Pepsi, Coke Battle Commodity Costs

PURCHASE, N.Y. ( TheStreet) -- PepsiCo ( PEP) feels the sting of rising commodity costs more than rivals Coca-Cola ( KO) and Dr Pepper Snapple ( DPS), but so far the food and beverage giant has been able to manage the risk.

PepsiCo beat profit expectations Thursday and reaffirmed its outlook despite what it called "high global commodity cost inflation ."

PepsiCo said it expects commodity cost inflation of $1.4 billion to $1.6 billion this year.


In its recent quarter, PepsiCo's cost of goods sold soared 22% to $5.45 billion, though the figure took up a smaller percentage of total revenue year-over-year.

PepsiCo turned to improved operational efficiencies and price increases to help offset those costs, but CFO Hugh Johnston conceded that pricing in the first half of the year "has not been what we would have liked or expected."


Coca-Cola, which posted a weaker-than-expected 18% profit increase last quarter , reported that its cost of goods sold was up 55% year over year to $3.95 billion, or 37.5% of total revenue. In the year-earlier period, cost of goods sold was $2.54 billion, or 33.7% of total revenue.

In late March, Dr Pepper Snapple said that costs for plastic bottles and fuel to transport beverages had been rising as oil prices marched higher.

Oil prices affect the price of polyethylene terephthalate, or PET, the plastic used by beverage companies to make soda bottles. Dr Pepper Snapple, Coca-Cola, PepsiCo and other beverage makers cannot hedge the prices they pay for PET because the material is not traded like other commodities.

Pepsi


Dr Pepper Snapple said it would raise prices and implement other cost savings initiatives in an effort to offset higher costs.

Despite higher costs, PepsiCo reaffirmed its 2011 outlook for earnings growth between 7% and 8%, indicating a range between $4.42 and $4.46 per share, lower than analysts' consensus for a full-year profit of $4.49 per share.

PepsiCo said its forecast included "high global commodity cost inflation, difficult macroeconomic conditions in developed markets and ongoing strategic investments in emerging markets and in brand-building activities."

A roster of food and beverage companies from McDonald's ( MCD) and Hershey ( HSY) to Kraft Foods ( KFT) and Starbucks ( SBUX), as well as consumer goods companies like Procter & Gamble ( PG), Hasbro ( HAS) and Colgate-Palmolive ( CL), have reported in recent months that rising commodity costs continue to pressure their bottom lines.

Both PepsiCo and Coca-Cola recently purchased their largest bottlers, hoping to streamline production and distribution costs. Coca-Cola bought out Coca-Cola Enterprises ( CCE) in October of last year in a $3.4 billion acquisition. Earlier, PepsiCo acquired two of its bottlers.

Diet Coke Overtakes Pepsi

Coca-Cola may be winning out over PepsiCo and Dr Pepper Snapple in terms of keeping costs in check, but it also topped its rival in the battle for consumer tastes.

Data released in March showed that Diet Coke overtook Pepsi's namesake beverage as the second best-selling soda in America.


Beverage Digest released the report, noting that regular Coke continued to outpace by far in 2010, with 1.59 billion cases sold last year for 17% of market share. Diet Coke sold 926.9 million cases last year, or about 9.9% of total market share, topping Pepsi-Cola's 891.5 million cases, or 9.5% of market share,

Many industry watchers hailed Coke as the clear winner on the decades-long cola wars.

Rounding out the top 10 list, in order, were Mountain Dew, Dr Pepper, Sprite, Diet Pepsi, Diet Mountain Dew, Diet Dr Pepper and Fanta.

Coke, Diet Coke and Pepsi-Cola each sold fewer cases in 2010 than in 2009, but Pepsi-Cola saw the steepest decline. Regular Coke sold 0.5% fewer cases year-over-year, Diet Coke 1% fewer and Pepsi-Cola 4.8% fewer.

Credit Suisse analyst Carlos Laboy said in a research note that he was "worried about the morale implications for PepsiCo's beverage people of having the company's namesake brand and its top beverage brand dropped to a tertiary spot within its category at a time that a tangible sign of brand momentum for the core brands would help."

That lack of momentum, said Laboy, has nothing to do with larger trends in the soft drink market, and everything to do with Pepsi. "There is no U.S. beverage category problem, just a Pepsi problem," he wrote.

Coke

Laboy downgraded PepsiCo shares to neutral, from underperform, back in February. Earlier this week, UBS analyst Kaumil S. Gajrawala kept a buy rating on the stock but lowered the firm's earnings-per-share estimate on PepsiCo shares.

Pepsi said it was not particularly worried, however. "I don't think that we'd view this as a blow," a Pepsi spokesperson told Ad Age.

"We're looking at our total position. Consumers want a wide range of products for a wide range of occasions. And we're in a great position to satisfy them with that. Today we're fighting a totally different battle on a much bigger battlefield than just colas, though we are completely committed to carbonated soft drinks."

That Diet Coke overtook Pepsi-Cola reflects not only Coca-Cola's dominance, but the growing trend toward diet sodas in general. A decade ago just two of the top 10 list were in the diet or sugar-free category, half of what it is today.

Diet Mountain Dew and Diet Dr Pepper saw volume grow 5.8% and 5.6%, respectively, last year. Colume of Diet Pepsi, meanwhile, fell 5.2%.

-- Written by Miriam Marcus Reimer in New York.

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