PepsiCo slashes forecast, deepens cost cuts as N.America recovery drags
FILE PHOTO: Bottles of Pepsi are displayed on a shelf in a supermarket in Sarajevo, Bosnia and Herzegovina October 29, 2024. REUTERS/Dado Ruvic/File Photo
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Oct 8 : PepsiCo warned on Thursday that growth and margin recovery in its key North American market was taking longer than planned and said it would pursue additional cost cuts to offset sluggish demand for its snacks and beverages.
Faced with high input costs, inflation hit to demand and the growing threat of GLP-1 weight-loss drugs, the company is pursuing record productivity savings in its turnaround efforts launched after activist investor Elliott Investment Management took a roughly $4 billion stake a year ago.
PepsiCo’s third-quarter revenue exceeded market expectations and the company adjusted its 2026 organic revenue forecast to about 3 per cent from a prior view of 2 per cent to 4 per cent, but flagged slow progress and profitability struggles in North America.
“In North America, we remain committed to improving growth and core operating margin,” said CFO Steve Schmitt in prepared remarks. “However, it is taking more time than we planned. Therefore, we expect North America’s core operating margin performance to remain under pressure in the fourth quarter.”
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PepsiCo’s core operating margin dropped 35 basis points in the third quarter from a year ago and was down 25 basis points year to date at 16.5 per cent of revenue. In December, after discussions with Elliott, PepsiCo said it was targeting a 100-basis-point uptick over three years.
The company also cut its fiscal 2026 forecast for core earnings per share after adjusting for currency fluctuations to an increase of 1 per cent to 2 per cent, compared with previous expectations for the low end of the 4 per cent to 6 per cent range.
The challenge is industry-wide. Packaged food makers such as General Mills, McCormick and Conagra Brands are spending more on promotions and affordability initiatives to revive demand while contending with higher input costs.
PepsiCo, whose shares were up about 1 per cent in early trading, is expanding its range of high-protein products to tackle the GLP-1 threat and is now promising extra productivity savings.
“Additional structural cost reduction actions are being identified and will be implemented in the coming months to help fund investments that aim to accelerate organic revenue growth and mitigate the impacts of rising input cost inflation,” CEO Ramon Laguarta said in a statement.
PepsiCo’s international business continues to perform well, but North America weakness, where third-quarter volumes in food were flat and dipped 2 per cent in beverages from a year ago, is a persistent pain point.
“The beverage business continues to disappoint, and we expect PepsiCo will continue to be a source of share to both Coca-Cola and Keurig Dr Pepper.” said Nik Modi, analyst at RBC Capital Markets. “PepsiCo will have to fully refranchise its beverage business or it will continue to lose share.”
The company cut prices by up to 15 per cent on products such as Lay’s and Doritos in February, but last month said it would raise some chip prices to keep pace with input cost inflation.
CEO Laguarta has bought some goodwill with the international numbers, but the pressure he is under is high and rising, said David Wagner, head of equity and portfolio manager at PepsiCo investor Aptus Capital Advisors, noting that patience from the board and activists is finite.
“Next couple of quarters need to show real North American inflection, or the pressure moves from ‘deliver the turnaround’ to ‘explain why you’re still the right person to lead it’,” he said.
Source: Reuters
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