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PepsiCo’s Operating Margin Benefits from Productivity Measures

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Margins in 4Q16

In 4Q16, PepsiCo’s (PEP) gross margin narrowed on a year-over-year basis. However, productivity measures helped the company improve its 4Q16 operating margin. PepsiCo’s gross margin contracted by 15 basis points to 54.2% in 4Q16 due to commodity inflation.

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Improvement in operating margin

PepsiCo’s operating margin expanded by 15 basis points to 12.2% in 4Q16. The company attributed this improvement to its revenue management strategies and productivity gains. PepsiCo has been trying to mitigate the impact of softness in beverage volumes on its revenue through higher pricing and by focusing on smaller packages of beverages.

In 4Q16, Coca-Cola’s (KO) operating margin contracted by about 80 basis points to 14.4% due to adverse currency fluctuations and structural items. Dr Pepper Snapple Group’s (DPS) operating margin expanded to 21.2% in 4Q16 from 20.8% in 4Q15. This expansion was a result of higher sales, lower logistics costs, and productivity improvements.

Fiscal 2016 margins

In 2016, PepsiCo’s gross margin widened by 65 basis points to 55.1%. Also, the company’s operating margin expanded by 235 basis points to 15.6%, mainly due to Venezuela impairment charges recorded in 2015.

PepsiCo’s productivity initiatives included investments in manufacturing automation, the optimization of its global footprint, the re-engineering of its go-to-market systems in developed markets, the expansion of shared services, zero-based budgeting, and the simplification of organization structures. Through its productivity initiatives, PepsiCo has been able to generate about $1 billion in annual savings since 2012. We’ll discuss analysts’ recommendations and PepsiCo’s valuation in the next part of this series.

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