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February 10, 2011

On the money: Commodities remain “major headwind” for PepsiCo

PepsiCo has said that it expects a "highly competitive environment" in 2011, with commodity costs remaining a "major headwind" for the snacks and beverage giant.

PepsiCo has said that it expects a “highly competitive environment” in 2011, with commodity costs remaining a “major headwind” for the snacks and beverage giant.

Speaking on an earnings call for the media today (10 February), PepsiCo CFO Hugh Johnston told reporters that as the Doritos maker remains mindful of the “challenging” trading conditions in developed markets and the prospect of growing competition in the beverages sector.

“The consumer outlook remains especially challenging and employment remains high in most developed markets,” Johnston said. “We are prepared for what could be a highly competitive environment, particularly in the beverages department. This will largely be stepped up in emerging markets where we have seen very fast growth.

However, Johnston added: “On the other hand, we are bullish on emerging markets where growth has been strong.”

PepsiCo this morning announced a 6% increase in full-year profits for 2010, driven by gains from its global snacks and beverage businesses and the acquisition of its bottlers in early 2010.

The firm grew its core earnings per share – earnings excluding one-time charges – by 12% on a constant-currency basis in 2010, hitting its target of 11-12% growth.

However, the firm revealed that it expects its core earnings per share growth to slow in 2011 due to higher commodity costs, “difficult” conditions in developed countries and investment in emerging markets.

Johnston told reporters: “Commodity costs remain a major headwind for us, we expect to see exceptionally high levels of inflation…we are driving productivity to offset as much of these increases as possible.”

He added: “What I do have is a high level of confidence in, is that commodities will continue to be volatile. It’s likely to be volatile and inflationary in coming years.”

Nevertheless, Johnston indicated that PepsiCo’s moves to hedge against some commodities had a “favourable” impact on its Frito-Lay business in the second half of 2010.

However, he added: “We can’t hedge everything, there are certain markets and certain things that there is no effective hedging strategy for that are in the market at the moment.”

Asked whether PepsiCo was feeling more pressure on costs than its competitors, Johnston said: “The reality is, we are a much bigger food company than beverage company so we are impacted by what is happening in food inflation, rather than being overly comparable with other big corporates.

“We have to focus on individual categories that we are playing in, find the balance of driving profit growth that we think is appropriate, and ensuring that we have appropriate pricing strategies in place that will continue to drive the franchise for the long term, that is the ultimate driver of value creation.”

PepsiCo shares climbed 2.1% to $63.05 at 11:35am ET today.

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