PepsiCo's health kick working for now

The Lex Column
July 13, 2017
AFR

Order your Mountain Dew Code Red drink with one click of the soda’s mobile app? Not quite yet.

PepsiCo, the drinks and snacks juggernaut that owns the Mountain Dew brand, said this week that it was thinking hard about ways to get products into the hands of consumers as they change how they shop. 

Such reflection should be expanded to address a worrying lack of volume growth.

For years, Pepsi (and other consumer giants) has been building and buying healthy, hipster brands with better margins than its eponymous sugary water. But consumer tastes are changing alongside shopping habits, as Whole Foods conceded when it decided to sell out to Amazon.

Nevertheless, Pepsi delivered another steady quarter, with year-on-year earnings growth of 13 per cent, and reaffirmed its annual targets of 3 per cent organic sales growth and 8 per cent earnings growth.

Pepsi’s shares are up 4 per cent in the past year. That is below the S&P 500 which has zoomed 14 per cent, but rival consumer stalwarts are also facing trouble. 

Unilever is under siege from 3G Capital. Mondelez is facing chief executive succession questions. And smaller competitor General Mills, whose fate is tied up with the fading breakfast-cereals category, has seen its shares dip a quarter.

Suddenly, Pepsi looks like a safe harbour. Second-quarter results were driven, in what has become a pattern, by pricing gains (3 per cent) rather than volume growth, which was flat, overall.

The company claims that its higher prices for healthier or more convenient drinks and snacks suggests it can obsess less about unit sales.

Already caught in a deflationary cycle and facing competition from Amazon, the question remains how Pepsi can maintain its pricing leverage.

A chunky forward price-to-earnings ratio of 22 times may be unsurprising given its historic resilience. That could start to look rich if drinkers do not start buying more low-calorie soda from their smartphones.

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