PepsiCo Inc. said Thursday that its first-quarter net income fell slightly from a year ago, as the food and beverage giant hiked prices to try and keep up with rising ingredient costs.
Like many of its peers, PepsiCo is struggling to balance its ever-increasing commodity costs without scaring off budget-conscious consumers with too many price increases. It's a particularly delicate dance for PepsiCo, which is also fighting to win back lost market share from The Coca-Cola Co. in the key U.S. market.
PepsiCo, which makes Tropicana, Quaker Oats, and Lay's potato chips in addition to its namesake cola, has taken measures such as putting fewer chips in a bag to control costs. It also pushed up prices by 5.5 percent in the latest quarter. The increase reflects what the company charges retailers but typically trickles down to consumers as well.
Chief Financial Officer Hugh Johnston said in a conference call with investors that additional price hikes should continue to drive up revenue in the months ahead, but warned that there might be lower volume as a result.
"So far, the consumer seems to be accepting that pricing and understanding that there's inflation," Johnston said.
The Purchase, N.Y.-based company said price hikes helped offset a $300 million jump in ingredient costs for the quarter, which was spread across items such as aluminum, corn, packaging material and fuel for trucks transporting products. Overall, commodity costs are expected to increase 7 percent for the year.
To help defray the expanding expenses, PepsiCo is also implementing a cost-cutting program this year that's expected to save $1.5 billion by 2014; the plan includes a 3 percent reduction in the company's global work force of 300,000. Pepsi anticipates the program will result in charges of about $392 million in the remainder of the year, on top of the $33 million it incurred for the quarter.
For the first three months of the year, PepsiCo said it earned $1.13 billion, or 71 cents per share. That compares with $1.14 billion, or 71 cents per share, in the same period last year. A reduced number of average outstanding shares in the quarter lifted the latest per-share results. Not including one-time items, the company said it earned 69 cents per share, which topped Wall Street expectations for 66 cents per share.
PepsiCo affirmed its outlook for the year, forecasting that adjusted net income would fall by 5 percent. Its shares fell 30 cents to close at $66.37 Thursday.
With the new pricing measures in place, CEO Indra Nooyi said the company can focus on rejuvenating its business in the year ahead. That will include plowing more money into advertising for its flagship brands, including the salty snacks in its critical Frito-Lay unit.
For the year, PepsiCo plans to push up advertising from 5.2 percent of net revenue to 5.7 percent of net revenue. In just the last quarter, it increased advertising dollars in the U.S. by 25 percent. A slate of major ad campaigns is also in store for the coming months.
PepsiCo is also betting that new products such as its Pepsi Next, which has about half the calories of regular soda, will help push up revenue. Johnston said the goal is to eventually double the sales contribution of new products such as Next and its 24-ounce Mountain Dew cans.
For the quarter, total revenue increased to $12.43 billion, up 4 percent from $11.94 billion a year ago; analysts had expected $12.35 billion, according to Fact Set.
The increase was driven primarily by gains in emerging markets; revenue from Europe rose 13 percent and revenue from Asia, Middle East and Africa rose 12 percent. In North America, revenue from the Frito-Lay unit increased 4 percent, while revenue from its Quaker Foods unit fell 3 percent. Revenue at the company's key America beverages unit fell 2 percent, with volume down 1 percent.
With sales slowing at home, PepsiCo is racing to strengthen its foothold in the emerging markets that will be critical for its long-term growth. Last month, the company received regulatory approvals to secure a stake in Tingyi Holding Corp., a drink maker based in Taiwan. The deal triples PepsiCo's manufacturing scale in China.