues to exhibit double-digit growth.
The company is planning 2-3% price increases this year.
Instacart Investment
In August of 2023 PepsiCo invested $175 million in food delivery app Instacart. Management said it was nothing more than a minor commercial investment but alluded to a larger strategic possibility.
"There is a commercial relationship trying to enhance the capabilities of our DSD system," Lagurta said, "with the shoppers that they have in store, and that is a continuous focus."
It is hard to speculate on how this plays out, but DSD is the company's backbone, one of its core strategic advantages. It's also highly unionized.
Changing consumers, not weight loss drugs, drive change.
Executives rightly punted on the impact of weight loss drugs on consumption. Generally, I think this is a dumb line of questioning, but it does point to a broader point: PepsiCo makes money to sell unhealthy stuff. How is that sustainable?
The answer is in changing trends. Urbanization and middle-class growth propel adoption in beverage and snack categories, with evolving lifestyles leaning towards mini-meals and unstructured eating patterns.
Getting healthier. The company has been actively reformulating its product portfolio over the past 5-6 years, emphasizing reduced sodium, fat, and sugar content, and introducing innovative cooking methods, positioning them for potential future shifts.
They said it:
CFO Hugh Johnston on future price increases:
If you think of pre-pandemic inflation being kind of in that 2%, 3% range, inflation is going to be a little elevated relative to that. And our pricing will be roughly in line with inflation. So that should at least give you a rough sense as to how things might shake out.