PepsiCo warns of rising cost pressures as U.S. consumer demand softens

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PepsiCo warns of cost pressures

Highlights

PepsiCo expects higher input cost inflation in the second half of the year but anticipates offsetting savings from productivity and tariff refund claims.
North American snacks sales volumes are flat and organic revenue falls 2 percent in Q2, while international growth drives a 6.4 percent increase in group revenue to $24.2bn.
PepsiCo maintains full-year guidance amid industry headwinds such as oil-driven cost inflation, Walmart price rollbacks, and consumer pushback against processed foods.

Second-quarter performance and cost outlook

As reported by Financial Times, PepsiCo said on Thursday that it expects higher input cost inflation in the second half of its financial year than in the first six months, although productivity savings and tariff refund claims are expected to offset a good portion of the increase.

Ramon Laguarta, the company’s chief executive, says results in the quarter are tempered as U.S. food and beverage category performance moderates while consumer budgets tighten under rising inflationary pressures. Sales volumes at PepsiCo’s North American snacks business are flat in the latest quarter, and organic revenue for the unit declines 2 per cent because of discounting.

The performance marks a slowdown from the first quarter, when price cuts of up to 15 per cent on snacks ahead of February’s Super Bowl help lift volumes and revenue in the division, one of PepsiCo’s two largest revenue drivers. That earlier boost now appears to be fading.

International support and wider industry pressure

A stronger showing from PepsiCo’s international businesses helps the group report a 6.4 per cent rise in second-quarter revenue to $24.2bn, ahead of Wall Street expectations. Net income rises to nearly $3bn, roughly in line with market forecasts, while the company’s shares fall slightly in pre-market trading.

PepsiCo maintains its full-year guidance, forecasting organic revenue growth of between 2 per cent and 4 per cent and earnings per share growth of between 4 per cent and 6 per cent. The company’s outlook comes as higher oil prices, following the resumption of hostilities between U.S. and Iran in recent days, risk prolonging inflationary pressure.

The consumer goods group also faces a tougher retail and industry backdrop. Walmart says this week that it is introducing grocery price rollbacks, including lower prices on several PepsiCo products, while packaged food companies are also dealing with consumer pushback against processed products and the rapid growth in use of GLP-1 weight-loss drugs.

In our earlier report on PepsiCo’s mixed second-quarter results, we noted that weaker performance in its North American food and beverage businesses was offset by solid demand in international markets. The piece highlighted rising U.S. inflation pressures tightening consumer budgets, while the company still delivered higher net sales and net income and pointed to a more challenging domestic spending backdrop.

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