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Oct 3, 2019

Pepsi says U.S. consumer chugging along even with higher prices

PepsiCo shares rise after topping third-quarter estimates

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PepsiCo Inc.  is getting a boost from higher prices on its drinks and snacks, a sign U.S. consumers still feel good amid recent indicators of a looming economic slowdown.

The snack and beverage giant said Thursday it will meet or exceed its full-year revenue growth after sales and profit both topped Wall Street estimates for last quarter. The results showed that once again consumers were willing to pay more for its products.

“The consumer right now in the U.S., at least in terms of our business, is doing really well,” Hugh Johnston, the company’s chief financial officer, said in an interview.

In recent days, weak manufacturing numbers have raised concerns that President Donald Trump’s trade war with China is hampering the economy. Other indicators have pointed to a slowdown: Companies are pulling back spending as tariffs weigh on business decisions and global demand slides. The August gain in consumer spending was the smallest in six months.

But with unemployment at record lows and gas prices down, U.S. shoppers haven’t bucked at higher prices for PepsiCo’s wide range of products, which include Gatorade, Diet Pepsi and Tostitos.

PepsiCo’s shares gained 2.1 per cent to US$136.70 at 8:58 a.m. in early trading in New York, amid declining stock markets worldwide. They had gained 21 per cent this year through Wednesday’s close, outpacing the 15 per cent gain for the S&P 500 index.

PepsiCo’s Frito-Lay division has helped the company navigate a broader decline in soda, with brands like Ruffles chips, Cheetos and Doritos dominating the salty-snack aisle last quarter. Frito-Lay North America posted 5.5 per cent organic revenue growth in the quarter, boosted by volume gains.

Sales were even up in the key North American beverage unit, which has faced pressure as consumers cut down on sugary soda and competitors flood stores with a host of new options. The Gatorade brand, which has struggled, posted mid-single-digit revenue growth, helped by the sugar-free Gatorade Zero product.

PepsiCo has put money back into the business, increasing marketing spending this year to fend off rival Coca-Cola Co. That’s helped boost brands like Bubly, the sparkling water the company launched last year that has quickly taken market share.

Investors have been on edge about any sign of potential weakness in consumer spending, the engine of the U.S. economy.

Unlike PepsiCo, Constellation Brands Inc., the maker of Modelo and Corona beer, disappointed on Thursday. While quarterly earnings topped estimates, beer depletion volume -- a measure of how much beer distributors sent to stores -- came in lower than expected, rising 6.2 per cent. Analysts anticipated 7.7 per cent growth.

Constellation dropped 2.9 per cent in early trading.

--With assistance from Janet Freund.