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Why PepsiCo’s Productivity Measures Helped Its 4Q15 Margins

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Margins increase in 4Q15

PepsiCo (PEP) reported a gross margin of 54.9% in 4Q15, which ended December 26, 2015, up from 53.1% in the comparable quarter of the previous year. The company’s operating margin also expanded to 12.1% in 4Q15 from 10.2% in 4Q15. Despite lower revenue, the company’s margins in 4Q15 benefitted from productivity initiatives and effective revenue management strategies. However, higher advertising and marketing expenses adversely impacted the company’s operating margin in 4Q15.

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Productivity plan

PepsiCo aims to generate $1 billion in productivity savings in 2016, in line with its plan to achieve $5 billion of productivity over the five years through 2019. The iShares Russell 1000 ETF (IWB) has 0.8% exposure to PepsiCo.

PepsiCo’s productivity plan involves several initiatives, including the following.

  • accelerating investment in manufacturing automation
  • optimizing the global manufacturing footprint, including the closing of certain manufacturing facilities
  • re-engineering the company’s go-to-market systems in developed markets
  • expanding shared services
  • increasing efficiency through simplified organization structures

Coca-Cola (KO) is also pursuing a productivity program that aims to generate $3 billion in annualized productivity savings by 2019. Coca-Cola’s operating margin improved to 15.2% in 4Q15 from 13.3% in the comparable quarter of the previous year. Dr Pepper Snapple’s (DPS) Rapid Continuous Improvement program is also helping create a leaner and more efficient operating structure. Monster Beverage’s (MNST) margins are benefitting from energy drinks’ higher pricing compared to other beverages.

Factors impacting fiscal 2016 margins

PepsiCo’s margins in fiscal 2016 might be impacted by low single-digit inflation in commodities, including the impact of currency fluctuations. The company’s operating margin is also likely to be adversely impacted by operating expense inflation, mainly due to labor. The company expects labor costs to rise ~4% in fiscal 2016. Also, continued investments in advertising and marketing expenses should impact PepsiCo’s fiscal 2016 operating margin. The company expects lower corporate unallocated expenses in fiscal 2016, mainly due to lower pension expenses.

We’ll discuss the company’s dividend and share repurchase plan in the next part of this series.

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