PepsiCo posted a net income increase of 35% in the second quarter to $2.01 billion

PepsiCo Inc. reported higher profit and revenue in the second quarter even as sales at its U.S. drink business continued to slip.

The mostly positive results coincide with heightened investor scrutiny after activist shareholder Nelson Peltz last week urged the maker of Lay's potato chips and Pepsi colas to buy Mondelez International Inc. and create a snack powerhouse while spinning off PepsiCo's slower growing beverage unit.

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PepsiCo Chairman and Chief Executive Indra Nooyi reiterated Wednesday that she doesn't see the need for any large-scale acquisitions and that the company benefits from its geographic and product mix. About half of PepsiCo's sales are fueled by snacks and the other half from beverages; roughly half of overall revenue is outside the U.S.

But Mrs. Nooyi again left the door open for potentially significant changes at PepsiCo's North American beverage unit, reiterating management is "exploring every possible alternative'' to improve results. That includes the possibility of refranchising regional bottling operations or spinning off the business entirely.

She repeated that shareholders will be updated early next year on its strategic review of the unit, which has been losing market share to Coca-Cola Co.

Net income rose 35% to $2.01 billion for the 12 weeks ended June 15, compared with 1.49 billion a year earlier. Adjusted earnings per share rose to $1.31 from $1.12. About 11 cents came from a $137 million, one-time gain from refranchising bottling operations in Vietnam and a temporary tax-rate drop.

Revenue rose 2.1% to $16.81 billion from $16.46 billion, with strong growth in Asia, the Middle East, Africa and its Americas-wide snacks business.

PepsiCo reiterated that it expects full-year per-share earnings to rise 7% on a constant-currency basis, and a mid-single-digit percentage rise in "organic" revenue. Organic revenue strips out the effects of acquisitions, divestitures and foreign-currency translations. But it now expects currency headwinds to have a negative impact of two percentage points on net income, up from its earlier estimate of one percentage point.

The company also expects $900 million in productivity gains.

Advertising and marketing expenses are expected to increase "at or above the rate of revenue growth'' in 2013. Such expenses were boosted to 5.7% from 5.2% of sales last year, as part of a restructuring drive, after PepsiCo rejected calls from some investors to split up the company. The bulk of any extra marketing investments this year would go to international operations, Chief Financial Officer Hugh Johnston told investors.

Operating profit at PepsiCo's Americas-wide beverage unit rose 5% to $882 million, boosted by higher pricing and cost-cutting, but revenue dropped 2% to $5.26 billion as volume fell 3.5%. For North America, the company reported a mid-single-digit percentage decline in soda volumes and a low-single-digit percentage decline in noncarbonated drink volumes. PepsiCo's beverage brands include Gatorade sports drinks, Tropicana juices and Mountain Dew soda.

Beverage companies say unseasonably chilly and wet U.S. weather damped sales, particularly soda. Coke last week reported a 1% volume decline in North American beverages in the second quarter, reversing 12 straight quarters of increases. Dr Pepper Snapple Group Inc., the third-largest soda company in the U.S., reported Wednesday its second-quarter revenue slipped 0.6% to $1.61 billion amid a 4% volume drop.

Mrs. Nooyi acknowledged the U.S. beverage business still has "challenges,'' especially when it comes to soda. But she said PepsiCo has made market-share gains in tea, Gatorade and Mountain Dew, and is confident last year's stepped-up marketing investments will pay dividends. PepsiCo also has been developing new low-calorie sweeteners to try to win back lapsed soda drinkers.

Other parts of PepsiCo's business performed better, with global snack and beverage volumes in the second quarter growing 3% and 1.5%, respectively. Revenue at its Americas-wide snack unit, whose brands also include Doritos, Cheetos and Tostitos chips, rose 5% to $6.03 billion, including a 4% increase in North America.

Revenue at its Asia, Middle East and Africa division grew 6% to $1.87 billion, boosted by a 9% volume increase in beverages and 6% in snacks. PepsiCo said beverage revenue soared 22% in China amid heightened distribution following last year's drinks joint venture with Tingyi (Cayman Islands) Holding Corp. and Asahi Group HoldingsLtd. By contrast, Coke reported flat volume in China in the second quarter.

