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PepsiCo and Coca-Cola are hit by consumers' shift to digital

Brian Sozzi
Editor-at-Large

Blame the robots for the restructuring of Big Soda.

Over the course of a few weeks, investors have learned that putting money to work in consumer staples no longer offers a predictable outcome thanks to the shift to digital shopping. That consumer migration has led to fewer trips to the center of grocery stores, which is where big brands such as PepsiCo, Hershey and Coca-Cola call home.

Not making it any easier for these mega food brands are rising costs for employees and transportation and volatile currency translations.

But it’s the digital shift that no doubt is causing the larger headache for Big Soda in particular. Consequently, Big Soda has uncorked big restructuring plans to protect profits for the long-term.

PepsiCo gets leaner

An advertisement for Pepsi is shown downtown for the NFL Super Bowl 53 football game in Atlanta. PepsiCo Inc. reports earns on Friday, Feb. 15, 2019. (AP Photo/David J. Phillip, File)

The soda and snacks giant revealed Friday it’s taking $2.5 billion in charges through 2023 to restructure its business. PepsiCo says the efforts will help drive savings of at least $1 billion annually through 2023.

“Contributing to the productivity goal are expected savings from certain restructuring actions that are intended to enable the Company to leverage new technology and business models to further simplify, harmonize and automate processes; re-engineer our go-to-market and information systems, including deploying the right automation for each market; simplify our organization and optimize our manufacturing and supply chain footprint,” PepsiCo said in a statement.

No details were shared on potential job losses related to the moves.

The details of the restructuring follow a mixed fourth quarter for PepsiCo.

PepsiCo reported fourth quarter adjusted earnings of $1.49 a share, in line with analyst forecasts. Sales clocked in at $19.52 billion versus Wall Street analyst forecasts for about $19.51 billion.

Organic sales gained in all segments during the quarter save for a 2% drop in Quaker Foods North America. Operating profits for the division fell 1%. The North American beverage business saw a modest 0.5% organic sales increase. Operating profits for the business declined 14%.

The company forecast 2019 earnings of $5.50 a share, below estimates for $5.86 a share. PepsiCo said it sees long-term organic sales growth of 4% to 6%. The company also added it expects to return to core high-single percentage earnings growth long-term.

PepsiCo shares rose 3% on Friday as analysts were likely hopeful cost-cutting would reignite profits over time. Wells Fargo beverage analyst Bonnie Herzog said the lackluster 2019 guidance by PepsiCo was expected by the market.

Coca-Cola surprises investors

Coke also hit the reset button on its profit outlook amid the changing landscape for its business.

The company said Thursday it sees 2019 earnings declining 1% to gaining 1% versus 2018 results of 2.08 a share. Wall Street analysts were banking on earnings of $2.24 a share. Coke shares dropped as much as 8% on Thursday’s session.

Herzog of Wells Fargo called the outlook “concerning” and “surprising.” Maybe it shouldn’t have been with Coke dealing with many of the structural problems as long-time foe PepsiCo.

While Coke CEO James Quincey did his best to reassure Wall Street on a conference call, it largely fell on deaf ears. Quincey played up the company’s sales momentum behind brands such as Diet Coke and initiatives to stop selling slow moving items.

But, Quincey did say his team is looking for $600 million in fresh cost savings in 2019. The savings are part of a $3.8 billion cost-cutting plan Coke unveiled in 2017, mostly centered around selling off its capital intensive bottling operations (otherwise known as re-franchising).

Brian Sozzi is an editor-at-large at Yahoo Finance. Follow him on Twitter @BrianSozzi

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