PepsiCo raises full-year guidance on portfolio performance, braces for challenges in sports and energy categories

By Ryan Daily

- Last updated on GMT

Image Credit: Getty Image - Kwangmoozaa
Image Credit: Getty Image - Kwangmoozaa

Related tags Pepsico Frito-lay Pepsi Gatorade Energy drinks

PepsiCo beat second quarter expectations with its Frito-Lays and PepsiCo Beverages North America divisions posting double-digit organic revenue growth, but the company faces several challenges across its business, especially in the energy and sport drink category, in the second half of the year.

For the second quarter ending June 17, 2023, PepsiCo's net revenue grew 10.4%, and net income came in at $2.748bn, compared $1.429bn from the same period last year. With these results, PepsiCo raised its full-year guidance​ and expects organic revenue for the full fiscal year to come in at 10% growth and core constant currency EPS growth at 12%, previously forecasted for 8% and 9%, respectively.

Our strong performance and the progress we are making on our strategic priorities give us confidence that the investments we are making to become an even faster, even stronger, and even better organization by winning with Pep+ are working,​” PepsiCo chairman and CEO Ramon Laguarta shared in a press release. “Moving forward, we will look to elevate our focus on productivity initiatives to further support investments in innovation, brand building, digitalization, and sustainability to win in the marketplace and fortify our businesses for the long-term.​”

Consumer stick with brand despite inflation

Heading into this year, PepsiCo faced lingering supply chain issues and questions about how a possible recession will impact its bottomline, and while these persists, several areas are improving and helping the overall business, Laguarta shared on a call with analysts.

On the supply side, things have become much better. We're seeing much better flow of materials from suppliers. We're seeing, in general, a better labor market, and that has helped us to run a better company,​” Laguarta said. “That's why you will see that our costs are performing better.​"

And while consumers are facing a number of economic pressures, the “majority of consumers stay within [PepsiCo’s] categories​” and brands, Laguarta noted.  Part of the reason why PepsiCo hasn’t seen more trade down is that “unemployment is very low in most of the economies... [in] developed markets but also developing markets,​” he added

However, PepsiCo has noticed consumer adjust how and where they shop in respond to high prices, and “lower income consumers [are] strategizing around ... optimizing their budgets,​” Laguarta said.

We're seeing consumers shopping in more stores than before. They're looking for better deals. They're starting to look for optimization; they're going to channels that have better-perceived value. They're buying more in dollar stores or buying more in mass or in clubs. So, every segment of the consumer is making an adjustment.​”

PepsiCo prepares for challenges in sport and energy drinks

PepsiCo Beverages North American saw 10% organic revenue growth in the second quarter, lead by Gatorade, which saw double-digit net revenue growth, and Pepsi, Starbucks, and Rockstar saw high-single-digit net revenue growth. This growth comes at a time of increased competition in the sports drink category with newer entries like Prime​ making a dent in Gatorade’s shelf space, Laguarta admitted.

It is true that there are some new entrants in the category, like Prime, that have taken some space, especially with younger audiences. They'd been affecting Gatorade, but they'd been affecting more some other brands in the category that had that kind of profile. So, we feel good about the execution. We feel good about how the brand is performing. We've increased advertising substantially against Gatorade, and we'll continue to do so in the back end of the summer and the year.”

PepsiCo has expanded its sports nutrition portfolio with products like Fast Twitch and moved into the supplement space with Gatorade Zero and Propel Immune Support tablets. To further support sports drink development, PepsiCo opened the Gatorade Sports Science Institute Research & Development​, which will track consumer changes in the space.

Navigating the evolving energy drink landscape

PepsiCo also faces challenges to its energy drink business with newer brands like Alani Nu, C4, and Celsius—which the company has a strategic distribution partnership with​—seeing success in the market. When asked about the partnership strategy and its impact on PepsiCo’s business, Laguarta shared how Celsius is attracting new consumers into the category and committed to its energy drink brands like MTN DEW and Rockstar.

Celsius is a brand that is capturing new consumers to the energy category consumers that were not consuming energy drinks for many reasons in the past,​” Laguarta said. “The category keeps expanding and we're glad that that's in our portfolio. And we're working together with sales just to see additional international opportunities whether we can expand the brand in some other some other markets.​”

In addition to these market activities, PepsiCo is still committed to deliver zero-sugar Pepsi, Mountain Dew, and Gatorade offerings and will look to refresh its line of teas and sparkling and functional waters in the future.

Frito-Lay growth led by advertising and marketing spend

On the snack side of PepsiCo’s business, Frito-Lay’s core operating profit outpaced beverages and increased by 14%, led by its product diversification, responding to consumer product demands, and increases in advertising and marketing spend. Lay’s Doritos, Cheetos, Ruffles, PopCorners, Sun Chips, Bare, and Off the Eaten Path each delivered double-digit net revenue growth.

PepsiCo also responded to demands for smaller snack sizes and spicier flavors. Recently, the company released bite-size versions of its Doritos, Cheetos, and Sun Chips brands with Frito-Lay mini with more options to be released. The company has ­­expanded the Flamin’ Hot flavor to Doritos, Cheetos, Funyuns, Fritos, and Chester’s.

PepsiCo is expanding the occasions Frito-Lay is offered with a focus on street food offerings. For instance, the Doritos and Fritos Walking Taco is inspired by street foods, and Doritos After Dark is a restaurant pop-up that provides Doritos-inspired recipes and products using Frito-Lay products as ingredients.

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