PepsiCo plans price cuts as demand for its drinks and snacks slips

PURCHASE, NY — PepsiCo is cutting prices on Lay's, Doritos, Cheetos and Tostitos chips this year to win back customers exasperated by years of price hikes.

“For some consumers, low- and middle-income consumers, the biggest friction they have today in our category... is affordability,” PepsiCo Chairman and CEO Ramon Laguarta said Tuesday during a conference call with investors. “So we have been testing multiple ways to give them affordability.”

PepsiCo has leaned on price increases as the cost of packaging, ingredients and transportation rose. In the fourth quarter, PepsiCo hiked prices by 4.5% globally. Prices for PepsiCo beverages rose 7% in North America, while prices for the company’s snacks ticked up 1%.

That has pumped up revenue, including in the most recent quarter. PepsiCo said its net revenue rose 5.6% to $29.3 billion in the October-December period. That was higher than the $28.9 billion Wall Street was expecting, according to analysts polled by FactSet.

But the price hikes have also weakened demand, and consumers have begun swapping out brands they are familiar with for cheaper versions or cutting back altogether.

Volumes for PepsiCo snacks like Doritos and Cheetos fell 1% in the most recent quarter. North American beverage volumes dropped 4%. Globally, PepsiCo said beverage volumes rose 1% while food volumes fell 2%.

Laguarta said PepsiCo began testing price cuts in some markets in the second half of last year and found that they helped boost sales.

“Volume return is pretty good, and that’s what the category needs,” Laguarta said.

PepsiCo said in December that it planned to cut prices and trim nearly 20% of its product offerings as part of a deal with activist investor Elliott Investment Management.

Elliott, which took a $4 billion stake in PepsiCo in September, has been prodding the company’s board to make changes, saying PepsiCo was being hurt by slowing growth and lower profits in its North American food and beverage business.

In addition to price cuts, PepsiCo plans to accelerate the introduction of new offerings with simpler and healthier ingredients, including Gatorade Lower Sugar and Simply NKD Cheetos and Doritos, which contain no artificial flavors or colors. Lay's potato chips will soon introduce versions made with avocado oil and olive oil.

Laguarta said younger households, in particular, love PepsiCo's products but won't shop the category unless the company offers versions without artificial ingredients.

PepsiCo is also responding to growing demand for functional ingredients like protein and fiber. Among its new products are Doritos Protein and Pepsi Prebiotic, which it said sold out within 30 hours after its introduction on Black Friday. PepsiCo said the soda will soon be available across the U.S.

Adjusted for one-time items, PepsiCo earned $2.26 per share in the fourth quarter. That was also higher than analysts expected. Net income attributable to the company of $2.54 billion, or $1.85 per share, is up from $1.52 billion, or $1.11 per share, during the same period last year.

Shares rose 2.5% in morning trading Tuesday.