A sharper focus on innovation, brand building and marketplace execution continued to drive solid fundamental business performance at PepsiCo, Inc., in the first quarter of fiscal 2015, but it was the company’s Frito-Lay North America business that stood out as the shining star in the period.
Overall, net income at PepsiCo, Inc. in the first quarter ended March 21 was $1,221 million, equal to 81c per share on the common stock, up narrowly from $1,216 million, or 79c per share, in the same quarter a year ago. Net revenue was $12,217 million, down 3% from $12,623 million.
But in the first quarter ended March 21, operating profit within Frito-Lay North America was $920 million, up 7% from $862 million in the same period a year ago. Net revenue in the division increased 3% to $3,319 million from $3,219 million.
“The U.S. salty snacks category continued to show solid growth and Frito market share again posted steady sequential improvement supported by both volume growth and price realization,” Indra Nooyi, chief executive officer of PepsiCo, Inc., said during an April 23 conference call with analysts. “Our key brands had revenue growth, including particularly good performance from Lay’s, Doritos and Cheetos. And we continue to innovate. We launched Cheetos Sweetos, the first ever sweet Cheetos, in the U.S. as well as Tostitos Dip-etizers, Doritos Jacked 3D and Rold Gold Pretzel Dippers.”
PepsiCo Americas Beverages also performed well in the period, with operating profit up 9% to $468 million from $429 million on a small increase in revenues to $4,433 million from $4,426 million.
Ms. Nooyi said PepsiCo gained value share across important subcategories, including sports drinks and ready-to-drink teas. The company also grew retail sales in major channels in the United States for regular sodas and Mountain Dew within carbonated soft drinks.
She said the company continues to invest in R.&D. to drive sustainable innovation. To that end, the company during the quarter rolled out a newly designed Gatorade 28-oz bottle featuring a sleek, contemporary design built with improved ergonomics based off insights from athletes.
“Early results are promising with this packaging innovation contributing to double-digit retail sales growth in regions that have converted to the new packaging,” Ms. Nooyi said.
Health and wellness also remains a focus. PepsiCo recently introduced new Naked Juice flavors, including chia cherry lime, chia sweet peach and beets, which Ms. Nooyi said are “delicious fruit and vegetable smoothies that pack a nutritional punch.” PepsiCo also has launched Tropicana Farm Stand Tropical Green, which is a green juice featuring a full serving of fruits and vegetables in each 8-oz serving, and Mountain Dew DEWshine, a craft premium soda inspired by the brand’s roots in the backwoods of Tennessee. It is a clear citrus Dew made with real cane sugar and packaged in clear glass bottles.
One business that did not fare as well during the first quarter was Quaker Foods North America, where operating profit fell 38% to $99 million from $160 million, while sales inched up 1% to $639 million from $634 million.
“Quaker Foods North America delivered commendable results despite continued challenges across center-of-store food categories,” Ms. Nooyi said. “During the quarter we gained or held value share in all three of our key categories — hot, ready-to-eat cereals and snack bars — while expanding gross margin at the same time. These value share gains were driven by innovation, which includes the launch of Quaker 3-minute steel cut oats in the quarter. This product has the same hearty texture and nutty flavor as traditional steel cut oats, but caters to the consumer’s need for convenient products as the cook time is cut from 30 minutes to just 3 minutes. We also launched gluten-free varieties of Quaker Popped Rice Crisps.”
Given some of the challenges in the center of the store, and Quaker Foods North America specifically, Ms. Nooyi was asked by an analyst during the call whether PepsiCo still sees all of its center-of-the-store food brands as core to the company’s mission.
“I think there are two kinds of businesses I said were not core to the mission,” she said. “Quaker is very core to the mission. What we were talking about is sort of the peripheral businesses we got as part of the Quaker Oaks acquisition — the Golden Grain and the Aunt Jemima.
“Those businesses are center of the store. They are not core to our portfolio, but today they are doing fine. They are holding their ground, sometimes even gaining share. They are generating very valuable U.S. cash flow and these are businesses with fantastic margins. So at this point it is more dilutive to get rid of them than to keep them. And so, what we are going to do is just manage those businesses steadily as long as they don’t distract us from our core mission of growing the rest of the portfolio. That is what we are focused on.
“And lastly, they also provide scale to our warehouse sales operation. So at this point just steady management of those businesses, don’t distract ourselves from the core, enjoy the U.S. cash, the good margins and that is all we are doing.”