Revenue in Europe inched 1% higher to $3.65 billion, powered by a 3% increase in snack volumes, despite tough economic conditions.

But results worsened at the company's Quaker Foods North America unit, which has been struggling with sluggish oatmeal sales. Revenue at the unit shrank 1% to $577 million and operating profit fell 14% to $133 million as the company ramped up investments to bring new products to market.

Stifel Nicolaus analyst Mark Swartzberg said in a research note Wednesday that the second-quarter results indicate PepsiCo's restructuring push "is working'' after profit fell last year but that it is too early to rule out bigger structural changes.

"We continue to think buying Mondelez is unlikely but that PepsiCo management may ultimately revise its attitude to splitting up,'' wrote Mr. Swartzberg.

Mr. Peltz, the prominent activist investor, said last week that PepsiCo should split its snack and beverage businesses even if it doesn't buy Mondelez, whose snack portfolio includes Cadbury chocolate bars, Oreo cookies and Trident gum.

A spokeswoman at Mr. Peltz's Trian Fund Management LP, which amassed stakes of more than $1 billion in each of PepsiCo and Mondelez earlier this year, declined Wednesday to comment on PepsiCo's second-quarter results.

Article written by Mike Esterl (at mike.esterl@wsj.com) for the Wall Street Journial and can be found here.

Best Overall Brands: Crest, Gillette, and Dove; and Kellogg, Heinz, and Kraft



The best overall brands in health and beauty, and food and beverage categories are Crest, Gillette, and Dove; and Kellogg, Heinz, and Kraft, respectively, according to a pair of new Forrester rankings based on online surveys this year of 4,500 adults. The Boston-based market research firm argues that brand health comes from the extent to which it is trusted, remarkable, unmistakable, and essential. If you turn that into an acronym, you get Forrester's TRUE formula for brand equity.


In the survey, from which the rankings are derived, consumers said Dove provides "a consistent experience every time I use the brand," and has "products/services that consistently deliver on their promises." Thanks in part to its campaign about authentic, versus manufactured, beauty the company has gone from a $200 million soap brand in the 1990s to a $4 billion mega-brand today, notes Forrester.

The research firm suggests brands shouldn't expect miracles based on spikes in consideration from a new product, or sudden interest from a new ad campaign. Dove's slow and steady pace is exhibit A: trust over buzz wins, says the consultancy. The firm says P&G's Crest and Gillette also lead in their categories because of this, with the latter leading among men between 25 and 34. The firm says that by contrast, younger, more niche brands like Axe haven't yet built trust, and haven't become "essential" to consumers. The brand, per Forrester, does resonate with consumers 18 to 34.

Dove, meanwhile, does best with women 40 to 49, with consumers overall preferring Dove over all other brands based on the levels of trust consumers have for it. The survey found, for example, that the brand provides "a consistent experience every time I use the brand," and scores well for "having products and services that consistently deliver on their promises."

Thanks to a refocus on athletes, Gatorade did well in the food and beverage survey in terms of consumers' sentiment that the brand helps athletes "to always perform at their peak." Forrester said the PepsiCo unit's marketing strategy around affiliating the brand with athletic performance, plus touting scientific research to back its claims, puts it above Coke on the brand ranking with its core target audience of 20-something men. The firm also says Gatorade's efforts have helped return it to a dominant -- 46% share -- position in the global sports drink sector.
Generally speaking, the study finds that familiar food brands have the highest TRUE ranking and "old-guard" brands are more trusted by upstarts. And -- not surprising -- as trust drops, so does preference. For example, Vitaminwater, whose preference level is under 20%, has the lowest trust score of any brand in the competitive set. Above Vitaminwater is Snapple, which is bested, in terms of preference, by Pepsi, Lipton, Gatorade, Kellogg, Nestle, Kraft, Coke and Heinz.

Article Written by Karl Greenberg, Yesterday, 2:34 PM for Marketing Daily - original post can be found here.http://www.mediapost.com/publications/article/204498/forrester-healthy-brands-are-true.html#axzz2ZFVaGIQj