PepsiCo 'Reset' Shows Promise One Year In

Company, Analysts Cite Increased Marketing Spending as Key Reason for Fourth-Quarter Gains

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Wondering if advertising works? Just ask PepsiCo.

After several years in which bad news trumped good and executives found themselves on the defensive, PepsiCo is making progress on its "reset" effort. But don't declare victory just yet.

The positive signs come a year after PepsiCo declared it would boost advertising spending across key brands, trim agency partners in the North America Beverage division and better leverage its global scale -- while cutting costs and enhancing shareholder returns. The company is making progress, according to data from several sources, including PepsiCo's annual financial report released last week. And importantly, when it comes to marketing, PepsiCo has put its money where its mouth is.

"It's a very good effort so far, with early signs of progress," said John Sicher, editor and publisher of Beverage Digest. "But we have to wait until at least partway through the summer to see if we can call it a success."

Hugh Johnston, PepsiCo's chief financial officer, said the company has "absolutely" accomplished what it set out to in 2012 and is seeing improved brand-equity scores and an upward trend in market share.

PepsiCo reported a 4% drop in full-year profits in part due to increased marketing spending. But fourth-quarter profit rose 17% as the spending kicked in. Pepsi also posted 5% organic revenue growth for the quarter and year.

"We not only stepped up the level of investment in advertising and marketing, but we took steps to improve its efficiency and effectiveness by better leveraging our global scale and driving consistent brand positioning and coordinating advertising, creative and production activities," said Indra Nooyi, chairman-CEO of PepsiCo, on a call with analysts.

PepsiCo increased measured-media spending in the U.S. by 24%, or nearly $130 million, in the first three quarters of 2012, compared with the same period in 2011, according to Kantar Media. The company had pledged to add spending of between $500 million and $600 million globally, a promise Mr. Johnston says it's kept. In the coming year, Mr. Johnston said advertising and marketing will be at least 5.7% of sales, matching the 2012 investment.

Ali Dibadj, a senior analyst at Bernstein Research, said that while he'd hoped to see even bigger marketing investments than what the company committed to, the ad outlays have had an impact. "We've seen signs of improvement on the main focus areas -- carbonated soft drinks in North America are gaining share, not hemorrhaging share -- and a lot of that is because of the ad spend."

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