PepsiCo raises 2023 full-year earnings outlook on Q3 performance, Gatorade loses market share to PRIME

10-Oct-2023 - Last updated on 12-Oct-2023 at 09:33 GMT

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PepsiCo released its 2023 third quarter fiscal year report and beat Wall Street estimates, citing increased demand for smaller-sized snacks and healthier options, as the company faces challenges from PRIME in the sports drink category and anticipates potential long-term impact on its business from Ozempic and other weight-loss drugs.

For the third quarter ending Sept. 9, 2023, PepsiCo’s net income came in at $3.116bn, with net revenue growing by 6.7%, compared to a year-to-date average of 8.9%. Core gross profits increased by 9%, and core gross margin expanded by 105 basis points, as core operating profit increased by 12%, and core operating margin grew by 80 basis points. Earnings per share for the quarter came in at $2.24, compared to $5.62 for the full year.

“We are pleased with our performance as our businesses and associates displayed tremendous agility and resilience across geographies and categories in an evolving and dynamic environment. Given the strength of our businesses and categories and a continued focus on advancing our holistic cost management initiatives, we now expect our full-year 2023 core constant currency EPS to increase 13% (previously, 12%) and continue to expect our full-year 2023 organic revenue to increase 10%,” said Ramon Laguarta, Chairman and CEO in a press release.

PepsiCo loses market share to Prime, keeps an eye on Ozempic

For the quarter, PepsiCo Beverages North America saw 6% organic revenue growth, compared to 13% the same quarter last year, and investments in advertising and digitalization have helped growth across its portfolio. Gatorade delivered double-digit net revenue growth, while bubly saw high-single-digit net revenue growth, and Pepsi and LifeWTR products contributed mid-single-digit net growth.

Despite this revenue growth, Gatorade is facing fiercer competition in the sports drink category with the growth of Logan Paul's PRIME brand, which has become popular among younger consumers. However, PepsiCo has prepared for the tougher competition in the category with G Zero, Gatorlyte, and its powders and tablets, Laguarta noted during an investor's Q&A.

"It is true that the emergence of PRIME in the category took ... some share from Gatorade, but less than other brands in the category or less proportionally to the size of the brand. But I would say PRIME impacted Gatorade in ... some transactions during the peak of the season,” Laguarta said.” We're seeing that ... the size of PRIME in the category getting smaller, as we go into the fall, which gives us very good optimism."

Similar to other food and beverage companies, PepsiCo is also keeping an eye on recent developments from Ozempic’s use for hunger suppression and weight loss. When an investor asked how drugs like Ozempic might impact the company’s bottom line, Laguarta responded that “so far, the impact is negligible in our business,” and he stood by PepsiCo’s brand evolution as a means to secure the company from any impact.

"Everything we've been doing for the last five, six years when it comes to reducing sodium, reducing fat, reducing sugar, reducing ... the portions of our products, adding some new cooking methods to our snacks, those are all very positive trends that will help us beef up the portfolio if needed in the future," Laguarta said. "A lot of these structural trends that are in our category, I think remain very solid, and even we see them accelerating, and our portfolio strategy we think is very solid when it comes to a potential protection against some of these future developments."

Frito-Lay North America grows, as consumers shift to smaller pack size

Elsewhere in the company’s portfolio, PepsiCo's Frito-Lay North America division delivered 7% organic revenue growth, compared to a 20% increase during the prior year quarter, with the business gaining market share in macro and savory snack categories. The division also increased business investment and advertising and marketing spending, which edged core operating profits lower to an increase of 5%, compared to 14% in the 2023 second quarter.

PopCorners, Miss Vickie’s, and SunChips saw double-digit net revenue growth, while Doritos, Cheetos, and Ruffles saw "strong net revenue growth," as well as net revenue growth across channels, which include foodservice, convenience and gas, and large format, according to prepared remarks.

Consumers have also started to shift their preferences “towards smaller packages that offer the benefits of convenience, variety, portion control, and good value,” PepsiCo stated in prepared remarks. PepsiCo is tapping into this demand and making adjustments to its portfolio, by releasing smaller pack sizes of its Frito-Lay Baked, Simply, and lightly salted options and releasing bite-sized Frito-Lay Minis in Doritos, Cheetos, and SunChip varieties, with other offerings on the way.