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What Drove PepsiCo’s 2Q17 Earnings?

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Part 4
What Drove PepsiCo’s 2Q17 Earnings? PART 4 OF 7

PepsiCo’s Soda Volumes Continued to Disappoint in 2Q17

Lower soda volumes

PepsiCo’s (PEP) North America Beverages segment continued to experience lower soda volumes in fiscal 2Q17. The segment’s soda or carbonated soft drink volumes fell 2.5% in fiscal 2Q17, which ended on June 17, 2017. This decline follows a 4.0% decline in soda volumes in fiscal 1Q17. Rival Coca-Cola (KO) reported a 1.0% decline in its sparkling soft drink volumes in fiscal 1Q17. Consumers’ changing preference for healthier beverage options like ready-to-drink tea and bottled water is adversely impacting its soda volumes.

PepsiCo’s Soda Volumes Continued to Disappoint in 2Q17

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Noncarbonated beverage volumes

PepsiCo’s noncarbonated beverage portfolio continued to outperform the company’s soda portfolio in terms of volume growth. In fiscal 2Q17, PepsiCo’s noncarbonated beverage volumes rose 4% on a year-over-year basis. This growth was a result of the double-digit increase in the company’s overall water portfolio volumes, a low-single-digit rise in Gatorade sports drink volumes, and a high-single-digit increase in Lipton ready-to-drink tea volumes.

Overall, PepsiCo’s carbonated beverage volumes fell 3.0% in the first six months of fiscal 2017. In contrast, PepsiCo’s noncarbonated beverage volumes were up 4% in the first six months of fiscal 2017 on strength in the volumes of the company’s water portfolio and Gatorade brand.

Growth plans

PepsiCo is relying on the innovation of healthier beverage options to drive its beverage volumes. PepsiCo’s recently introduced products include LIFEWTR, Lemon Lemon, and IZZE Fusions. In the fiscal 2Q17 conference call, PepsiCo’s CEO, Indra Nooyi, mentioned that LIFEWTR has already generated $70 million in retail sales across measured channels since its launch in the first quarter. The company’s CEO also stated that LIFEWTR is on track to deliver about $200 million in retail sales on an annualized basis.

Aside from internal innovation, PepsiCo is also looking for strategic acquisitions to enhance its health and wellness beverage offerings. In 2016, the company acquired KeVita, a leading North American maker of fermented probiotic and kombucha beverages.

We’ll discuss PepsiCo’s fiscal 2Q17 margins in the next part of this series.

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