To offset commodity costs that are expected to rise through the high teens for the year, the CPG giant introduced another round of price increases early in its fourth quarter, CFO and vice chairman Hugh Johnston told investment analysts during the company’s third quarter earnings call yesterday. These follow an average increase of 12% in the second quarter, 10% in the first quarter and 7% in the fourth quarter of last year.
He added that the company could raise prices again given the strength of its products’ performance and consumers’ apparent willingness to absorb the increases.
“I still think we’re capable of taking whatever pricing we need,” he said, noting that while PepsiCo is hedged about six to nine months out – which is consistent with past practices – it still could be impacted next year by the highly volatile commodity cycle.
Johnston stopped short of making predictions about the upcoming year, noting the macroeconomic climate remains highly unpredictable even though there has been some softening in select commodity prices and PepsiCo’s basket is well diversified so that it should have wiggle room across its portfolio even if there are dramatic spikes in a few places.
‘Affordable treats and small moments of pleasure continue to be a key need state’
His assessment about PepsiCo’s ability to continue raising price as necessary without fallout from the shopper is based on ongoing “relatively low elasticity” despite previous rounds of price hikes.
In terms of inflation, CEO Ramon Laguarta added he expects the upward trend to continue, but he also thinks the positioning of many PepsiCo products as affordable indulgences will help protect them from any consumer pullback.
“Our categories seem to be growing faster than food and food is growing faster than non-food. I don’t think that’s going to change,” he said. However, he added, “We’ve see, I think, affordable treats and small moments of pleasure continue to be a key need state [for] consumers today and our categories play in the space. I think we should assume that will continue in spite of all the ups and downs.”
Despite Laguarta’s optimism about PepsiCo’s long-term outlook and ability to offset inflation through pricing and still gain market share, he cautioned future quarters might not be as positive as the company’s most recent.
Cautious optimism for coming quarters rests on innovation, promos and branding
He described the company’s 16% increase in organic sales and 14% core constant currency earnings per share growth in the third quarter as “outstanding,” but also it may not be sustainable in coming quarters given the pricing the company is taking.
Still, he said, “we’re aspiring to beat our long term as many quarters as possible.”
He suggested this may be possible thanks in part to PepsiCo’s increased investment in innovation, promotions and brand building – all of which create value in the consumers’ eyes, making it easier to justify higher prices.
Managing an increasingly complex supply chain
The increased variety of products, additional flavors and packaging sizes all add complexity to the supply chain at a time when it may still be strained, but Laguarta remains confident that expanding the portfolio is the right decision to drive sales and consumer engagement.
He explained that PepsiCo will manage extra costs and supply by leaning more heavily into formats where it has higher revenue per liter or per kilo and moving into channels where it can more easily take price because the consumer has different price expectations.
He also noted that the company is focusing on digital, which gives it more agility to adjust as necessary based on the market and consumer responses.
With this strategy in place and PepsiCo’s ongoing positive standing in consumers’ eyes, the company optimistically raised its guidance for the full year so that it now expects organic revenue for the year to increase 12% -- up from 10% -- and its earnings per share to increase 10% -- up from 8%.