Transportation costs push PepsiCo profits in Q3

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In her final conference call as CEO, PepsiCo’s (NYSE: PEP) Indra Nooyi presented their third-quarter results, once more pointing to transportation costs that threatened to eat into profits.

In a summary of third-quarter financial results, the North American Beverages (NAB) division of PepsiCo reported that operating profit decreased 14%, “reflecting certain operating cost increases, including increased transportation costs, higher commodity costs which negatively impacted operating profit performance by 9 percentage points and higher advertising and marketing expenses.”

Within the discussion of year-to-date results, the topic of transportation costs arose once again. For the NAB division, operating profit decreased 17%, “reflecting certain operating cost increases, including increased transportation costs, as well as higher commodity costs which negatively impacted operating profit performance by 7 percentage points. These impacts were partially offset by planned cost reductions across a number of expense categories,” according to the company.

“Commodity inflation, operating cost inflation, particularly in transportation costs, product mix and a stepped-up advertising expense each pressured our profit performance in the quarter. However, we expect that our recently implemented pricing actions will improve profit performance in the coming quarter,” the report reads.

Kevin Grundy, senior VP and equity analyst for Jefferies, LLC (NYSE: JEF) noted that for NAB in Q3, “results improv[ed],” but that the progress came “at a cost when we look at the margin pressure year-over-year, understanding that freight and commodities are pulling apart.”

Looking at the Cass Freight Index—Expenditures (CFIE.USA), a proprietary index that provides a good view of what’s happening in the overall freight market as well as the general economy—freight expenditures have increased by 34.83% since 2016, as can be seen on the SONAR chart below.

 Cass Freight Index—Expenditures (CFIE.USA) as seen on SONAR.

Cass Freight Index—Expenditures (CFIE.USA) as seen on SONAR.

Despite the increase in transportation costs, PepsiCo isn’t the only food and beverage giant to suffer: Both General Mills (NYSE: GIS) and Hershey (NYSE: HSY) have compensated for logistics costs by raising prices on the shelves, as reported by The Wall Street Journal, though Kellogg (NYSE: K) “generally lower[ed]” prices in Q2.

Despite an increase in profits in the second quarter, Kellogg noted that transportation costs were beginning to impact the company’s profit margin. “The surge in transportation costs has been well documented,” said Kellogg’s CFO Fareed Khan in the company’s quarter two earnings call on August 2.

The Wall Street Journal stated that, as a direct result of rising transportation costs,“PepsiCo also plans to increase prices on single-serve Frito-Lay products by 4% to 5% this week.”

Overall, it was an eventful quarter for the maker of Mountain Dew as Nooyi announced her resignation after 24 years at PepsiCo. The Wall Street Journal notes that “during her tenure PepsiCo’s annual revenue rose 81% to $63.5 billion last year.”

In her two plus decades at Pepsi, Nooyi has steered Pepsi toward alternative offerings, saying it's important for the company's future because of consumers' increasing attention to health. In September, Pepsi acquired SodaStream, expanding Pepsi’s water and at-home beverage portfolio.

SodaStream's products, marketed as a healthy option, fits into PepsiCo's goal of "making more nutritious products while limiting our environmental footprint," Nooyi said. "Together, we can advance our shared vision of a healthier, more sustainable planet."

Nooyi will hand the reins of PepsiCo to Ramon Laguarta, who will serve as the company’s sixth CEO.