PepsiCo CEO credits ‘remarkable’ marketing teams for minimising price elasticities

PepsiCo has credited marketing for strengthening its brands and improving perceived value, which it says has helped consumers stomach price rises and prevent them from switching to competitors.

“It’s remarkable what our marketing and commercial teams have been doing to minimise elasticities,” said PepsiCo CEO Ramon Laguarta talking on an investor call today (13 July) following the release of its second quarter results.

“In some respects it’s what we have been investing for over the past few years. Our brands are stronger, the perceived value of our products is better than it was and obviously we have been able to raise prices and consumers stay within our brands.”

Despite the current challenging economic climate and the squeeze on people’s finances, Laguarta said PepsiCo has been able to retain the “majority” of consumers thanks to its marketing efforts.

But that’s not to say consumers aren’t adapting their shopping habits, he said, adding that lower income consumers are “strategising around optimising their budget”, for example.

“We’re seeing consumers make some adjustments. We’re seeing consumers shop in more stores than before, they’re looking for better deals, they’re starting to look for optimisation. They’re going to channels that have better perceived value, they’re buying more in dollar stores, they’re buying more in mass… So every segment of the consumer is making adjustments.”

Overall, he was positive about the consumer outlook, putting it down to low levels of unemployment around the world, both in established and developing markets, such as Mexico and some parts of Asia.

He said its brands continue to be an “affordable treat” and consumers are making “trade-offs” to stay within its categories.

It’s remarkable what our marketing and commercial teams have been doing to minimise elasticities.

Ramon Laguarta, PepsiCo

“What we’re seeing overall is very good consumer behaviour, especially when it refers to our categories that’s why we raised guidance on our top line,” he said.

PepsiCo’s organic revenue increased by 13% during the second quarter as a result of “strong” business momentum, and it now expects its full-year organic revenue to rise by 10%, two percentage points higher than previously estimated.

PepsiCo’s gross profit and core operating profit both increased 13% during the quarter, while its core gross margin expanded 130 basis points and core operating margin expanded by 45 basis points. The business says the performance reflects a “strong double-digit increase” in advertising and marketing spend, as well as the ongoing digital transformation of the organisation, improved labour efficiencies, the unlocking of capacity constraints and reducing waste through its value chain.

The business also puts the increase in revenue down to improvements on the supply side, with Laguarta singling out a “much better” delivery of materials from suppliers and improved labour markets generally in helping it “run a better company”. He added the business has also been “flowing some of that revenue down into the bottom line”.

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Investing in marketing

While the business continues to work on increasing productivity to help improve margins, PepsiCo’s chief financial officer Hugh Johnston said it will also continue to invest in areas like marketing.

PepsiCo increased investment in advertising and marketing (A&M) by 50 basis points during the quarter and plans to invest more in the second half of the year.

“We are continuing to invest. We’re investing in advertising and marketing. A&M was up 50 bps in the second quarter and you’ll continue to see us invest in A&M. You’ll continue to see us invest in capability,” he said.

“Our investment cycles tend to be more back half orientated than they are front half oriented when we have a sense of how the year is going to turn out.”