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Why PepsiCo’s Margins Contracted in 2Q17

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Dec. 4 2020, Updated 3:52 p.m. ET

Gross margin

PepsiCo’s (PEP) gross as well as operating margins contracted in fiscal 2Q17, which ended on June 17, 2017. The company’s gross margin contracted about 55 basis points on a year-over-year basis to 55.1% in fiscal 2Q17. Higher commodity prices continued to put pressure on the company’s gross margin.

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Operating margin

In fiscal 2Q17, PepsiCo’s operating margin contracted by about 20 basis points to 19.0%. The company’s operating margin was adversely impacted by a rise in certain operating costs, higher commodity costs, and currency headwinds. The gains associated with the sale of the company’s minority interest in Britvic favorably impacted the company’s reported operating margin by 60 basis points.

Productivity measures

To mitigate the impact of macro challenges in certain markets, PepsiCo is taking several measures to reduce its overall costs. The company’s productivity measures include optimizing its manufacturing footprint, automating manufacturing processes, expanding shared services, and simplifying its organizational structures. In the first six months of fiscal 2017, the company incurred restructuring charges of $61 million.

Peer Coca-Cola (KO) is also enhancing its margins through various productivity measures. Coca-Cola’s six-year productivity program aims to deliver annualized productivity savings of $3.8 billion through 2019. The company is also refranchising its bottling operations to reduce its exposure to the low-margin bottling business. PepsiCo is also trying to enhance its margins by focusing on premium products that carry higher margins. Some of the company’s premium products are Lipton Tea’s Pure Leaf and Lay’s Poppables.

We’ll look at analysts’ recommendations for PepsiCo in the next part of this series.

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