Author: Pan Xian
In the face of headwinds, PepsiCo, which owns brands such as PepsiCo, 7-Up, Quaker and Lay's, intends to continue to stimulate growth with investments.
According to its third quarterly report released last night, for the 12 weeks ending September 7, 2024, PepsiCo recorded a net revenue of US$23.319 billion (about 164.751 billion yuan), with an organic revenue increase of 1.3%; The net profit was 2.945 billion US dollars (about 20.807 billion yuan). At the same time, the company revised its full-year organic revenue growth to a low-single-digit percentage.
In a prepared commentary, PepsiCo's chairman and chief executive officer Ramon Laguarta attributed the change in the quarter to the downturn in North America and business disruptions due to heightened geopolitical tensions in some international markets, but said the overall business "remains resilient." In addition, he revealed in his earnings call last night that the share of the food business in the Chinese market has increased.
Ramon Laguarta, Chairman and Chief Executive Officer, PepsiCo
Let's take a look.
"Focus and fast"
Let's start with information about the Chinese market.
According to the financial report, for the 12 weeks ended September 7, 2024, PepsiCo Asia-Pacific achieved net revenue of US$1.195 billion (about RMB 8.443 billion) and operating profit of US$262 million (about RMB 1.851 billion). For the 36 weeks ended September 7, 2024, the region's net revenue was US$3.362 billion (about 23.753 billion yuan) and its operating profit was US$718 million (about 5.073 billion yuan).
"2024 is a year of many challenges." In an internal letter seen by Xiaoshidai, Changan Xie, PepsiCo's CEO of Greater China and chief growth officer for Asia Pacific, said that the challenges include consumers becoming more cautious and customer segments becoming more divergent, traditional retailers and distributors becoming more cautious about investing in the market, and disruptive emerging competitors are doubling down on their efforts to consolidate market share.
Even under pressure, PepsiCo China still has something to offer.
Long Jiade said in a commentary that since the beginning of this year, the market share of savory snacks in China, Brazil, India, Australia, South Africa and Pakistan has stabilized or increased. He also admitted in the earnings call that although the share of the food business in the Chinese market is increasing, the growth rate has slowed from double digits to single digits, also due to more cautious consumer sentiment.
Talking about the growth of the food business in China, Xie Changan described in an internal letter that the performance of the business in the quarter "showed a positive growth advantage" compared with the overall category. This is due to the doubling down on consumer activation and GTM to develop unpenetrated regions and channels.
"Despite short-term challenges to consumer sentiment and customer momentum, we remain confident in the long-term prospects of the Chinese market; This means that we need to accelerate the strategies that we already know and work with more determination than ever before, leveraging our strengths, while opening up new areas of growth and strengthening our new capabilities. Xie Changan said.
"I hope that everyone will continue to give their all, focus and complete their tasks quickly, and play their own ownership in the face of challenges and opportunities." She said.
Breakthrough in China
In fact, PepsiCo, which is firmly betting on the potential of the Chinese market, unlocked a number of high-value projects in the third quarter, paving the way for future growth.
In terms of production capacity, in September, PepsiCo, which has made frequent investments in recent years, announced that its Shandong food production base was officially put into operation. The first phase of the plant has a construction area of about 35,000 square meters, an investment in fixed assets of 450 million yuan, and is equipped with two new automated potato chip production lines, with a full annual production capacity of about 25,000 tons, and it will be officially put into operation in only 15 months.
The plant not only marks the expansion of PepsiCo's business footprint in China and the improvement of local supply capacity, but also promotes the further implementation of the group's sustainable development strategy, the PepsiCo Positive Plan.
According to the data, the above-mentioned Shandong base will become PepsiCo's green factory in China, aiming to set a benchmark in greenhouse gas emission reduction and green logistics by equipping PepsiCo with China's first biomass boiler, 100% renewable electricity coverage of the whole plant, and an innovative farm-factory co-city model.
Taking its innovative intra-city model as an example, PepsiCo has established a 10,000-mu potato self-owned and cooperative base in Linyi City, Shandong Province, realizing the operation of potato farms and production bases in the same city, greatly reducing carbon emissions in the transportation of raw materials and promoting the green upgrading of the supply chain.
In terms of product health, PepsiCo launched breakthrough new products in different categories in the quarter.
Among them, the snack brand Lay's launched the "6 Big 0 Additives" [1] (hereinafter referred to as "0 Additives") freshly baked naked rice crackers for the first time. In addition to a simple and clean ingredient list, the new product also features a selection of rice from Northeast China, of which the amount of rice is not less than 74%[2], and through an innovative process, the sweetness of the ingredients is brought out without the addition of sucrose.
It is worth mentioning that this new product belongs to a new sub-brand of Lay's - Lay's Food Research Institute. As the backbone of Lay's brand innovation, its goal is to bring more product choices of different categories and richer taste buds according to the diverse needs of Chinese consumers. It is expected that the new brand will become an important starting point for PepsiCo to continue to expand the boundaries of its snack business in China and respond to local consumer demand.
In addition, the oat brand Quaker continued the innovative idea of adding healthy nutrition and launched a blockbuster new product "probiotic fermented oats". According to reports, the product adopts Quaker's breakthrough fermentation technology, and the fermentation process of oat flour collects five major probiotic strains [3], and contains super fiber Q fermentation small molecules, which focuses on the selling point of "good intestinal absorption" [4].
