PepsiCo considers more price hikes and product mix changes to combat inflation

Dive Brief:

• PepsiCo said it is considering further price hikes and changes to its product mix as it braces for rising expenses and higher levels of inflation for the rest of the year, the company said in its second-quarter earnings.
• In prepared remarks, CEO Ramon Laguarta said PepsiCo is sharpening its revenue management capabilities with “mix and assortment solutions,” which could be smaller sizes in its variety packs. Hugh Johnston, the company’s CFO, told CNBC the company may sometimes choose to reduce the number of chips in a bag rather than increase prices. 
• As food and beverage companies grapple with how to deal with inflation and rising input costs, CPGs of all sizes are looking for ways to offset some of those expenses without passing all of them on to cash-strapped consumers.

Dive Insight:

With a portfolio of iconic snacks and drinks, PepsiCo so far has shown an ability to withstand the brunt of outside forces impacting U.S. businesses.

Its North America beverage unit posted organic revenue growth of 9%, compared to a year prior, while its North America Frito-Lay snacks division rose 14%, the earnings report said. Frito-Lay also gained market share in both the overall snack category and savory snacking for the quarter and year-to-date, according to the prepared remarks from management. In a filing with the U.S. Securities and Exchange Commission, PepsiCo indicated consumer prices throughout all of its divisions jumped 12% during the quarter.

The company’s quarterly revenue increased to $20.2 billion, from $19.2 billion a year ago. For the second consecutive quarter, PepsiCo raised its outlook, forecasting revenue growth of 10% this year — up from 8% — as consumers keep buying its offerings. 

But even a giant like PepsiCo is treading carefully when it comes to the current instability sweeping the economy. While consumers have generally accepted higher prices, PepsiCo can’t be sure that will continue, especially with further price hikes planned from the company and other CPGs to offset inflation. 

To be sure, PepsiCo’s size gives it multiple levers it can pull to protect its business that won’t alienate consumers. Johnson noted the company’s broad portfolio allows it to tailor a store’s product mix depending on the shopper. For example, some stores in low-income neighborhoods are carrying more Santitas chips. 

“There’s still plenty of unknowns in terms of what’s going to happen with consumer behavior. We think we’re well positioned,” Johnson told analysts. “But we still have six months to go [in the year] and consumers are still sort of absorbing the impact on inflation on their overall spending.”

PepsiCo noted this quarter that it is looking to smaller sizes, either in the packaging or how much product is contained inside. So-called shrinkflation — where companies reduce the size or quantity of a product while charging the same price — is nothing new, but the current environment has made it a popular tool for many businesses, especially those that make food and beverages. 

PepsiCo has already reduced the liquid in Gatorade bottles from 32 ounces to 28 ounces. Tillamook, an Oregon-based dairy company, downsized its ice cream cartons from 56 ounces to 48 ounces last year in order to keep the price the same. General Mills reduced the contents in its family-size cereal boxes. Mondelēz did the same for its Wheat Thins Family Size.