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HomeMarketPepsiCo layoffs arrive as analysts point to less aggressive price hikes ahead

PepsiCo layoffs arrive as analysts point to less aggressive price hikes ahead

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Beverage and snack giant PepsiCo may be laying hundreds of employees. But as analysts try to get a read on the direction of the economy and the trajectory of swelling food prices, analysts were mixed on whether those reported cuts amounted to a routine exercise in keeping operations lean, or something more.

The Wall Street Journal reported on Monday that PepsiCo
PEP,
-0.81%
was laying off hundreds of staff at the headquarters of its North American beverage and snacks segments. Steeper cuts are concentrated in the former, the report said. A staff memo said the layoffs were intended to “simplify the organization so we can operate more efficiently,” the Journal reported.

The layoffs at PepsiCo would come amid a growing number of job cuts in the tech and media industries. But they would also come after price increases, a product of higher demand and higher costs, propelled sales growth this year for PepsiCo and its rivals — even if they didn’t always sell as much stuff. Since people need to eat, many food-industry executives have said they still have room to keep prices elevated.

Dan Su, an analyst at Morningstar, noted that Pepsi employed hundreds of thousands of people globally. PepsiCo, as of last year, employed roughly 309,000 people worldwide, according to a filing.

“A couple hundred, I wouldn’t necessarily read too much into that as suggesting anything other than ordinary business activities,” she said.

PepsiCo executives have been trying to strengthen margins at the company’s North American beverage business. But some felt that Pepsi’s layoffs, given the company’s size, could nonetheless help dictate sentiment for industry peers.

“Pepsi is a leader in the consumer packaged goods space,” said Manini Madia, an adjunct faculty member at Columbia Business School, who has experience advising retail and consumer goods companies. “When Pespi has layoffs like this, I think the rest of the industry, definitely, will be very interested, and perhaps other companies may follow suit.”

The company did not respond to a request for comment. Shares finished 0.9% lower on Tuesday, but had touched a record high last month.

PepsiCo in October reported quarterly results that beat analysts’ expectations as shoppers, Wedbush analysts noted at the time, showed a willingness to pay more for drinks and snacks. At the time, PepsiCo executives bumped their full-year sales growth outlook higher. In November, the company declared a $1.15 per share quarterly dividend, a 7% increase.

But since then, some analysts have grown more pessimistic on the consumer-goods industry, saying in essence that cooling inflation, while good for customers and markets, won’t be so good for the companies that churn out packaged goods like snacks, drinks, paper towels and diapers.

Deutsche Bank analysts, in a research note dated Monday, said that “although data points are choppy, there have been a number of positive developments for markets at large over the past several weeks (lower-than expected inflation in November, the Fed signaling a move to a more deliberate pace of hikes, signs of progress away from Zero COVID policy in China — even if disorderly in the near-term), which we in turn view as negative for relative returns of defensive assets (i.e., US CPG).”

“As a result, we are moving away from our more definitively positive sector bias
across Staples,” they said.

In the process, those analysts downgraded a number of packaged-goods companies, including General Mills Inc.
GIS,
-1.07%,
ConAgra Brands Inc.,
CAG,
-1.80%,
Molson Coors Beverage Co.,
TAP,
-2.28%
Boston Beer Co.
SAM,
-5.21%,
the maker of Samuel Adams beer, and Wonder Bread maker Flowers Foods Inc.
FLO,
-4.28%
The analysts, in part, cited higher competition.

Su, of Morningstar, also said that the price increases seen this year would likely ease next year.

“Price increases will probably come down,” she said. “And volume will continue to be stable or even tick up a little bit.”

Madia said PepsiCo, given its popularity, could still command prices that were more favorable to the company. But along with its larger rivals, she said PepsiCo faces competition from smaller, nimbler drink and snack brands that are more social-media savvy, and that are more geared to a nutrition-minded consumer.

“A strong brand is always going to have pricing power,” she said. “But I think we really need to look at the changing landscape of what it means to be a strong brand.”

Credit: marketwatch.com

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