PepsiCo CFO Johnston concerned about stagflation and stressed consumers

PepsiCo CFO Johnston concerned about stagflation and stressed consumers

PepsiCo's CFO has warned that weak economies in the developed world are making it increasingly difficult for soft drinks companies to offset lower volume sales with price increases. 

Hugh Johnston said yesterday (7 September) that stagflation and a "stressed consumer" in many western markets are causing the sector headaches. "While our brands are solid and our company is highly productive, this stagflation has made pricing a tricky balancing act," he told analysts.

He warned that an expected rise in consumer confidence in 2011 has not materialised. "The outlook has been degrading over the last six months and it's now clear the developed markets have little growth," he said at the Barclays 'Back to School' Conference.

His frank assessment of western economies reflects fresh stock market uncertainty, fuelled by concern about debt levels across the developed world, as well as high unemployment and low economic growth. 

Against this backdrop, weak volume sales and higher input costs have put a greater strain on PepsiCo and its rivals, particularly in the US. "Price elasticities have become steeper at the same time where pricing is required to cover higher input costs, and this is squeezing performance across food and beverage," said Johnston.

PepsiCo expects to have raised prices on a wide range of its drinks by the end of September. Price rises on Gatorade, however, will be delayed until the final quarter of the year.

Following the Barclays conference address, Stifel Nicolaus analysts trimmed their forecast for PepsiCo's third and fourth-quarter earnings per share, to $1.27 from $1.29 and to $1.21 from $1.22, respectively. "Announced price increases by Coke and Pepsi in US beverages are going through and reflected in CPI and IRI data, but we take Mr Johnston’s comments as an indicator of greater-than-expected continuation of volume weakness in US," they said. 

Johnston said that PepsiCo is "deeply economising" in developed markets. But, he said that the challenging times will not last forever: "Commodity markets will rebalance and the developed market consumer will recover."

At the same time, PepsiCo is investing heavily in emerging markets. In terms of net sales, the group's emerging markets business has grown by 25% of the past five years and has double-digit operating margins. "Because these businesses are scaling up so rapidly, they [have] significant opportunities for margin improvement over time," Johnston told analysts.

For a transcript of the presentation, click here.