What’s going on?
Drinks are on PepsiCo: the American food and drinks giant announced stronger-than-expected second-quarter earnings on Tuesday.
What does this mean?
Investors can sit back, relax, and pop open a can: Pepsi reported “organic revenue growth” – i.e. minus the effects of currency swings and acquisitions – of 13% compared to the same time last year, beating shareholders’ already-high expectation of 8%. That was partly because Pepsi upped the prices of its drinks and snacks, which kept its profit from shrinking even as its costs rose. And since people tend to buy its “consumer staple” products no matter what, the strategy worked: the company’s quarterly profit beat expectations. Its outlook came in stronger than expected too, with Pepsi now expecting to grow organic revenue by 6% and profit by 11% this year – up from roughly 5% and 9% respectively.
Why should I care?
For markets: Prices are rising across the board.
Data out on Tuesday showed consumer prices in the US were 5.4% higher in June than the same time last year. That’s the fastest rise in nearly 13 years, and higher than economists were predicting – even if you strip out volatile food and energy prices (tweet this). But it’s not all down to price hikes from the likes of Pepsi: the biggest drivers were used cars, as well as travel-related products and services like hotels and airfares.
The bigger picture: Pepsi’s well-positioned for the future.
Prices among producers have been hitting new highs in the last few months too, mostly due to a surge in the cost of raw materials. Couple that with wage inflation, and companies are facing lower profits than investors might’ve been expecting – unless they can pass those costs onto their customers. That’s easier to do in some sectors than in others: consumer staples like Pepsi, for instance, typically have strong “pricing power”. In other words, they’re able to sell products for a higher average price every year, meaning they can offset rising costs and deliver profits at least as high as investors are expecting.