PepsiCo’s ‘strong’ brand and innovation programmes drive growth despite inflation

The FMCG giant is looking to build “sustainable results over a long period of time”, which means continuing to invest in its brands even as cost inflation bites.

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PepsiCo CEO Ramon Laguarta has credited strong brand, channel and innovation programmes as the “main reason” the FMCG giant has been able to deliver continued growth despite record breaking inflation levels.

The business is seeing low elasticity of demand as it raises prices to offset rising costs, Laguarta said on a call with investors today (12 July).

According to Pew Research Center analysis, inflation rates have doubled in 37 of 44 advanced economies over the past two years. Meanwhile, the UK’s Office for National Statistics revealed consumer price inflation rose to 9.1% in May, its highest rate in 40 years.

Yet, PepsiCo has managed organic revenue growth of 13% over the second quarter of this year, up from 12.8% compared to the same period in 2021. Core operating profit increased 8% despite inflationary pressures on operating expenses, and the business expects full-year organic revenue to increase from 8% to 10%.

For PepsiCo, the company’s “number one responsibility” as a large player in snacks and beverages is to make sure the category continues to grow “under any circumstances”, as that ensures the continued health of the business, Laguarta said.

“Everything we’re doing in our commercial plans, both in the US and outside the US, is to make sure we have strong brand programmes, channel programmes, execution programmes and innovation programmes that continue to make our category preferred over other categories. And we’re seeing that,” he explained.

“That’s the main reason [behind] the growth we’re delivering and lower elasticity we’re seeing around the world.”

PepsiCo also reported market share gains in the macro-snack and savoury snack categories for Q2 and the year-to-date around the world, including in the US, China, the UK, India, Saudi Arabia and Turkey. Share gains for beverages were achieved in Mexico, Brazil, China, Egypt and Vietnam.

Laguarta said these gains are a consequence of investments PepsiCo has made in its brands over “several years”.

“We’ve strengthened our go-to market capabilities, our digital capabilities, our brands are looking more modern and engaging, and our innovation is great,” he said.

However, Laguarta said the business does have concerns when it comes to the toll inflation and the rising cost of living may have on consumers with lower incomes.

“That’s where we’re all looking more carefully and making decisions on entry points in the categories, and [figuring out] how we continue to have that particular consumer engaged in our categories.”

Balancing the long and short

Meanwhile, the business is looking to reach higher return on investment (ROI) across all costs in the business, including trade promotion and marketing. As the firm’s two “big demand creation budgets”, work has been undertaken to optimise investment through more intelligence, data and more precise decisions.

“This is a journey I would see as continuous, to optimise all the budgets we have [and] maximise return,” Laguarta said, suggesting resources could be moved out of trade promotion to areas where PepsiCo can drive “better” demand generation.

CFO Hugh Johnston added that improvements in cost productivity have enabled PepsiCo to take a “more consumer-centric approach” to dealing with inflation and subsequent pricing action, as the business isn’t “forced” to pass all costs on to its customers.

The business believes its investments are now at the “right level”, with Laguarta confirming PepsiCo plans to continue putting money behind its brands as inflation continues to leap.

Johnston adds: “The way we’re collectively trying to run the company is to build sustainable results over a long period of time, and that means you’re constantly balancing delivering the near term, while making sure you’re building capability for next year and the year after.

“I think we have the right balance on that right now, and we’ll see as the results come in whether we need to make adjustments.”