By Andrew Martin
Wednesday, October 15, 2008
Tap water is making a comeback. That's bad news for PepsiCo's profits.
The company, which makes Pepsi, Doritos and Quaker Oats cereal, announced on Tuesday that its quarterly earnings were down 10 percent in part because of declines in sales of soda and bottled water in the United States.
In response, the company is planning to eliminate 3,300 jobs and close as many as six plants to cut costs and to refocus its efforts on stabilizing its domestic beverage business.
"Revitalizing this business is a huge priority for us," said PepsiCo's chief executive, Indra Nooyi.
Pepsi reported net income of $1.58 billion for the third quarter, compared with $1.74 billion a year earlier. Excluding losses related to commodity hedges, the company's earnings were $1.06 per share. Analysts surveyed by Thomson Reuters were expecting $1.08 per share.
The company's stock price dropped $7.37 to close at $54.40 on Tuesday. The stock has fallen 28 percent since the beginning of the year, most of that in the last two weeks. PepsiCo's stock on Oct. 1 was $71.64.
Sales of carbonated soft drinks have been declining in the United States for several years, as consumers turn to a growing number of new beverages like enhanced waters, sports drinks and energy drinks. But the problems have accelerated in a volatile economy, with consumers eating at restaurants less and buying fewer grab-and-go beverages.
In addition, consumers are increasingly choosing tap water over other beverages at restaurants and at home to help save money and the environment, according to PepsiCo and industry analysts. Research by William Pecoriello, an analyst at Morgan Stanley, found that 34 percent of consumers say they are reusing plastic bottles more often and 23 percent say they are cutting back on bottled beverages in favor of tap water or beverages in containers that create less waste.
Information Resources, a research firm, found that sales of water filters increased 16 percent in the first half of the year.
PepsiCo said volume for beverages in North America declined by 4 percent in the third quarter, which ended in Sept. 6.
In recent years, noncarbonated beverages were an engine of growth as soda sales slipped, but no longer. Volume for noncarbonated beverage sales dropped 5 percent in the quarter, led by double-digit declines in Aquafina and Propel, a flavored and vitamin-enhanced water drink.
Carbonated soft drink volume in North America declined by 3 percent in the quarter.
In response, PepsiCo is creating new packaging and logos for many beverages, and plans to introduce new products in the coming year.
"Because of the economy, there is some movement, probably temporarily, back to tap water," said John Sicher, publisher of Beverage Digest, an industry publication. He predicted that both PepsiCo and Coca-Cola would ratchet up their efforts to improve beverage sales in 2009.
"Unless both Pepsi and Coke do something quickly, they could lose a generation of carbonated soft drink consumers," Sicher said.
To increase sales in the United States, Nooyi said, would take a "breakthrough" product. Both Pepsi and Coke are hoping for a breakthrough when they introduce beverages that use a natural, low-calorie sweetener derived from the stevia plant.
Despite the lackluster beverage sales in North America, Nooyi said international growth remained robust, particularly in the Middle East, India and China. Revenue for PepsiCo's food businesses in the North America grew by 12 percent in the quarter, and profit increased by 9 percent.
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