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PepsiCo benefits from health focus as Americans ditch soda

By: Jennifer Kaplan, Bloomberg News
February 15, 2017 Updated: February 15, 2017 at 1:44 pm
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Some of the brands under the PepsiCo umbrella. Photo courtesy PepsiCo.com.

PepsiCo Inc., the maker of Mountain Dew and Cheetos, is under more pressure to shape up.

The food giant now generates 45 percent of its revenue from so-called guilt-free products, which include lower-calorie drinks and items with grains, fruits and vegetables. But with some overseas economies slowing - and currency fluctuations weighing on international sales - investors are looking to the company to turn its healthier portfolio into bigger growth.

Shares of PepsiCo fell as much as 2 percent to $104.77 on Wednesday after the company delivered a disappointing forecast, saying that earnings would come in at $5.09 a share this year. Analyst had predicted $5.15. Chief Executive Officer Indra Nooyi also warned of "continued macroeconomic challenges" ahead.

With customers attempting to eat healthier - especially in North America - the company is scrambling to release new and revamped products. That effort has helped PepsiCo cope with an industrywide slump in sugary beverages. Per capita soda consumption fell to a three-decade low in 2015, according to Beverage Digest, a trade publication. The shift has put more emphasis on products like Sabra hummus and Naked juices.

A category that the company calls "everyday nutrition," which includes water, unsweetened tea and healthier snacks, now accounts for 25 percent of sales. PepsiCo is focused on "lower sugar, lower salt, lower fat," Chief Financial Officer Hugh Johnston said in an interview, "while Pepsi-Cola is becoming a smaller part of the mix."

The move helped PepsiCo post earnings of $1.20 a share in the fourth quarter, excluding some items, topping the $1.16 estimated by analysts. Sales gained 5 percent to $19.5 billion in the period, matching estimates.

But Nooyi is looking to take the health kick further in the future. In October, the company pledged to reduce its reliance on sugar, salt and saturated fat. At least two-thirds of the company's volume will have no more than 100 calories from added sugars per 12-ounce serving by 2025.

PepsiCo has taken other steps, including:

- Agreeing in November to buy KeVita, a maker fermented probiotic drinks.

- Debuting an organic version of Gatorade in August.

- Introducing a line of healthy vending machines in December 2015.

- Announcing a partnership in October 2015 with BarFresh Food Group Inc., a smoothie maker.

PepsiCo and beverage rivals Coca-Cola Co. and Dr Pepper Snapple Group have all vowed to get customers to consume less sugar. The American Beverage Association, a trade group that represents the three companies, announced a pledge in 2014 to lessen per capita calories from drinks by 20 percent by 2025. But the work has gotten off to a slow start. Caloric intake from beverages only dropped 0.2 percent in 2015.

PepsiCo also hasn't figured out how to reinvigorate its flagship diet soda. It removed aspartame from Diet Pepsi in August 2015 after the ingredient gained a bad reputation with consumers. But after sales sputtered, it rereleased an aspartame-sweetened version less than a year later. Now the company has three diet offerings: Diet Pepsi, Diet Pepsi Classic Sweetener Blend and Pepsi Zero Sugar.

The company's bottom line also has been helped by Nooyi's cost-cutting push, which has cut about $1 billion a year since 2012.

PepsiCo is pursing a "virtuous cycle of productivity leading to investment leading to growth," Johnston said.

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