Insight into PepsiCo’s Productivity Measures

PepsiCo (PEP) has been working on improving its margins and increasing its efficiency by removing unnecessary layers in its organization and working on a leaner structure. The company’s operating model is in a better place now to leverage its global scale to a greater extent.

Softness in soda beverage volumes and currency headwinds have been adversely impacting the margins of beverage makers. In fiscal 2014, PepsiCo’s gross margin increased to 53.7% from 52.9% in the previous year.

However, the company’s operating margin fell to 14.4% in fiscal 2014 from 14.6% in fiscal 2013. PepsiCo constitutes 0.7% of the iShares Russell 3000 ETF (IWV) and 1.6% of the iShares S&P Global 100 ETF (IOO).

PepsiCo generated $3 billion in productivity savings between fiscal 2012 and fiscal 2014. The company is now pursuing a five-year productivity program with an aim to generate $5 billion in productivity savings from fiscal 2015 through fiscal 2019. Some of PepsiCo’s productivity measures are:

• increased automation: PepsiCo’s initiative to implement packaging automation in about one-third of its snacks plants worldwide has helped the company reduce packaging label costs in these facilities by at least 50%.
• streamlining go-to-market systems: Through its geographic enterprise solutions at its Frito-Lay North America division, PepsiCo has been consolidating certain plants and distribution networks. This will facilitate the implementation of automated order picking, reduce distribution centers, and enable an efficient direct-to-store delivery system. The company is taking similar initiatives in its North America Beverage business.
• optimizing global manufacturing footprint: PepsiCo has reduced the number of company-owned beverage plants in North America by 23% since 2010. The company has simultaneously increased its capacity utilization by 20%.
• shared services: PepsiCo is selectively outsourcing financial transaction processing, accounting, reporting, and other back office tasks.

Coca-Cola (KO) and Dr Pepper Snapple (DPS) have also been focusing on improving their margins by streamlining their operations.

In late 2014, Coca-Cola extended its productivity program with the aim to generate annualized savings of $3 billion per year by 2019 through the implementation of several initiatives, including the restructuring of its global supply chain.

Dr Pepper Snapple has also been implementing several measures under its Rapid Continuous Improvement program to facilitate margin expansion.

We’ll discuss PepsiCo’s dividends in the next part of this series.