Commodity cost concerns from PepsiCo and Coca-Cola

The two major soft drinks rivals, PepsiCo and Coca-Cola Company, have both issued concerns over cost inflation going into 2011.

Earlier this year, when reporting the end of year results, PepsiCo CEO Indra Nooyi said the company needed to remain aware of “high levels of cost inflation for the coming year, driven by broad and pronounced commodity inflation.”

During a meeting with investor, PepsiCo Chief Financial Officer Hugh Johnston revealed that the company is facing a $1.4 to $1.6 rise in costs, which is around 8 to 9.5% increase in commodity costs.

PepsiCo had announced a 34% surge in revenue during 2010, but Nooyi has warned of 2011 presents “a potentially difficult competitive pricing environment, particularly in beverages”, where, due to spiralling unemployment levels in certain developing markets, it is unlikely that the high cost can be passed on to consumers.

A combination of the low commodity price situation and PepsiCo’s acquisition of lower margin bottlers is likely to be the main factors behind the company’s decision to lower its predicted earnings for 2011.

Philip Gorham, analyst for the Morningstar, believes PepsiCo will have a task to maintain profitability, saying, “Following the closure of the deals, Pepsi has become more exposed to commodity costs, and with the costs of sweeteners at multiyear highs, margin pressures are likely to remain until consumers become willing and able to bear the burden of rising costs. We think that is unlikely to occur while unemployment and gas prices remain relatively high.”

While less candid than PepsiCo, it looks likely that Coca-Cola are in the same boat. Coca-Cola Chief Financial Officer has told investors that “We expect the full year 2011 impact of increased commodity cost on our total company results to range between $300 million and $400 million.”


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