In the beverage sector, PepsiCo launched a number of new products during the period, among which Gatorade's daily hydration series focused on "light and delicious taste", which successfully broadened the daily life scene and drove business growth.
In addition, 0 sugar, 0 fat and 7 joy are newly launched, which is said to contain "lemon juice extracted from whole fruits", positioning high-end differentiated taste. In addition to new products, PepsiCo Beverage is also actively developing unpenetrated regions and channels, and working with partners to make precise investments to stimulate consumption vitality.
Invest in transformation
Finally, let's pay attention to the overall situation of PepsiCo.
According to the financial report, for the 36 weeks ended September 7, 2024, the group's net revenue was US$64.07 billion (about RMB 452.661 billion), an increase of 0.7% year-on-year, and the organic revenue increased by 1.9%; The net profit was 8.092 billion US dollars (about 57.171 billion yuan), a year-on-year increase of 3%.
"Based on our performance to date and outlook for the fourth quarter, we expect full-year organic revenue growth to be in the low single-digit percentage (note: below our previous guidance of about 4% growth) and maintain our expectation of at least 8% EPS at constant exchange rates, as we focus on disciplined cost management to better adapt to the current sluggish growth environment." Long Jiade said.
He also stressed in the conference call that despite the current obstacles, PepsiCo's category still has considerable potential in the long run.
"In our view, the long-term growth level of PepsiCo's category will not stop at just 1%. By reinvesting in our business, brand support, and innovation this year and next, our category will grow by well over 1%. Snacks and beverages are trillion-dollar categories and are showing healthy momentum in many markets around the world, according to Longgard.
Subsequently, he circled three major priorities, including productivity improvement; The long-term healthy development of the category continues to make consumers support PepsiCo's brands and categories; Develop a successful plan with your partners to create profitable growth for both parties. "What we want to do is control what we can control."
Going forward, investing to capture growth momentum is one of PepsiCo's priorities.
It is reported that for the rest of the year, PepsiCo will continue to invest in marketing activities and brand building to stimulate consumer demand. In terms of medium- to long-term planning, the company will focus on investing in the transformation of productivity and cost structure to balance revenue and profit growth.
"We've been thinking about overall company productivity in a highly programmatic and systematic way, and we've deployed some large platforms and will continue to do so in the coming years." These large platforms drive supply chain automation, including warehouses, manufacturing and distribution centers, Long said. At the same time, the company has invested heavily in data applications to enable digital transformation across the entire value chain to drive growth and productivity.
According to him, under the transformation strategy, PepsiCo began to create global business service centers a few years ago, and now these service centers have developed and can be used more widely in human resources, corporate services, etc.
In fact, this initiative has also landed in China. Last year, PepsiCo established its first global business service center in the Asia-Pacific region, which is the company's sixth business service center in the world, supporting the implementation of its digital strategy and continuous improvement of innovation.
Looking back on the transformation results, Xie Changan mentioned in the above-mentioned internal letter, "Thanks to the integration plan and accelerated implementation of digital transformation, business planning and resource deployment have become more accurate, coherent and collaborative. Precision marketing at scale and end-to-end business connectivity have led to improved consumer intimacy and omnichannel execution for our brands. ”
After the success of the transformation plan, PepsiCo intends to dig deeper into this competitive barrier.
Longgard revealed that in the coming years, the company will continue to deploy multiple productivity platforms in the United States and international markets to be able to selectively invest in the business, develop the category responsibly, and provide investors with financial returns that meet expectations.
"We are pleased with our performance this year because we still [expect full-year] earnings per share to be at the high end of our long-term target range, even in the face of significant challenges in the consumer market." PepsiCo believes the right investment in productivity and cost transformation initiatives will create returns, he said.
For PepsiCo's latest results, Reuters reported that rising prices for food and other products have forced United States consumers to spend less, choose smaller packages and portion sizes, and shop more at large retail stores than convenience stores, which typically account for a large portion of PepsiCo's beverage sales.
Bloomberg pointed out that PepsiCo lowered its full-year revenue guidance, citing lower-than-expected growth and turmoil in international markets, but cutting costs and improving efficiency will enable it to meet its profit targets. The agency also quoted analysts as saying that PepsiCo's failure to cut sales and profit guidance at the same time was "impressive", indicating that its "operating model can still achieve its goals" despite the tougher economic situation.
On the day of the earnings release, PepsiCo's shares closed up 1.92%.
[1] It means that no additional sucrose, monosodium glutamate, sweetener, leavening agent, gelatin, and food flavor are added in the production process, and their content is 0g/100g. The sugar content is shown in the nutrition facts table.
[2] Data source: Product ingredient list
[3] The 5 major probiotics refer to Lactobacillus reuteri myxobacteria, Lactobacillus plantarum, Lactobacillus acidophilus, Streptococcus salivarius subsp. thermophilus, and Lactobacillus deutscillus subsp. Bulgaria.
[4] It refers to the fact that some of the macromolecular nutrients in the oat flour fermented by Quaker probiotics are well absorbed by the small intestine after fermentation into small molecules.