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PepsiCo's (PEP) Productivity & Cost-Saving Initiatives Bode Well

PepsiCo Inc. PEP has persistently showcased the benefits of stringent cost-saving actions and focus on productivity improvements. These actions have gone a long way in bolstering PEP’s margin performance, along with continued focus on expansion.

The company has been focused on driving greater efficiency and effectiveness by driving down costs and plowing back these savings to develop scale and core capabilities. The company expects to achieve its productivity goals through savings generated from its restructuring actions. These actions are likely to position it to further simplify, synchronize and automate processes; re-engineer the go-to-market and information systems; simplify the organization; and optimize its manufacturing and supply-chain footprint.

Savings from the productivity and restructuring plans should help drive the top line and margins. In 2024, the company anticipates elevating its focus on holistic cost-management initiatives to boost productivity and use these savings to mitigate cost inflation and prioritize investments in its brands, innovation, and channel expansion.

Gains from PepsiCo’s cost-management initiatives were well-reflected by its improved margins in fourth-quarter 2024. On a consolidated basis, the company’s reported gross profit increased 1.2% year over year in the quarter, while core gross profit rose 1.3%. The reported gross margin expanded 91 basis points (bps), whereas the core gross margin expanded 97 bps.

PEP’s reported operating income rose 106% year over year. The core operating income grew 8.7% year over year and the core constant-currency operating income improved 10%. The reported operating margin expanded 313 bps from the year-ago quarter. Meanwhile, the core operating margin expanded 97 bps due to ongoing holistic cost-management initiatives to drive superior supply-chain and distribution efficiencies, partially offset by ongoing inflationary pressures and planned business investments.

Other Factors Driving Growth

PepsiCo has been benefiting from strength and resilience in its categories, diversified portfolio, modernized supply chain, improved digital capabilities, flexible go-to-market distribution systems and robust consumer demand trends. Additionally, pricing gains, driven by strong realized prices across all segments, have been key drivers.

Notably, effective net pricing improved 9% year over year in fourth-quarter 2023. Driven by the pricing gains and growth across categories and geographies, organic revenues grew 4.5% year over year in the fourth quarter. PepsiCo’s fourth-quarter core EPS of $1.78 increased 6.6% year over year. In constant currency, core earnings improved 9% from the year-ago period, backed by the mitigation of inflationary pressures through cost-management and revenue-management initiatives.

Peer Comparisons

The company shares space with The Coca-Cola Company KO, Monster Beverage Corp. MNST and Keurig Dr Pepper KDP in the Beverages – Soft Drinks industry.

Coca-Cola, the leading global beverage giant, is on track with its strategy of becoming a total beverage company, through last year’s streamlining of its portfolio, focusing on the core brands, and investing in its portfolio of brands to meet the evolving needs of consumers. It is focused on diversifying its portfolio to tap into the rapidly growing RTD alcohol beverages category as part of its innovation strategy.

Coca-Cola has been witnessing positive business trends in the past quarters, thanks to strong revenue growth across most of its operating segments, aided by an improved price/mix and increased concentrate sales.

Monster Beverage, based in Corona, CA, is a marketer and distributor of energy drinks and alternative beverages. The company’s continued momentum in the energy drinks category remains a key growth driver. Monster Beverage is witnessing robust margin trends, driven by the easing of supply-chain headwinds, particularly reduced freight costs. Additionally, the company continues to benefit from its pricing actions across various regions to negate the impacts of rising commodity costs and inflation.

Keurig Dr Pepper is a beverage and coffee company in the United States and Canada, with annual revenues of more than $14 billion. Keurig Dr Pepper has been witnessing continued momentum in the Refreshment Beverages segment, which is aiding the top line. Continued brand strength and significant pricing have also been the key drivers.

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