Pepsi Reports 9% Revenue Decline in Beverages

Announces Plans to Acquire Pepsi Bottling Group and PepsiAmericas

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NEW YORK (AdAge.com) -- PepsiCo's beverage business continued to languish in the first quarter, despite heavy marketing investment and the revamping of its major brands.

The beverage division reported a 9% decline in revenue and a 6% decrease in volume for the quarter, which included PepsiCo's New Year's Eve, Inauguration and Super Bowl marketing blitzes.

Indra Nooyi
Indra Nooyi
"Our performance in Q1 is wholly consistent with our plan," Chief Financial Officer Richard Goodman said during a conference call with analysts. "Our focus for the quarter was largely on brand restages and innovation launches and both have been executed successfully."

Tropicana sales, however, plummeted 20% in the weeks following the introduction of new packaging. Massimo d'Amore, CEO-PepsiCo Americas Beverages, said performance at Tropicana has picked up since the original packaging was reinstated. Trop50, a new line extension of light orange juice, has helped boost the brand's performance, he added.

Acquisition plans
In its meeting with investors, PepsiCo announced plans to acquire all outstanding shares of its two largest bottlers, Pepsi Bottling Group and PepsiAmericas, for $6 billion. The move represents another investment in the struggling North American beverage category. "We believe that the [category] remains attractive and that maintaining a strong position in this business will be a key component of PepsiCo's overall success," said Indra Nooyi, CEO.

Ms. Nooyi pointed out that the North American beverage category is valued at more than $100 billion, and PepsiCo believes the category can sustain volume growth of about 1% to 2%, in line with population growth, once the recession is over. "Believe me, there are not too many consumer categories where expected volume growth alone would add $1 to $2 billion a year in category revenues," she said.

If successful, the bottler acquisitions would give PepsiCo control over 80% of its total beverage volume in North America and result in $200 million in pre-tax synergies annually. Consolidating the bottlers would also enable the company to better test new products.

"This combined company will allow us to bring innovation to the market much faster, because the shape of the innovation going forward is going to be different from the shape of the innovation that we had some years ago. More niche products, stuff that doesn't stick for a long time," said Ms. Nooyi. "We're going to have to be very, very flexible in the distribution system and not spend too much time negotiating the finer aspects of profit splits rather than focusing on the customer and the consumer and being extremely nimble."

'Power of One'
Ms. Nooyi also said the acquisitions would allow PepsiCo to better capitalize on its "Power of One" strategy, which entails making the company's myriad businesses more cohesive. By integrating the bottlers, PepsiCo would be better positioned to bundle promotions for its snacks and beverages, merchandise its products together and coordinate things such as joint deliveries. Still, while PepsiCo Americas Beverages continues to receive plenty of attention and investment, it's Frito-Lay North America that has been the bright spot. Revenue at the division was up 12% during the quarter, though volume decreased 1%. Frito-Lay North America is PepsiCo's single largest division, and accounted for more than one-third of revenues during the quarter.

The division began putting 20% more product in take-home sizes of Doritos, Cheetos, Tostitos and Fritos without raising the price, shoring up its value message. And it's looking to increase penetration among Hispanic consumers with new flavor variations across its Lays, Doritos and Cheetos brands. Mr. Goodman said the division expects volume will begin to grow again in the second quarter, thanks, in part, to those efforts.

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