PepsiCo's 2Q earns up, plans to boost prices

AP News
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Posted: Jul 21, 2011 12:14 PM
PepsiCo's 2Q earns up, plans to boost prices

PepsiCo Inc.'s earnings report on Thursday told two familiar story lines.

One is of an American company benefiting from strong growth in new markets worldwide at a time when U.S. customers continue to cut back on spending. The other is of a firm raising prices on those same customers during a slow economic recovery to keep up with higher costs for ingredients, fuel and aluminum.

The maker of such products as Mountain Dew, Diet Pepsi and Lay's potato chips said revenue for Asia, the Middle East and Africa grew 17 percent, and revenue for Latin American food grew 18 percent. Meanwhile, revenue for Frito-Lay snacks in North America grew 3 percent, and revenue for Quaker oatmeal products in North America was flat.

CEO Indra Nooyi said in a statement the company is "satisfied with the performance of our portfolio overall," but that "the consumer in developed markets continues to be stressed."

The different stories told in Pepsi's earnings illustrate a broader trend among other U.S. companies. At a time when firms are trying to get cautious U.S. consumers to loosen their purse strings in the down economy, some companies also are passing along higher prices to those very customers to offset rising costs for commodities. At the same time, the companies are finding they can create a market for their products in other places throughout the world such as Europe and Asia.

Pepsi officials didn't give details of the price increases and declined to predict how much they may raise prices by year end. They acknowledged the price increases come in a depressed economy, but said they have no choice because of rising costs for commodities. They said they'll watch closely to see how customers react and make adjustments accordingly.

To keep U.S. customers buying, Pepsi also said it plans to spend more on advertising campaigns and offer sales. It will continue introducing new products such as a Hispanic line of flavors for Doritos, Cheetos and other salty snacks, and carafe packaging for orange juice.

Nooyi said that customers are willing to pay for Pepsi's healthier products like Tropicana orange juice, Quaker oatmeal and Gatorade. They're also willing to pay for good snacks, she said. However, they may cut back on drinks.

"We have to be a lot more careful because there are alternatives where you can start trading down pricing," she said. "You can go from packaged beverages to, first of all, bottled water, then to tap water."

John Compton, head of PepsiCo Americas Foods, said he expects his unit's revenue to grow as it raises prices, even if customers buy a lower volume of products. He also said the company is "not pricing to grow profits, we are pricing to cover our commodity costs."

Still, Pepsi said it's facing stiff competition in the U.S. And Credit Suisse analyst Carlos Laboy noted that Pepsi is charging for a new 1.5-liter drink pack the same price that Coke is charging for a 1.25-liter pack.

"Can you speak to the fact that you are having to give an extra quarter liter for free on a very similar package?" he said. "Do you worry that this opens up a slippery slope?"

To that, Eric Foss, head of Pepsi Beverages Company, replied that the company chose prices with the consumer in mind.

Pepsi did not change its expectations on the expense it expects from rising commodity costs. Though key materials that the company needs for packaging and transporting its products, like aluminum and fuel, are up compared with a year ago, they're down from highs this spring

Pepsi reported net income rose to $1.9 billion, or $1.17 a share, in the three months ended June 11, up from $1.6 billion, or 98 cents a share, a year ago. Per-share earnings, excluding one-time items, matched analysts' predictions of $1.21

Revenue rose 14 percent to $16.8 billion, beating analysts' estimates of $16.4 billion.

However, Pepsi also lowered its per-share earnings forecast for 2011, reflecting uncertainty about how much its customers will spend and how much costs will rise.