PepsiCo is increasing prices across business to offset commodity pressure

PepsiCo is increasing prices across business to offset commodity pressure

PepsiCo has increased prices in a bid to tackle commodity costs but, reporting its second-quarter results, the company was upbeat about the performance of its snacks brands.

The US food and drinks giant has decided to take "more pricing across all of our businesses", chairman and CEO Indra Nooyi said yesterday (21 July) after the company posted its quarterly and half-year numbers.

Alongside the results, which included a 6% increase in underlying quarterly operating profit from its Frito-Lay North America snacks business, PepsiCo altered its forecast for annual earnings.

The company is now targeting high single-digit earnings per share growth from last year's core EPS of $4.13. The forecast includes a benefit of two percentage points from currency fluctuation.

The estimate compares to PepsiCo's previous guidance for 2011 of a 7-8% rise in core EPS on a constant-currency basis. That forecast included an estimated one to two percentage point benefit from foreign exchange.

PepsiCo said its new forecast was due to uncertainty over the economy and consumer confidence, while it also cited its expectation that global commodity cost inflation will be "high".

CFO Hugh Johnston said PepsiCo still forecasts the company's commodity bill to rise by $1.4-1.6bn this year but told analysts the group's expectation had "moved to the higher end of the range".

Johnston said: "Second, the commodities environment has been quite challenging this year, and our commodities forecast is a headwind that has moved to the high end of our range. These commodities have appreciated in part due to the depreciation of the US dollar."

PepsiCo has already upped prices on some products. It increased prices on some Frito-Lay lines on 10 July and Nooyi said "early indications" from that business were "positive".

However, moves by PepsiCo and its peers to increase prices come in a challenging trading environment. Weak consumer confidence in the US has had an effect on the number of shoppers visiting stores but Nooyi said PepsiCo's Frito-Lay had managed to withstand the pressure. She also suggested that consumers were willing to pay higher prices for snacks products.

"Given the reduced retail traffic, the fact that Frito-Lay North America continues to perform well in this environment speaks to the relatively high resilience of salty snacks and the strength of the Frito franchise," Nooyi said. "Snacks, there isn't much of an alternative for snacks. It's just a great crisp, and people are willing to pay for that."

Nonetheless, despite plans to increase prices throughout the third and fourth quarters of the year, Johnston indicated that PepsiCo was aware that the uncertain economic climate meant it was difficult to forecast to what extent the company will be able to increase prices.

"While we're implementing this pricing ... we'll also need to gauge the consumer reaction in this uncertain environment and make adjustments accordingly," Johnston said. "As such, predicting the ultimate pricing realisation for the back half of 2011 is more challenging than it would be in a more stable consumer environment."