PepsiCo sees plenty of upside for drinks and snacks in tightening economy

PepsiCo will launch its new flavoured sparkling water brand Bubly in Australia this month, as consumers continue to spend up on drinks and luxury snacks instead of dining out.

PepsiCo Australia and New Zealand boss Kyle Faulconer says inflationary pressures in parts of his beverages and snack food business are starting to moderate but that “hot spots” still exist led by energy, some raw materials and packaging, forcing the company to lift the prices of some of its popular brands.

However, consumers are still spending on snacks as they seek “moments of joy” and opt to spend on affordable luxury snacks at home instead of dining out with friends.

And while rival beverage and food companies might be feeling the competitive heat from supermarket private label brands eating into their market share, Mr Faulconer said his categories were seeing much less substitution.

It comes as PepsiCo announced on Wednesday the launch this month in Australia of its new no-sugar sparkling water Bubly, with Australia only the fourth market in the world to get the new flavoured water, and the first time in its history of operating in Australia that PepsiCo has launched a new beverage outside of its core brands.

PepsiCo ANZ chief executive Kyle Faulconer sees plenty of upside for his new flavoured sparkling water Bubly and for soft drinks and snacks in general as consumers look to affordable luxuries.

Mr Faulconer believes that Bubly can become a billion dollar brand for PepsiCo and in Australia will help grow the no-sugar sparkling water category as it wins over health-conscious drinkers from sugary soft drinks, as well as fans of bottled water who are looking for some flavours and innovation.

Innovation as well as productivity are twin strategies being pursued by PepsiCo to attract customers and combat rising costs, with Mr Faulconer seeing some stabilisation of recent soaring inflationary pressures within his business but the landscape still dotted with inflation “hot spots”.

“We have seen inflationary pressure across all of our supply chain and all of our brands, but we are seeing it start to stabilise, and whether that is the new normal we can all debate that,” Mr Faulconer told The Australian.

Bubly sparkling water.

“We have taken price where we cannot offset it through productivity measures that we then pass on to the customer but our number one priority when we think about the inflationary pressures we have all seen is how do we be more efficient, more productive across our value chain. And we have really stepped that up.”

These productivity gains have included bulk snack packs, greater efficiency in the use of pallets to carry its products and getting its beverages and snacks more efficiently to the supermarket distribution centres.

But there were inflationary pressures persisting within its supply chain that ultimately had to be countered with price hikes.

“Gas for example. Last year our gas bill went up nearly 300 per cent … and we have seen that come down about 70 per cent but I will tell you we are still at a very high premium to what we were pre a lot of this inflation.

“So it is stabilising but we haven’t seen deflation. I would say a lot of it has stabilised and we still do have some hot spots out there. So energy is still hotspot, packaging is stabilising, and the raw materials such as potatoes, some of the grain crops, we want to make sure we are being good partners with our farmers … and we need to do the right thing by them.”

Consumers are still spending up on PepsiCo brands such as Doritos despite the pressures on household budgets. Picture: NCA NewsWire / Michael Dodge

Looking for alternative sources of raw ingredients have helped counter some of that price inflation, especially in oils, with PepsiCo switching from sunflower oil grown in the Ukraine – which was facing persistent inflationary pressure from the war – to Australian-grown canola oil.

Meanwhile, across the PepsiCo portfolio, which also includes snack brands such as Nobby’s, Sakata, Parker’s and Burger Rings, Mr Faulconer said these categories have been somewhat protected from the pullback in consumer spending despite the pressures on household budgets from rising living costs.

“We spent a lot of time talking to consumers, doing focus groups and doing lots of studies. What are the choices they’re really making at the moment of purchase? The areas that consumers are telling us they’re pulling back on right now are larger purchases in discretionary spending.

“So maybe I won’t get that new electronic (device) or game or some of those different areas and when it comes to our brands what we talk about is creating moments of joy.

“So whenever you open a bag or open a bottle it puts a smile on someone’s face. And it has been amazing to watch Red Rock Deli, I’ll give you that example. We are having very strong growth on that brand right now and we asked consumers why – because it’s one of our more premium brands – why are you buying this more? Here’s what they’re telling me, that they say, listen, I’m choosing maybe to not go out and eat with my mates and family a second time this week so we’re going to be at home. But I still want to have this moment of joy or these micro joys.”

Red Rock Deli chips, owned by PepsiCo, is enjoying strong growth in Australia despite the pressures on household budgets and the chips brand a premium priced offer. Picture: NCA NewsWire / Michael Dodge

He believes in this environment it is the right time to launch Bubly, both from a health perspective and where consumer tastes are going.

“The consumer is really focused on health and wellness and one of these trends we see is infused water and it is one the fastest growing categories and in the last four years has been an upper 17 per cent or 18 per cent compound annual growth.

“We think is a massive opportunity and are excited to launch here.”

Originally published as PepsiCo sees plenty of upside for drinks and snacks in tightening economy