Barclays Capital Back to School 2014: PepsiCo confident on US snacks despite slowing sales
PepsiCo looks to leverage snacks and drinks cross selling opportunities
PepsiCo is confident its US snacks business can deliver a best-in-class top-line performance despite its recent slowdown in sales growth.
Frito-Lay North America, the group's US snacks division, has delivered a compound annual growth rate of 3.8% over the past five years. According to management, this puts it "at the top of the CPG landscape" in the US.
The company leads the savoury snacks market in the country, with a share of 36.6% of total sales. Growth has been in line with wider sector trends. Research firm IBISWorld forecasts the sector's annual growth will total 3.8% between 2009 and 2014.
IBISWorld forecasts category growth will accelerate. "Forecast increases in household disposable income and continued innovation of healthy snacks will help drive demand for industry products, boosting industry revenue in the five years to 2019."
However, in its most recent quarterly update, PepsiCo revealed its own revenue growth slowed to 2% in the three months to 15 June.
As Wells Fargo analyst Bonnie Herzog observed in an investor note: "Frito Lay has reported mid-single digit revenue growth for its FLNA division every quarter for the past three years until this quarter, in which it reported only 2% organic revenue growth. We believe next quarter will remain in line with this quarter's moderated result."
In spite of this sales slowdown, Frito-Lay North America management remained upbeat about the group's top-line prospects.
Speaking at the Barclays Capital Back to School Consumer Conference in Boston yesterday (4 September), the unit's president Tom Greco stressed Frito-Lay sales have outpaced its peers in the US CPG sector this year.
"In 2014, PepsiCo is by far the largest contributor to food and beverage growth year-to-date. We've contributed almost two times the growth dollars of the next closest CPG competitor in the US and... many companies are actually declining," he said.
The company is using its complementary product line-up across its snack and beverage portfolio as a competitive advantage to lift its sales trajectory above the market average, Greco continued.
"Since our brands frequently compete in common demand spaces, we're able to leverage a common demand framework," Greco explained.
PepsiCo's snack volume sales and inventory display levels have been raised through the utilisation of joint displays with drinks brands. Snack inventory in joint displays was 53% higher than regular displays and the group also benefited from a lift in volumes, Greco said.
He stressed PepsiCo's customers have been keen to benefit from this trend.
"Our customers fully recognise this and they help us bring this to life in the marketplace. At Dollar General, Doritos and [Mountain] Dew is a part of year long program which has driven co-purchase transactions up 21% at DG. We also leveraged Doritos and Dew with our Latino consumers with Juntos Disfrutamos Más."
PepsiCo is also driving margin growth through closer integration of business functions across disparate units as it works to take advantage of the "scale benefits" presented by its global food and drinks businesses.
"We actually see a lot of room continued scale benefits here in North America as we look for ways to leverage the entire business here," Greco said.
For 2014, the company as a whole has targeted productivity savings of approximately US$1bn.
At Frito-Lay North America a "laser focus" on productivity "has led to a 6% CAGR on core operating profit and 2.7 points of operating margin expansion", Greco revealed.
Within the supply chain, the group has continued to roll out its "geographic enterprise solution programme" and a growing use of automation has helped strip out costs.
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