PepsiCo Struggles Despite Economic Optimism

PepsiCo, a significant player in the beverage and snack industry, delivered a mixed bag of quarterly results, indicating a dwindling demand for its products in North America.

The company’s chief executive officer, Ramon Laguarta, pointed out a broad slowdown in U.S. sales during the last quarter. He linked this decline to a price increase and a challenging disposable income situation among consumers. Interestingly, consumers’ habits are changing. Instead of consuming food and beverages at home, many are turning to convenience stores for their fix of snacks and drinks like Gatorade.

Despite these challenges, Laguarta remains hopeful. He is banking on a favorable consumer environment driven by low unemployment rates. He also expects a potential fall in interest rates by summer and an increase in wages outpacing inflation.

On Friday, the company’s share prices fell by 3.5%.

In terms of earnings, PepsiCo reported adjusted earnings of $1.78 per share, beating the expected $1.72 per share. However, the company fell short on revenue expectations. It reported $27.85 billion against an expectation of $28.4 billion.

The company witnessed a notable increase in its net income for the fourth quarter. It rose to $1.3 billion or 94 cents per share from $518 million or 37 cents per share during the same period the previous year.

PepsiCo’s net sales dipped slightly by less than 1% to $27.85 billion. This marks the first occasion since 2020 where the company’s quarterly revenue fell compared to the previous year. Fluctuating currency exchange rates were a significant factor in this decline, pulling net sales down by 1.5%.

Despite some shortfalls, PepsiCo’s organic revenue, excluding any acquisitions or divestitures, rose by 4.5% during the quarter. This improvement was primarily due to price hikes. However, these same increases have negatively impacted the demand for the company’s products.

PepsiCo’s leadership highlighted that high borrowing costs and lower personal savings have tightened consumer budgets, particularly in North America. They noted a trend in consumers preferring smaller pack sizes due to convenience and affordability.

Some of PepsiCo’s divisions reported drops in volume, such as North American Quaker Foods, which had an 8% decline. Product recalls of granola bars and cereals along with slower growth in the category impacted sales this quarter. Similarly, Frito-Lay North America, featuring brands like Cheetos and Doritos, experienced a volume drop of 2%, while the North American beverage division saw a 6% volume decline.

Looking ahead, PepsiCo projects a 4% increase in organic revenue and at least an 8% rise in core constant currency earnings per share for 2024. The company also expects a weaker first half of the year due to product recalls in its North American Quaker Oats business and international conflicts impacting sales in certain regions. However, the company is still hopeful for stronger international organic revenue growth than North America for the full year.