The Rising Influence of Rising Affluence

[DewDiligence]

PEP has encountered many of the same problems as PG, particularly
the sharp price increases of raw materials. The key difference that
explains the disparate performances of the stock prices following
the most recent quarterly results is that PEP gave its mea culpa
three months ago (#msg-72324630), but PG didn’t.

http://online.wsj.com/article/SB10001424052702304811304577367623168044462.html

›PepsiCo Slips Despite New Ads

April 26, 2012, 1:28 p.m. ET
By MIKE ESTERL

PepsiCo Inc.'s snack business is going strong but the company continues to struggle to halt rival Coca-Cola Co., which has been taking away U.S. soda market share.

World-wide snack revenue grew 7% in the first quarter from the year-earlier period, PepsiCo said, but beverage sales expanded just 2%. Commodity costs continued to weigh on results, it added.

The maker of Lay's potato chips, Quaker oatmeal and its namesake Pepsi-Cola said many consumers are agreeing to pay higher prices for its big retail brands, which also include Doritos corn chips, Tropicana orange juice and Gatorade sports drinks. It raised prices 5.5% globally, including 6% at its Frito-Lay North America snack unit, where revenue rose a more modest 4%.

Those price increased helped overall first-quarter sales rise 4.1% from a year earlier to $12.43 billion but net income slid 1.4% to $1.13 billion, weighed down by higher commodity costs and ramped-up marketing efforts.

PepsiCo has 22 brands that each generate annual retail sales of at least $1 billion.

Food and drink companies are performing a juggling act as they try to pass along rising commodity costs for items such as corn, potatoes, aluminum and plastic without losing customers. PepsiCo said its commodity inflation totaled $300 million in the first quarter and that it expects commodity costs to increase this year by about $1.5 billion, or roughly 7%. [But these price increases in raw materials should moderate heading into 2013, according to PG (#msg-75125839).]

U.S. advertising expenditures increased 25% in the first quarter, PepsiCo said, part of a planned marketing budget increase of as much as $600 million globally in 2012 to breathe new life into its brands. It warned in February that its profit will fall 5% this year as it targets $1.5 billion in new cost savings by 2014, including 8,700 job cuts.

Beverages remain a work in progress after Diet Coke surpassed Pepsi-Cola in 2010 to become the No. 2 selling soda in the U.S. behind regular Coke. PepsiCo said Americas-wide beverages volume and revenue slipped 1% and 2%, respectively, in the first quarter, as operating profit slumped 6% from the year-earlier period. Soda volumes dropped 2% but non-carbonated beverages rose 1% at the regional unit, which generates more than a third of company revenue.

PepsiCo said its Americas beverage results were affected by accounting changes following the refranchising of its Mexican drinks business, which reduced net revenue by 4 percentage points. But it pointed to signs of improvement in the U.S., where convenience-store sales remain strong despite high gas prices.

Some investors suggested last year that PepsiCo should split up the company so that its snacks aren't dragged down by the underperforming beverage business. The company has rejected such calls, arguing the two businesses provide much-needed scale.

Chairman and Chief Executive Indra Nooyi told investors Thursday that PepsiCo's U.S. beverage market share in stores rose 0.1 percentage point in dollar terms in the first quarter. That doesn't include sales at fountain-service accounts such as restaurants, where Coke is the market leader. Coke said last week it gained U.S. beverage market share in dollar and volume terms in the first three months of 2012.

PepsiCo said its mid-calorie cola, Pepsi Next, which was launched in March with roughly half the calories of a regular cola, has quickly captured about 1% market share in the U.S. in dollar terms.

"It's really bringing back lapsed cola users,'' said Mrs. Nooyi on a conference call, although she cautioned it is still too early to gauge Next's long-term impact.

PepsiCo, based in Purchase, N.Y., said its [color=red]snack and beverage revenue grew 13% in emerging markets in constant-currency terms[/color=red]. Mexican beverage volumes rose 11% after restructuring its bottling business there. Global revenue from the company's expanding nutrition portfolio surged 10%.

But its Quaker Foods North America unit underperformed, with revenue dropping 3% to $623 million and operating profit falling 12% to $187 million from the year-earlier quarter. PepsiCo attributed most of the profit decline to an inventory accounting change that boosted last year's numbers.‹