Even in the current tumultuous conditions in the stock markets, the slump in PepsiCo’s share price earlier this week in the wake of a disappointing set of results caused a stir among indutsry watchers. Nevertheless, as Dean Best reports, the US food and beverage group believes its planned restructuring and global strength will help it ride out the economic storm.
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In these turbulent times, food stocks are often held up as safe havens for nervous investors.
That confidence in food rests on the premise that, well, we all have to eat. Any cut in consumer spending will, so the argument goes, be made on more discretionary items.
And, what’s more, right now, any downward movement in the share prices of food manufacturers or retailers could be placed squarely at the door of the almost unprecedented period of convulsion seen in stock markets around the world.
However, food, just like any other industry, is at the mercy of changes in consumer habits as the downturn bites. And a fall in a company’s share piece cannot simply be explained away by the chaos in the financial markets; investors are now concerned about the impact the turmoil on Wall Street is having on Main Street.
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By GlobalDataJust ask PepsiCo. Shares in the US food and beverage giant tumbled on Tuesday (14 October) after the company said third-quarter profits had fallen 10% and it then announced plans to lay off around 3,300 workers.
A cursory look at the headlines surrounding PepsiCo on Tuesday suggests the company is finding the going tough. The market for carbonated soft drinks in North America has been weak in recent years but concern over the economy has hit demand still further, eroding PepsiCo’s sales in the sector. Commodity costs are also squeezing the business, both in drinks and in food, which saw any growth in profits lag sales growth. The macro-economic conditions also meant PepsiCo was unable to provide any earnings guidance beyond the current fiscal year, a fact that unnerved some industry watchers.
Nevertheless, PepsiCo believes its business remains strong and the company argues its round of job cuts – part of a wider initiative dubbed ‘Productivity for Growth’ – will enable to it to emerge from the current economic storm in better shape.
“While we can’t control the macro economic situation, we can enhance PepsiCo’s operating agility to respond to the changing environment,” chairman and CEO Indra Nooyi said on Tuesday.
PepsiCo plans to make cuts right across its business and not just in its problematic North American beverage business. The company plans to reinvest the savings from the programme, which, according to the company, stand at US$1.2bn, in revitalising its beverage operations in North America, as well as in developing its snacks businesses in the world’s emerging markets and supporting its food operations in more mature markets from the threat of private-label and discount brands.
“[The Productivity for Growth initiative] will enable us to invest in our businesses, to further improve our competitiveness and to give us breathing room to respond to changes in the market-place,” Nooyi said on a conference call with analysts.
For Greggory Warren, analyst at equity investment research firm Morningstar, the restructuring is both vital and timely, given the economic downturn and deteriorating consumer confidence.
“It’s essential,” Warren told just-food. “Packaged food companies have faced five years of commodity costs increases. They have been trying to find cost-savings and efficiencies throughout the system [but], this year, they had to push through price increases. Given the economic slowdown, they need to be able to hold certain price-points and get cost out of their systems.”
Warren suggested that, among some industry watchers, expectations were high that cost-savings from PepsiCo’s restructuring would improve the company’s bottom line, which he said, would explain the fall in the group’s share price.
“Everyone was talking up the restructuring and that it was going to produce a lot of cost-savings that were going to fall to the bottom line but Pepsi said no, they were going to reinvest the cost-savings back into the business,” Warren explained.
It would be a prudent move from PepsiCo. Broadly speaking, the company’s food businesses at home and abroad are strong, with a burgeoning international business taking the pressure away from more mature snacks markets in North America and Europe. During the third quarter, PepsiCo saw operating profit from its international unit jump 18% on the back of a 20% rise in revenue. Snacks volumes were up 4% as the company saw double-digit volume growth from its snacks businesses in the Middle East, China and India. Snacks volumes in the UK and the EU only inched up 1% but PepsiCo said the result was held back by a calendar change in how it reports its results in Iberia, which reported three weeks’ fewer numbers than a year ago.
Despite the fledging nature of PepsiCo’s business in some emerging markets, the company believes it is likely to provide it with lucrative growth opportunities in the years ahead. “In many parts of the world, per capita consumption of our products is still relatively low, which gives us the opportunity to drive sales ahead of GDP growth,” Nooyi told analysts this week.
Warren said he sees some parallels with arch-rival Coca-Cola Co.’s global presence in soft drinks. “It’s a small part [of the business] at this point, although it is making a lot of effort in Latin America and Asia. The way I look at it is that PepsiCo is trying to be like Coke but in healthy snack alternatives.”
That said, for all the strength of PepsiCo’s food operations, for all the potential of the company’s businesses in emerging markets and for all the theoretical benefits for its restructuring, Nooyi knows this is a testing time for any business, including food manufacturers.
“For all these positives, there is no certainty about how this current economic crisis will play out.”
