Jeffrey Salazar
The price of soft drinks, including Diet Pepsi, has increased significantly in recent years, with inflation being a key factor. According to sources, the average cost of a 12-pack of soda has risen by more than 45% between 2019 and 2023. PepsiCo, the company behind Diet Pepsi, has hiked prices for seven consecutive quarters, with profits jumping by 14% in 2023. These price increases have been attributed to rising costs of commodities, such as aluminum, grain, and cooking oil, as well as supply chain disruptions caused by the pandemic. While Pepsi expects inflation to impact its earnings, it forecasts core revenue to rise, indicating that price hikes may continue. Consumers are becoming more cost-conscious, with some switching to generic brands or reducing their consumption of soft drinks like Diet Pepsi to manage their budgets.
| Characteristics | Values |
|---|---|
| Price hikes | 11% in the July-September period of 2023 |
| Sales volume | Down 2.5% |
| Revenue | Rose 7% in the third quarter of 2023 |
| Profit | Jumped 14% in the third quarter of 2023 |
| Expected inflation | Slightly higher than 2% to 3% |
| Commodity prices | Higher for items like grain and cooking oil |
| Full-year earnings per share | Expected to increase 13% |
| Core revenue | Expected to rise 10% in 2022 |
| Fourth-quarter net revenue | Rose 12.4% to $25.25 billion |
| Price increases | Modest increases expected for 2024 |
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What You'll Learn
Inflation and pricing strategy
While there is no direct link between Diet Pepsi and increased inflation, PepsiCo's revenue rose 7% in the third quarter of 2023 despite lower demand as the company continued to hike prices. This indicates that Pepsi's pricing strategy has contributed to its ability to maintain and increase profits during inflationary periods.
During inflationary periods, companies are often faced with the challenge of managing rising costs, which can include increases in raw material prices, shipping costs, and wage rates. This was particularly evident during the post-pandemic recovery, where input prices in July 2021 had increased by 9.6% compared to the previous year. As a result, companies may turn to pricing strategies to mitigate the impact of these rising costs on their profitability.
One approach is to implement targeted pricing strategies that take into account differences in products, channels, and customers. This allows companies to drive targeted price increases and avoid the negative consequences of broad-brush price increases, which can dilute the efficacy of new prices and damage customer relationships. For example, rather than increasing prices across the board, companies can focus on key-value items or high-profit-margin products within their product assortment. Additionally, companies can explore alternatives to raising prices, such as reducing costs in other areas or implementing surcharges for specific services, as some distribution companies have done to maintain service levels during early inflationary periods.
When adjusting prices, it is essential to consider competitors' pricing strategies and how price-sensitive customers are. Communicating price changes effectively, both internally and externally, is also crucial for maintaining transparency and customer relationships. Providing insights and demonstrating a dynamic, customer-centric approach can help companies address their customers' pain points during inflationary periods.
During inflation, companies that focus on total customer and product profitability may be better equipped to navigate inflationary cycles. By accurately assessing revenue retrieval and maintaining disciplined, value-based margin levels, businesses can sustain their margins without solely relying on price increases.
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Cost-cutting efforts
While there is no direct evidence that Diet Pepsi increases inflation, PepsiCo's response to inflation and its cost-cutting efforts are notable.
PepsiCo's revenue rose 7% in the third quarter of 2023, despite lower demand, as the company continued to hike prices. The company raised prices by 11% in the July-September period, marking the seventh straight quarter of double-digit price increases. The higher prices negatively impacted demand, with sales volumes dropping 2.5%. PepsiCo attributed some of this decline to its strategy of shrinking package sizes to meet consumer demands for convenience and portion control.
In the face of inflation, companies like PepsiCo may implement cost-cutting strategies to maintain profitability. Here are some general cost-cutting efforts that businesses can employ:
- Reducing indirect costs: Minimizing indirect costs, which are dispersed and intertwined with organisational complexity, can be challenging. However, simple spending cuts can yield 5% to 10% savings, while adopting a zero-based budget can result in 10% to 20% savings.
- Turnaround strategies: These approaches eliminate support costs or adjust service levels to focus on core activities and preserve cash flow.
- Process improvements: This involves generating headcount savings through process improvements, potentially including layoffs, especially in a talent-scarce employment market.
- Peer scrutiny and cost-cutting exercises: Nominating a peer Exco member as a critical sounding board can help address conflicts of interest and provide momentum for change. Starting with a cost-cutting exercise during the baselining phase can help identify quick wins and demonstrate the return on investment.
- Contractionary monetary policy: This approach involves reducing the money supply within an economy by increasing interest rates, making credit more expensive and reducing consumer and business spending.
- Price and wage controls: Governments can implement price caps or floors on specific goods and suppress wage push inflation. However, these measures have had limited success in the past.
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Supply chain disruptions
PepsiCo has faced challenges due to supply chain disruptions and commodity inflation, particularly in Sub-Saharan Africa. The region, a major producer of food and beverages, has struggled with disruptions caused by global events and economic factors. These issues have impacted manufacturing, especially in South Africa and Southern Africa.
The scarcity of foreign currency in some African nations has further complicated the situation, making it difficult for PepsiCo to import goods and conduct transactions. The company has had to navigate through a complex web of challenges, including supply chain bottlenecks and rising input costs.
