Profits dented by inflation, marketing now even more vital: PepsiCo

PepsiCo’s boss has underlined the importance of marketing and brand, particularly as prices continue to rise, as he committed to improving how the company measures return on investment for marketing.

PepsiCo posted a 4.5 per cent drop to its full-year operating profit in Europe, as a result of rising costs, and higher advertising and marketing expenses in the fourth quarter.

The group, which owns Pepsi, Walkers and Quaker, said the dent to its full-year profits was primarily caused by higher operating expenses, namely a 28 percentage point increase to commodity costs.

It also pointed to the supply chain disruption caused by the implementation of an ERP system in the UK, which impacted the supply of its crisp brands during the fourth quarter and meant supermarket shelves were left without Walkers.

In the fourth quarter alone, operating profit decreased by 16 per cent, primarily reflecting a 41 percentage point rise in commodity costs and higher restructuring and impairment charges. But the company says these were offset by net revenue growth and productivity savings.

It also pointed to higher advertising and marketing expenses as being a contributing factor.

PepsiCo chairman and CEO Ramon Laguarta, said the group is now focused on improving how it measures marketing effectiveness.

“One of the things I think we’re getting better at is measuring our return on investment on our marketing,” he said on an earnings call yesterday (10). PepsiCo is “becoming a better data company,” he added.

“We’re able to put better numbers to those investments and have the marketing teams and the commercial teams overall choosing different levers that give us the best return overall. And that’s playing very well. It’s obviously one of the reasons why we’re gaining market share across many categories.

“Strategically we want to continue with these kind of investments, being very rational in the way we invest A&M [advertising and marketing], but understanding that a company like ours, the core competency is building brands.”

He said it is more important than ever to build brands given rising commodity costs.

“In situations like we’re having this year where we have to price, we have consumers following us in spite of higher prices. So I think strategically it’s a very important element in our overall growth strategy.”

Overall, the PepsiCo group recorded an 11 per cent increase in operating profit for the year, with net revenue growth of 12.9 per cent.