The US firm has been dealing with a series of complex challenges, with weak consumer demand, fuelled by rising food and drink inflation, hampering its ability to deliver profit growth.
Higher input costs, increased competition from long-time rival Coca-Cola and the growing impact of GLP-1 weight-loss drugs have all combined to put considerable strain on its North American business, which is seeing a consistent drop in volumes.
And despite undertaking drastic measures to improve its performance, including steps to make record productivity savings and introducing a 15% price cut for flagship products including Lay’s and Doritos, these efforts have failed to yield tangible improvements.
The firm is also feeling the heat from activist investor Elliott Investment Management, which took a roughly $4 billion stake in PepsiCo a year ago.
Core operating margin fell to 16.3% in the first half, down 15 basis points year on year, putting the company’s trajectory directly at odds with its target of increasing margins by 100 basis points over three years.
Coupled with a nearly 12% drop in its share price this year, and a 16% decline since Elliott invested, reports suggest management is facing growing scrutiny.
“They have not identified a focused path to recovery in the face of the ‘changes’ that they’ve made. They were simply too late, and now they have the threat of GLP-1s,” said Stephanie Link, chief investment strategist at Hightower Advisors, a PepsiCo investor, speaking to Reuters.
To counter this margin loss, PepsiCo has recently shifted back towards raising prices on some US chips and drinks, which may be an implicit acknowledgement that its earlier strategy of using lower prices to stimulate volumes has not delivered the hoped-for results.
The question therefore remains: will the soft drinks and snacking juggernaut be able to turn around its North American snacks business quickly enough to satisfy Elliott and other investors, while also adapting its vast portfolio to a consumer environment increasingly shaped by health-consciousness and GLP-1 drugs?
