From SodaStream to Starbucks: PepsiCo on building a power portfolio
PepsiCo: ‘We’re seeing consumers going after functionality, going after health and wellness, but also going after indulgence’
Do consumers want hydration or do they want functionality? Do they want indulgence or do they want value? Do they want sugar or do they want sweeteners?
Choice will continue to be the way to address multiple consumer demands, says Ramon Laguarta, chairman and CEO, PepsiCo: with a portfolio that ranges from SodaStream to Starbucks. Brands that can innovate in multiple spaces will be a bonus. “We’re going to play in every vector of demand,” says Laguarta.
Capturing occasions throughout the day
PepsiCo has been on a mission to drive its North American Beverages (NAB) forward: rewarded with 3% organic revenue growth over the latest quarter, it reported this week. Worldwide across the company, it saw 4.3% net revenue growth and 3.1% in the year to date.
A broad portfolio will be the way to continue to build growth and appeal to as many consumers as possible, said Laguarta, speaking in the earnings call with analysts.
“We're seeing the consumer going after functionality, going after health and wellness, but also going after indulgence and going to many spaces in the convenience association, so a lot of different vectors that drive consumer preference and choices.
“And then, obviously, a very important vector which is price. So premium value is very important segmentation as consumers make choices.
“So the decision we made is that we're going to give the consumer maximum choice, again, to each one of the vectors and we're trying to capture demand from all of the different occasions throughout the day.
“That's the only way we're going to keep our share growing and we're going to be successful in our category.”
Evolving the portfolio
PepsiCo’s North America beverage portfolio covers a wide variety of drinks from its flagship Pepsi brand through to bottled waters LIFEWTR, bubly and Aquafina; and from sports drink Gatorade through to Pure Leaf tea and Starbucks coffee.
Star performers at the moment include Gatorade (mid-single-digit net revenue growth), Gatorade Zero (which has surpassed $0.5bn in retail sales since its launch in May 2018 and is credited with bringing calorie conscious consumers back to the brand) and Bolt24 (a new functional hydration beverage for athletes).
Trademark Pepsi, meanwhile, is now in its fifth consecutive quarter of net revenue growth.
In bottled water, bubly continues to gain share in the flavoured sparkling water category, while premium water brand LIFEWTR enjoys double-digit net revenue growth.
Pure Leaf Tea and Starbucks (PepsiCo and Starbucks have a long-standing partnership for Starbucks branded RTD beverages) have been seeing high single-digit net revenue growth.
In the doldrums: Mountain Dew
Mountain Dew, conversely, continues to be a thorn among the roses. The brand’s performance has been ‘flat’, and although the brand is well-resourced it’s about having the right ideas to drive it forward, said Laguarta.
The drink is higher than others in sugar and calories (170 calories per 12 fl oz serve – slightly higher than Pepsi at 150 calories), while PepsiCo admitted back in 2017 that the brand suffered when attention was diverted to newer, trendier brands.
"It's a brand that is in the intersection of CSDs and energy, and it's not as easier problem to solve in terms of maintaining the relevance and the consumer high awareness for this brand compared to some of the other new trends that are happening in energy," said Laguarta. "So that's work for us to do."
PepsiCo has been boosting marketing spend and innovations around the product – such as with a version designed specifically for video gamers.
“Mountain Dew is improving, but it's not to the levels that we would like to see,” said Laguarta. “So that's the focus of the team for the next few quarters, make sure that we get Dew back to what we think is a more sustainable performance.”
Archrival Coca-Cola has been expanding its take on the CSDs-meets-energy proposition, with the US rollout of Coca-Cola Energy coming next year.
But Laguarta has downplayed the idea of a competing 'Pepsi Energy' product, saying that while he agrees energy will be a key category moving forward, he doesn't see branded cola energy blends as the center of the category.
What about soda?
With consumers moving away from carbonated soft drinks, a question mark continues to hover over the category. While PepsiCo’s North America CSD volumes were down 3%, it points to a rise in net revenue.
Small pack sizes is a trend that’s helping boost the category, and PepsiCo says its investing capacity for these smaller formats.
PepsiCo is seeking to become more insightful as to what occasions and consumers the CSD category needs to target, Laguarta continued.
“There is, I think, a structural change in consumer demand in this category,” he said. “It's moving to a smaller format, a different format, that drives a different volume net revenue construction here.”
Sodastream: doing better than anticipated (in Europe, at least...)
SodaStream is often championed as a key part of PepsiCo’s efforts to broaden its portfolio away from both sugary drinks and plastic waste: with consumers flocking to flavoured sparkling water as a healthier alternative to soda.
'You will see some transformational programs for SodaStream next year in the US'
“The good news is that SodaStream is doing very well, and it's doing better than what we had in our business case for M&A, so it continues to be very successful across multiple parts of the world," said Laguarta.
"In Western Europe, where it started, it's very, very strong. Germany, France, Holland, Central Northern Europe as well. It is strong in Japan. It is very strong in Canada.”
In the US, however, there’s still work to be done in encouraging consumers to adopt the brand into their homes and routines. PepsiCo is making some ‘organizational changes and upgrading talent’ in the business – seeking to boost the brand in the country.
“We're leveraging, obviously, the customer relationships that we have with our PepsiCo business to open some new relationships, and we are innovating a lot. You will see some transformational programs for SodaStream next year in the US - I'm very optimistic about the step change in the household penetration that will give us.”
To acquire or not to acquire?
But what will PepsiCo's portfolio look like in the coming years? Will it use in-house innovation or look to acquisitions to tap into more occasions?
For now, Laguarta’s message is that PepsiCo has already built a powerhouse portfolio (it has 22 billion-dollar brands and hopes to soon add bubly as another) that can drive the company forward into the future.
“I think we have a very good portfolio in North America to cover both existing demands and future demands,” said Laguarta.
“Whether we'll need some smaller brands to add to the portfolio, like we have KeVita or some other smaller brands, we'll see as we go forward. They will not be meaningful to the overall breakdown of the portfolio that we have."
Rather, the job is to ensure its existing powerhouse portfolio continues to stay with the times, says Laguarta.
"I think we have the brands. Now, we need to keep those brands very relevant, keep them modern, keep them attractive to the consumer as the new generations come into the marketplace. And then we need to keep innovating into new spaces under the umbrella of those brands. And they're broad enough brands that can cover multiple spaces."