PepsiCo's CEO, Tertius Carstens, has acknowledged the need for responsible pricing adjustments to account for increased input costs. The company has also emphasized the importance of balancing long-term and short-term investments, investing in digital capabilities, and making sustainability bets.
In addition to supply chain issues, PepsiCo has faced challenges due to tariff volatility and reduced consumer spending. The company has offered less expensive products to entice consumers who are tightening their wallets, and it has calculated the impact of higher costs associated with tariffs. PepsiCo has also faced increased costs for commodities like grain and cooking oil, which are expected to lead to price increases for consumers.
Despite these challenges, PepsiCo has demonstrated resilience through its digital capabilities, process improvements, analytics, and automation efforts. The company has managed to balance inflation and higher costs while focusing on efficiency and cost-cutting measures.
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Demand and sales volume
The demand and sales volume for Pepsi have been impacted by various factors, including consumer behaviour, health concerns, and economic conditions.
Consumer behaviour has shifted towards cost-consciousness and healthier alternatives, affecting Pepsi's sales volume. Consumers have expressed their unwillingness to pay higher prices for Pepsi, opting for cheaper generic brands or reducing their soda consumption altogether. This shift has resulted in a decline in Pepsi's sales volume, with consumers making better purchasing decisions to manage their budgets.
Additionally, health concerns associated with the consumption of sugary drinks, such as Pepsi, have influenced people to make healthier choices. The artificial sweeteners in Diet Pepsi have been linked to weight gain, increased sugar cravings, and a higher risk of type 2 diabetes. As a result, some consumers have cut down on their Pepsi intake or switched to healthier alternatives, contributing to a decrease in demand and sales volume.
Economic factors, such as inflation and supply chain disruptions, have also played a role in Pepsi's demand and sales volume. Inflation has led to increased prices for commodities like grain and cooking oil, which has impacted the production and pricing of Pepsi products. Supply chain issues during the pandemic further exacerbated cost increases, forcing PepsiCo to raise prices. While price hikes initially boosted profits, they eventually took a toll on demand, with sales volumes dropping as consumers became more price-sensitive.
However, it is important to note that the impact of these price hikes on Pepsi's sales volume has been mixed. While some consumers have reduced their purchases or switched to cheaper alternatives, others have continued to purchase Pepsi products despite the higher prices. This loyalty, coupled with strategic decisions by PepsiCo, has resulted in varying sales volume declines across different regions and product categories.
Moreover, external factors such as rising incomes and the growing popularity of snacking instead of meals could counter the negative impact of inflation on Pepsi's sales volume. These tailwinds, according to Pepsi, could continue to drive sales and revenue growth in the future.
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Healthier alternatives
While Diet Pepsi is marketed as a low-calorie beverage option, its regular consumption can have adverse effects on your health. The artificial sweeteners in Diet Pepsi can trick your body into craving more sugar, leading to increased calorie intake and potential weight gain. These sweeteners can also disrupt your body's insulin response, increasing the risk of type 2 diabetes. Additionally, the high acid content can contribute to tooth decay, and studies have linked regular diet soda consumption to bone loss and an increased risk of heart disease.
- Filtered Water: Drinking enough water is essential for maintaining good health. It helps keep your body hydrated and aids in flushing out toxins.
- Herbal Tea: Tea is an excellent alternative as it is caffeine-free and contains antioxidants that boost your immune system. Opting for herbal tea varieties provides additional health benefits.
- Sparkling Water: If you enjoy the fizziness of Diet Pepsi, sparkling water is a great substitute. You can add a slice of lemon, lime, or other fruit for natural flavoring without the added sugar.
- Freshly Squeezed Juice: While pure fruit juice can contain high amounts of sugar, freshly squeezed juice made at home or purchased from health food stores can be a healthier option. You can also try making flavoured ice cubes with fruit and herbs, adding them to your water for a refreshing drink.
- Unsweetened Coffee: Coffee, when consumed in moderation, can be a healthy part of your diet. Opting for unsweetened coffee, either black or with a small amount of low-fat or plant-based milk, can provide potential health benefits. Coffee drinkers may have a lower risk of certain types of cancer and heart disease. However, it's important to monitor your caffeine intake, especially if you are pregnant or trying to conceive.
- Plant-Based Milk: Alternatives such as almond, coconut, rice, or oat milk can be nutritious dairy substitutes. Soy milk, in particular, is the most nutritionally comparable to dairy milk in terms of protein content.
- Kombucha: Kombucha, a fermented tea, is an excellent way to satisfy your craving for carbonation while reducing your added sugar intake.
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Frequently asked questions
No, Diet Pepsi does not cause inflation. Inflation refers to the general rise in the price of goods and services over time, and while the price of Diet Pepsi has increased due to inflation, it is not the cause of it.
Inflation has caused the price of Diet Pepsi to increase. In October 2023, the average price of a 12-ounce can in a package of 12 was over 56 cents, compared to under 34 cents in April 2018, representing a nearly 65% increase.
Inflation and the resulting price hikes have negatively impacted Pepsi's sales volume. Consumers have become more cost-conscious and some have switched to cheaper alternatives or stopped purchasing the product altogether.
