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PepsiCo expects to 'take good, strong price increases' this year because of inflation

·Anchor, Editor-at-Large
·3 min read
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Beverage and snacks giant PepsiCo (PEP) is among those in the food space looking to raise prices this year to help counteract strong levels of inflation in categories such as labor, logistics and raw materials that have resulted from the economy roaring back to life from the COVID-19 pandemic. 

"The way we think about pricing is really a reflection of the investments we make in our brands and the innovation that we have because those are the things consumers are willing to pay more for. We think of it as connected to delivering value to consumers. Obviously with cost pressures it puts that much more pressure on pricing," PepsiCo vice chairman and CFO Hugh Johnston said on Yahoo Finance Live. "In fact, we will be taking pricing post Labor Day. It varies by business as to how much it will be in Quaker vs. Frito Lay vs. the beverage business. What I would point out in the second quarter our pricing was up about 5% in the North America businesses. I think you will see us take good, strong price increases which are really reflective of the fact that even through the pandemic we kept investing in the business, building the brands and building capacity to fulfill sales," 

Johnston added, "So we do think our products are worth paying more for, and we think consumers will."

The company's comments on likely pricing actions this year corresponds with similar moves conveyed by frozen food giant Conagra Brands on its earnings release Tuesday because of inflation.

"As the fourth quarter unfolded, input cost inflation accelerated and we now expect fiscal 2022 input cost inflation to be materially higher than we anticipated at the end of fiscal Q3. In response, we have further enhanced the aggressive and comprehensive action plan already being executed, which includes broad-based pricing," said Conagra Brands CEO Sean Connolly

That said, PepsiCo's price increases in the second quarter didn't appear to have a negative impact on consumer demand. 

PepsiCo — widely expected by analysts to have a strong quarter as economies globally re-open from the pandemic — blew away forecasts across the board. Total revenue rose 20.5% from a year ago, powered by strong double-digit sales gains in PepsiCo's North America beverage, Latin America, EU and Africa businesses. Sales rose by 6% each in the Frito Lay North America and Asia Pacific divisions.

In this Monday, April 23, 2018, photo, Pepsi soft drink cases are stacked on display at a store in Londonderry, N.H. PepsiCo Inc. reports earns on Thursday, April 26. (AP Photo/Charles Krupa)
In this Monday, April 23, 2018, photo, Pepsi soft drink cases are stacked on display at a store in Londonderry, N.H. PepsiCo Inc. reports earns on Thursday, April 26. (AP Photo/Charles Krupa)

Sales at Quaker Foods North America dropped 14% from last year when U.S. shoppers were stocking up on packaged food at the start of the pandemic. Operating profits grew at a faster rate than organic sales (a key comparison for PepsiCo analysts) at the Frito Lay North America, North American Beverages, Latin America and Africa businesses.

PepsiCo shares rose 2.5% in afternoon trading Tuesday. 

As a sweetener for investors, PepsiCo took the wraps off a new $1 billion cost-cutting plan that will be run through 2026.

The blowout quarter and new restructuring plan will likely cement the bull case widely held on the stock on Wall Street even in the face of inflationary headwinds.

"PepsiCo enters FY21 from a strong position and is well equipped to outperform in a post COVID-19 environment," Bank of America analyst Bryan Spillane said in a note ahead of the results. Spillane rates PepsiCo's stock at a Buy with a $165 price target.

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

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