Pepsi to place less reliance on cola as it shifts to healthier options

Arrangement of PepsiCo mega brands inlcuding 7UP, SunChips, Lipton, Tropicana, Quaker, Lay's, Pepsi, Mountain Dew, Doritos, Cheetos, Sierra Mist, Mirinda and Gatorade - image courtesy of PepsiCo
Arrangement of PepsiCo mega brands inlcuding 7UP, SunChips, Lipton, Tropicana, Quaker, Lay's, Pepsi, Mountain Dew, Doritos, Cheetos, Sierra Mist, Mirinda and Gatorade - image courtesy of PepsiCo.

Global soft drink giant PepsiCo released its first quarter results for 2016 this week revealing that it is currently receiving less than 25% of its global sales from carbonated soft drinks.

PepsiCo’s Q1 2016 Earnings Call revealed that the makers of Pepsi, Gatorade, Mountain Dew and Naked juices now gets less than 25% of its global sales from soda, and just 12% from its Pepsi range.

The PepsiCo decision to move away from its revenue reliance on carbonated soft drinks is a result of intensifying competition faced by the world’s biggest soda brands, and a backlash for its bad image stemming from the perception that its products fuel the obesity epidemic in markets such as the US.

‘Healthier’ Pepsi products

PepsiCo CEO, Indra Nooyi, said during the recent results call that Pepsi had been shifting its beverage range to lower-calorie products and increasing the nutritional profile of the company’s snacks and foods in order to accelerate growth in strategically advantaged subcategories.

“Guilt-free products account for approximately 45% of our portfolio by revenue, and the growth of our everyday nutrition products, which accounts for a quarter of our global net revenue, is outpacing the growth of the balance of the portfolio,” she said.

“And we’ve had a significant amount of activity underway to transform the portfolio.”

This activity has included a broadening of its beverage portfolio to lessen the reliance on colas, with PepsiCo also investing in creating advantaged sweetener solutions and lower-calorie products.

The new shift in its beverage portfolio has also focused on marketing products with fewer calories – such as the Mountain Dew Kickstart which contains just 40 calories per eight ounces, compared to 100 calories for Pepsi.

The focus on increasing PepsiCo’s nutritional profile has also seen the introduction of products such as Smartfood Delight, reduced fat Doritos and gluten-free Quaker Oats.

PepsiCo’s new healthier products have had a positive effect in the first quarter, with Mountain Dew Kickstart posting 34% volume growth after generating more than $300m in estimated retail sales in 2015.

Smartfood Delight grew over 75% volume during the first quarter while the reduced fat Doritos grew 30%.

This shift towards healthier products comes after PepsiCo reported another quarterly decline in revenue to start 2016, the sixth straight quarter its revenue has dropped.

Slow global growth and declining soft drink sales

This downward trend was explained by Nooyi as coming at a time when “most of the developed world outside the United States is grappling with slow growth.”

She also explained the decline in revenue due to factors such as woes in key-energy-producing nations, where low commodity prices has led to high levels of inflation thus eroding the ability for consumers in those markets to spend.

The stubbornly high US dollar is also another factor in PepsiCo’s recent revenue decline.

Despite a tough operating environment, PepsiCo has said it is performing well with a handful of key brands such as Cheetos, Gatorade and Mountain Dew performing well in markets outside the US.

PepsiCo focus on stopping its continued drop in revenue has involved addressing the 11 straight years of falling demand for carbonated soft drinks in the US.

PepsiCo has shifted about 6% of its US volume from traditional 2-litre packs to 12-ounce packages such as mini cans and aluminium bottles which command higher margins and fetch more per ounce, with smaller sizes a way to resonate with consumers who want to lessen their soda consumption but still enjoy the product.

PepsiCo’s sales declined 3% to $11.86b (US) for the period ending March 19, which was shy of the $11.9b that analysts predicted.

PepsiCo anticipates 2016 adjusted earnings of $4.66 per share, with analysts polled predicting $4.70 per share.

PepsiCo’s shares edged down 9% to $103.68 in afternoon trading on April 19, and have increased 8% over the past year.