In The Spotlight: Indra Nooyi, PepsiCo

By | 13 June 2008

Under the stewardship of CEO Indra Nooyi, PepsiCo has so far been able to shrug off the rising costs and economic slowdown that has taken the shine off many food companies. Nevertheless, Nooyi remains only too aware of the dangers presented by the current economic climate. Katy Humphries reports.

These are troubled times for the food industry. Costs of fuel and energy are spiralling. The price of raw materials, commodities, ingredients and packaging is soaring. Add to this, the economic slowdown that has been witnessed in many of the world's largest economies and it is easy to see how some food companies are finding the going tough.

It was with this backdrop that PepsiCo CEO Indra Nooyi took to the stage at the Wall Street Journal's Deals and Deal Makers conference this Wednesday (11 June) to call on Washington to take action over rising commodity costs. 

"There is no bust in prices in sight. It is very worrisome, and what really surprises me is that I've not seen anyone in Washington saying this crisis is the biggest we've had. I just don't see the leadership," Nooyi's warning rang out.

Policy makers must "figure out what they're going to do about it" before US consumer spending slows, she said.

As head of a company that controls such brands as Quaker Oats and Lays potato chips, Nooyi said skyrocketing commodity prices are one of her biggest worries.

In April, PepsiCo revealed plans to raise prices in order to offset higher costs for cooking oil, oats, wheat, corn and energy. At this time, Nooyi predicted commodity inflation of 9-10% for the year.

While the food industry is - to a certain extent - buffered from recession, Nooyi observed that rising energy prices represent a serious challenge, as they are also likely to eat into discretionary consumer spending.

In an attempt to curb spending, consumers are increasingly switching to cheaper own-brand products. This makes maintaining brand relevance one of the largest challenges facing brand manufacturers.

Nooyi became PepsiCo CEO in 2006, having served as CFO and president at the food and beverage giant for eight years. Before taking the helm at PepsiCo, Nooyi played a pivotal role in the spin-off of PepsiCo's restaurant operations as Yum! Brands, was instrumental in the 1998 acquisition of Tropicana and oversaw the transformational merger with Quaker.

Under Nooyi, PepsiCo has responded to the need to remain relevant by further increasing its focus on health and wellness. Product development, reformulation and marketing have all centred on this new emphasis.

Nooyi has seen the elimination of trans-fats through the use of sunflower oil, while sugars have been reduced or eliminated. Frito-Lay has introduced a Flat Earth line of baked fruit and vegetable crisps and, most recently, Pinch of Salt reduced-salt crisps were brought to market.

Ironically, given the company's increased emphasis on nutrition, Nooyi said slowed consumer spending has not hit PepsiCo because many consumers look to the snack food giant's "fun-for-you" range for comfort.

Since becoming CEO Nooyi has also reorganised the group to accommodate international growth. The company's operating units have been divided into PepsiCo International, PepsiCo Americas Foods and PepsiCo Americas Beverages.

And it is this strategy of fostering international growth has been key in PepsiCo's ability to shrug-off a fall in US consumer spending.

When the company posted its first-quarter results in April it booked a 10% jump in profits as earnings from its overseas businesses leapt by more than a quarter.

Earnings from PepsiCo International grew by 26% to US$241m, with sales up 27% to $1.8bn.

These gains helped PepsiCo deliver profits of $1.6bn during the three months to the end of March, and allowed the company to reiterate its full-year outlook. PepsiCo sees volumes rising by 3-5%, revenues climbing in "high single-digits" and earnings per share of at least $3.72.

In the near-term, it looks certain that through leveraging its brands, increasing its relevance, tapping into key trends and nurturing development in international markets, PepsiCo will successfully buck the economic downturn that has depressed the results of various food groups.

However, in the longer term Nooyi is perhaps wise to be worried about the constricting economic situation.

As she warned the industry conference in New York: "Food prices have gone up and consumer spending is really getting squeezed. Yes, you can pass the costs on to the consumer, but at what point will they stop buying?"

Sectors: Commodities & ingredients, Emerging markets, Health & wellness, NPD & innovation, Snacks

Companies: PepsiCo, Yum!

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