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PepsiCo's Cost-Saving Plans to Spur Growth Amid Weak Sales

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Cost-saving initiatives and productivity improvement have been favoring PepsiCo Inc. (PEP - Free Report) amid subdued sales in the recent quarters, courtesy of growing health consciousness. PepsiCo’s shares have sunk approximately 3.8% in the past year, against the industry’s rise of 2%. Nonetheless, the company is striving to retain investors’ optimism and regain its footing.

The company stepped up productivity and cost-saving initiatives to boost profitability by reducing overall costs. In February 2014, the company announced a new five-year restructuring plan to generate annual productivity savings of $1 billion each from 2015 to 2019, through productivity measures. The savings come from improved efficiency through increased manufacturing automation, closure of manufacturing facilities and increasing capacity utilization, re-structuring go-to-market systems in developed markets, expanding shared services as well as simplifying organization structures.

In the past two years, the company has been using automated high-speed packaging lines across the globe, which increased packaging line speed by up to 50%. Savings from these investments and technology and operational changes are being re-invested in the business to drive the top line.

Apart from cost savings, PepsiCo’s product innovation and aggressive marketing techniques are boosting growth.

The company regularly introduces new flavors of existing products and maintains a robust pipeline of new products. Most of the company’s latest line-up of products offer health benefits like reduced calorie beverages, non-carbonated beverages and healthier snacks. It is working to offer products with less sodium, sugar and saturated fat to reap benefits from shifting consumers’ preference toward healthier products.

Moreover, the company has significantly stepped up its advertising & marketing (A&M) and R&D investments to strengthen its brands and accelerate product innovation. It has significantly increased investments in social and digital marketing campaigns. Advertising and other marketing activities, reported as selling, general and administrative expenses, totaled $4.1 billion in 2017, up from $3.9 billion in 2015.

Hurdles

Consumers’ tastes are rapidly shifting from carbonated soft drinks (CSDs) to non-carbonated beverages. Hence, sluggish CSD volumes are a concern for this beverage giant as well as for other nonalcoholic beverage companies such as The Coca-Cola Company (KO - Free Report) , Monster Beverage Corporation (MNST - Free Report) and Dr Pepper Snapple Group, Inc. (DPS - Free Report) .

Though PepsiCo has increased marketing investments and is driving package and product innovation to boost the carbonated beverage business, no significant improvement has yet been witnessed. The company’s CSD volumes fell 5% in 2017.

Pepsico, Inc. Price

 

Zacks Rank

Pepsi carries a Zacks Rank #3 (Hold). You can see  the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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