PepsiCo Orders Cost Cuts as North America Drags on Profits

PepsiCo will raise prices on select chips and cut costs across its operations as its North American business, which generated about 56% of the company's $25.27 billion in third-quarter net revenue, continues to drag on profits.

The maker of Doritos and Gatorade is targeting redundancies and discretionary spending, with implementation planned in the coming months.

"We're going to look at every cost with aggressive lenses and with the lenses that everything that is not related to growth will not be part of the company," CEO Ramon Laguarta said on an earnings call Thursday.

What does the pricing reversal mean?

The planned chip price increases respond to higher energy and agricultural costs, PepsiCo told analysts. The move reverses course from February, when the company announced it was lowering prices by up to 15% on Doritos and other snacks to win back inflation-wary consumers who had cut back on spending.

Laguarta said the cost cuts will free up money to fund investment opportunities across the business, including functional foods and other better-for-you segments.

Where does North America stand?

North America "performed below our expectations and represents a meaningful opportunity for improvement," Laguarta said in prepared management remarks.

Still, the region showed signs of stabilization. PepsiCo reported:

• Sequential improvement in organic revenue and volume trends in U.S. savory and salty categories for the third quarter and year-to-date
• Four consecutive quarters of volume growth in the U.S. salty category, which "outperformed" the broader U.S. food and beverage category
• Flat North American volumes overall, with U.S. share gains in potato chips, curls, rice snacks and flavored pasta

In beverages, organic volume trends improved on strength in energy drinks, functional hydration, and zero-sugar and flavored soft drinks. North American beverage volume fell 2% during the quarter.

Can innovation drive the turnaround?

PepsiCo plans to launch more on-trend products with simpler ingredients, alternative oils, and functional elements such as protein and fiber. The company said it was "encouraged" by recent launches, including:

• NKD line
• Doritos Protein
• Lay's baked with olive oil
• Gatorade lower sugar without artificial colors, flavors or sweeteners

Despite the improvement, Laguarta said PepsiCo will keep "acting with urgency to sustainably improve our business." The company lowered its organic revenue outlook to up about 3%, compared with its prior forecast of up 2% to up 4% — signaling that management expects the turnaround to take longer than previously projected.