Global snack and beverage producer PepsiCo (NYSE: PEP) posted encouraging results for its fiscal-2009 third quarter. But despite sequential improvement, the company will need heavy investment to align its products with shifting consumer trends.

Revenue came in light, at $11.08 billion, a 1.5% decline from the year-ago period and slightly below analyst expectations. However, a 10% year-over-year gain in earnings per share -- $1.09 versus $0.99 -- beat expectations, although results were helped by a lower tax rate. Excluding mark-to-market and one-time items in both periods, EPS rose 2%. Those who prefer to pour from the currency-neutral tap can cite a more respectable 8% increase.

Total company volume, meanwhile, edged up 1%, with snacks doing substantially better than beverages (up 2% and 0.5%, respectively). Yet with both categories in the black, PepsiCo's volume improved on the previous quarter's results.

Segment performance was varied, deserving a line-by-line read. Among the highlights, I have to flag Americas Beverages, where North American net revenue fell 7% on a 6% drop in volume. At 25% of 2008 net revenue, this segment -- and its poor performance -- represents a big challenge for PepsiCo. Commenting on the overall marketplace environment, CEO Indra Nooyi told conference call listeners:

Now, unfortunately in beverages versus foods, there is a free alternative called tap water, and so one has to be very cognizant of that as we think about the outlook for a beverage business.

The company's Gatorade brand -- its second-biggest-selling beverage by volume -- is the ongoing subject of a brand transformation following declines in market share and volume in the first half of the year. Volumes for Gatorade did improve sequentially, but I still question whether the new "G" can be a long-term success.

On a positive note, PepsiCo's U.S. carbonated soft-drinks portfolio captured the No. 1 volume and market-share positions in the quarter. However, that's in "measured channels," which excludes sales from Wal-Mart Stores (NYSE: WMT) and some other retailing locations. In other words, private-label beverage producer Cott (NYSE: COT) could've put up a better fight than those numbers suggest.

So what's PepsiCo's growth strategy going forward? In short, it's focusing on getting the value equation right, and providing products that offer functional health and wellness benefits. In light of ongoing consumer trends, both approaches appear spot-on. Continued...