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 other packaged food and drink companies, 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 rival 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, says it was able to push up prices by 5.5 percent in the latest quarter on the strength of its brands. The increase is reflective of the price at which the company sells its products to retailers but typically trickles down to consumers.
The Purchase, N.Y.-based company said the hikes helped offset a $300 million increase in costs for ingredients for the quarter. The increase was spread across a vast number of ingredients, including aluminum, corn, packaging material and fuel for trucks transporting products.
Chief Financial Officer Hugh Johnston said in a conference call with investors that additional price increases are in store, with commodity costs expected to increase 7 percent for the year.
"So far, the consumer seems to be accepting that pricing and understanding that there's inflation," Johnston said.
To help defray higher commodity 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 said it 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. The 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 slipped 24 cents to $66.42 in morning trading.
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 increased advertising dollars 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 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 contribution of new products such as Next and its 24-ounce Mountain Dew cans to the company's revenue.
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.
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.
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.