PepsiCo's third quarter (Q3) results reveal good year-to-year growth within snack division Frito-Lay, despite the continuing challenge of a trade landscape divided between volatile emerging economies and sluggish developed markets.
"Our productivity is funding our growth initiative and is contributing to our operating margin improvement. We’re reaping productivity from across the value chain through the acceleration of global procurement initiatives and coordination of our global supply chain which in turn is enabled by the investments we have made over the past decade in our SAP platform," said PepsiCo chairman and CEO, Indra Nooyi, in the company’s earnings conference call. The operations software firm SAP AG claims to have helped unify operations, standardize processes and increase efficiency across PepsiCo's different divisions.
Nooyi announced that snacks volume has grown by 3% on an organic basis globally both in the quarter and year-to-date, while the same figure for the beverage sector stood at 1%. Frito-Lay North America’s revenue increased by 5% in the quarter.
PepsiCo announced overall growth in key developing and emerging markets for the quarter and over the past year. China had strong double-digit organic revenue growth and in Brazil there was 9% organic revenue growth. Turkey saw 7% organic revenue growth in Q3 and 9% organic revenue growth year-to-date.
The Quaker Medleys platform – which has expanded to ready to eat cereals and bars – was noted as one of the year’s seven new products set to achieve $100m in annual rate sales in the US. Despite this organic revenue declined 1% in the quarter, while net revenue declined 2%. This was put down to an unfavorable foreign exchange translation impact. In this year's second quarter results the Quaker brand was identified as an area in need of "some attention" .
Strongest position in five years
Amit Sharma of BMO Capital Markets - one analyst who participated in the call - commented that Frito-Lay is positioned to post the strongest volume growth that it has seen in at least the last five years.
Nooyi responded saying Frito-Lay’s progress was down to the interesting way in which PepsiCo had segmented the Frito-Lay business.
“We look more at demand spaces rather than just cohorts or day-parts. And looking at demand spaces now, we can see how we can expand the Frito-Lay eating occasions,” she said.
“So, as you look at the overall macro-snack environment, we know how to push salty snacks into taking away cookie occasions, cracker occasions, chocolate occasions by looking at various demand spaces and looking to see what consumers consume for each of those demand spaces,” Nooyi explained.
Nooyi said also that Frito-Lay has become known for looking at breakthrough productivity every three or five years, which in turn drives another three or five years of profit growth.
Emerging market volatility and portfolio management
PepsiCo's overall organic revenue in emerging markets Asia, Middle East and Africa grew 6% in the quarter reflecting organic volume growth in both snacks and beverages, despite political and marketplace volatility in certain markets, in particular Egypt and India.
The company said it had managed the business as a portfolio and had leveraged combined scale and capabilities to build sustainable value as opposed to overreacting to short-term pricing pressures or local value brand initiatives.
Nooyi said that as a result there was an increase in collective market shares for its top strategic international markets that account for approximately 80% of its total international business.
In the US, the company's largest market, grew value, volume and unit market share in salty snacks in the quarter. In Europe snacks volume rose 3%, while beverage volume declined 1%.