pepsi and the recession

Commodity Online
NEW YORK: Soft drink giants, Coca Cola and PepsiCo are facing a severe demand slump for their liquid beverage business in North America due to economic slowdown. Coca Cola has reported a 14 percent growth in third quarter earnings while PepsiCo has reported a 11 percent net revenue.

However, PepsiCo, the second largest US drink maker seems to have been affected more by the crisis looking at the core earnings per share which has grown by only 6 percent as against 17 percent for Coke reported during the period. PepsiCo also has announced plans to cut 3300 jobs and close six plants following the lagging soft drinks sale in USA and the surging US dollar.

For both companies it was the demand from emerging economies that helped them to offset to slump in US demand. In China, Coke’s volumes rose by 13 per cent, and still drink sales was up 27 per cent.

“Coke’s “international operations, in particular the emerging markets, continue to drive our growth, more than offsetting the challenges that we are addressing in North America,” according to Muhtar Kent, Chief Executive of Coca Cola.

“We anticipate that the operating environment, especially in North America, will continue to be challenging as we finish 2008 and move into 2009. However, we have been diligent in taking the evolving landscape into account as we are planning for 2009, and believe that the solid fundamentals of our business, our strong balance sheet and cash generating capability, the experience of our management team and the strength of our brands will drive the business through these difficult economic times.”

PepsiCo has announced that they are implementing a broad-based productivity program, which is expected to produce $1.2 billion in pre-tax savings over three years. The majority of the savings will be invested in Pepsi’s businesses.

”We were adversely impacted by continued weakness in the U.S. liquid refreshment beverage category, which resulted in disappointing performance in our domestic beverage business. We are taking important steps to revitalize our beverage portfolio," according to Indra Nooyi, Chairman and Chief Executive Officer of PepsiCo.

PepsiCo said it would renew its focus on carbonated soft drinks with a marketing campaign next year. That would be a reversal of its strategy to move toward more expensive alternatives, such as sparkling juice and energy drinks.

For the quarter, mark-to-market losses on commodity hedges increased by $147 million ($176 million compared with $29 million in the comparable period a year ago). PepsiCo enters into commodity hedges to manage its cost structure and pricing in a volatile inflationary environment.

Coca-Cola also has been working to strengthen its US beverage business, especially its Coke brands over the past three years. It has been expanding its drinks portfolio to include newer juice and enhanced water brands such as Vitamin Water.