PepsiCo has said it expects the performance of its Frito-Lay snacks division in North America to improve after sales volumes and margins fell in the first quarter of the year.
The US food giant yesterday (26 April) reported a 2% fall in volumes from Frito-Lay North America in the quarter, which ran until 24 March. Margins from the business were 26.2%, down from 26.7% a year ago.
PepsiCo said the extra week of trading in its 2011 results, which led the “key pre-New Year’s holiday week” to be included in the fourth quarter of last year instead of the first quarter of 2012, caused the fall in volumes.
The calendar effect and commodity costs weighed on Frito-Lay’s margins in the quarter. PepsiCo CFO Hugh Johnston told analysts the impact of raw material prices on the business in the first quarter of the year would be the “heaviest” it would see.
However, Johnston said PepsiCo had been increasing prices on its Frito-Lay products and those moves, combined with new products in the pipeline, would improve the division’s performance.
“What we’re really focused on is ensuring that we are getting the pricing through and we will and certainly expect to hold or grow margins. The volume, obviously, in Q1 was down two [percentage points], but we also said that we saw a negative two [percentage point] impact from the 53rd week. As the innovation gets out the door, we certainly expect to see all of the metrics from Q1 improve,” Johnston said.
PepsiCo chairman and CEO Indra Nooyi said the latest data showed Frito-Lay’s market share was starting to improve. “If you look at the IRI data that’s coming out today, you’re already beginning to see Frito share improve steadily,” she said.
Nooyi said Frito-Lay would continue to focus on three sets of products she described as “fun-for-you, better-for-you and good-for-you”.
“It’s critically important PepsiCo places its bets in all three,” she said. In the first category, the company would look to reduce salt levels and switch to “heart-healthy” oils. PepsiCo also plans to “dial up” better-for-you products like baked snacks, Nooyi revealed. She said the company would continue to invest in its good-for-you snacks as growth was “about two times or three times” that of the two other categories.
“The name of the game for Frito-Lay is slowly and deliberately building the business rather than jerking the business around to gain short-term share. And I feel good. I mean, look at the IRI data for this period four. You see very nice steady progress across the board,” she said.
Analysts at Sanford Bernstein said it had predicted volumes from Frito-Lay would be flat in the first quarter but said the business generated better margins than it expected, even if they were down year-on-year.
However, in a note to clients, the analysts wrote: “Why is PepsiCo so confident that it can hold Frito-Lay North America margins on the full year, while also holding or growing volume? Was the pull-forward of volume from Q1:12 to Q4:11 truly the reason for weaker volumes this quarter? Nielsen results would suggest continued share losses may have impacted Frito-Lay North Americas as well.”
Speaking to just-food, Sanford Bernstein analyst Steve Powers said the trends from Frito-Lay North America would need to be monitored but added: “We actually feel like Q1 was a reasonably validating performance in terms of showing evidence of Frito-Lay North America’s underlying strength. We still see PepsiCo’s Frito-Lay North America expectations for FY12 (offset commodities through pricing, hold or grow volume and margin) as ambitious, but likely achievable.”
In all, the analysts at Sanford Bernstein said PepsiCo’s results were “generally in-line, with some signs of progress or at least hope”.
PepsiCo has faced questions over its strategy in recent months from some investors and analyst concerned that a push into a healthier categories has meant the company has paid less attention to its core business. Some even called for PepsiCo to split in two.
In February, however, PepsiCo announced plans to plans to “drive growth” across the business, which included an increase in advertising spending, better productivity and a revamped management structure. The company also announced plans to lower costs by $1.5bn, which included the loss of 8,700 jobs. Nooyi said the idea of splitting the company in two did “not make sense”.