Brian Cornell - CEO, Pepsi Americas Foods
Tom Greco - President, Frito-Lay North America
Jamie Caulfield - Senior Vice President, Investor Relations
Christine Farkas - Merrill Lynch
PepsiCo, Inc. (PEP) CAGNY Consumer Analyst Group of New York Conference Transcript February 20, 2014 1:45 PM ET
While you were in clapping mode, I want to take this opportunity at the outset to thank PepsiCo for the snacks and drinks all week and in general for their long time support of this conference and attendance and presentation. Thank you very much.
Just an organizational note, due to some constraints there is not going to be a breakout session but rather management will stay in here for an extended Q&A session, and Brian and Tom will be available at the PepsiCo display for some Jacked up Hot Wing Doritos and any questions you might have in the time after the extended Q&A.
So we are lucky to have with us today Brian Cornell, the CEO of Pepsi Americas Foods; and Tom Greco, the President of Frito-Lay North America. Brian hails from successful career at Wal-Mart, running Sam’s Club, as well as Safeway and he really wanted to come to CAGNY to complete his career, so he joined PepsiCo.
Tom Greco has been -- is President of Frito-Lay North America and he has been PepsiCo since 1986 and that’s before Cool Ranch, Doritos, if you can believe it.
So without further ado, may hand off to Brian. Brian?
[Brian], thank you and good afternoon .I want to start by thanking everyone this afternoon for joining us. It's really a pleasure to be here with you today, and Tom and I are looking forward to walking you through our North American performance.
On behalf of all of us who came down here from New York this week. I also want to thank you for giving us even a couple of hours away from the Northeast chill, so it’s a pleasure to be here with you in Florida.
Before we begin, let’s take note of our Safe Harbor statement and as you know some of the statements today will include forward-looking remarks and non-GAAP financial measures.
Now for those of you who I have not personally met or not had a chance to meet Tom Greco. Let me quickly handle some introduction. Now after spending many of my early years at PepsiCo, working in both North America and Europe, as was mentioned, I spend a few years receiving little education in U.S. retailing, spending time, working at both Safeway and as a CEO of Sam’s Club. I am now moving into my third-year leading our Americas Food businesses. And as I like to say, I really do feel that I never left PepsiCo, I just miss a few meetings along the way.
Tom Greco who is here with us today leads an outstanding business and team at Frito-Lay North America. Tom also had significant role in his Group PepsiCo, as the Chief Commercial Officer for our America Beverages Business, as the President of Global Sales and as a President of Frito-Lay Canada.
Now, let me start by turning our focus to North America, which for PepsiCo as you know is a critical driver of our PepsiCo revenue, with over 50% of PepsiCo’s revenue coming from United States.
North America is where our businesses of PepsiCo America Foods, our American Beverage Businesses and Quaker North American base. And because we manufacture and distribute both leading food and beverage products, we have significant scale in many of the markets we serve and particularly right here in the U.S.
As you can see on the right-hand side of the screen, our major channel sales are nearly twice the size of the next largest food and beverage competitor, here in this very important U.S. market.
But as you have been hearing all week throughout this conference, the industry is seeing significant changes in the consumer and in the retail landscape. In the consumer space, we are seeing strong demographic shift with the rise of the millennial generation, while millions of baby boomers are aging and retiring every year. Additionally, we are seeing growing diversity in United States, with the growth in Hispanic and the Asian population.
Against these changing consumer dynamics, we see shifting needs, such as the [increasing portability] and on the go option. With our customers we are seeing significant channel shifting, with the value channel, such as dollar stores and the premium channel, growing faster and becoming a bigger grocery shopping destination. We see new formats emerging, such as ecommerce, options like AmazonFresh and the continued growth of Walmart.com.
To deliver in this new environment, we need to center on the power of the AND, A-N-D. Our playbook balance is focus and scale. We believe that in the slow growth North American environment we are going to need to focus on scale and we are going to need to make sure we are focus on operating our businesses to win.
In order to grow our key categories, we are focused on understanding what it takes to drive growth in individual categories. We have made significant investments in the Frito-Lay Flavor Kitchen, our culinary center to create and test outstanding new flavors that are now appearing in our Frito-Lay product here in the U.S., as well as products around the world.
Balancing this focus is scale, which enables us to have the money to pay for the capabilities, to grow and effectively execute our playbook. Our size gives us scale leverage in areas such as procurement, IT, back office, joint PepsiCo customers teams and R&D innovation, allowing us to create new growth opportunities, while delivering productivity and higher margins.
To deliver on focus and scale, our playbook has anchor on four key priorities, building our brand, driving consumer led innovation, enhancing execution and continuing to deliver productivity.
So, first, let's discuss how we are building our brand. In United States market today, we have 19 $1 billion global brands. Globally, we have 22 $1 billion global brands in our portfolio. Over the last few years we have significantly increased our support in building these brands, reinvesting some of those productivity savings. To continue to build these billion dollar brands and our regional and local brands, we have leveraged investments we made in foundational demand face insights.
Let me highlight some of those insights, we have gained from our proprietary methodology, which was first piloted at Frito-Lay North America and is now being extended to our Beverage businesses.
We know from our proprietary insights that currently 65% of the addressable U.S. snacks, breakfast and beverage market addresses common or complementary needs, where snacks, breakfast and beverage brands interact.
You know yourself, the choices you make at breakfast or the break during the day, via the ice coffee you drink or the snack in the middle of the morning, or the chips you drink you eat, or the drink at the end of the day. Our foundational demand face insights help us better understand, had position our brand to meet these common or complementary needs.
These insights also drive new innovations, as well as the promotions we design. Understanding had a best fulfill these common or complementary needs is the basis for our approach to better together.
For the remaining 35% of the market, it is crucial to understand what drive distinct consumer needs. One example is the work that the Gatorade works science institute. To better understand the hydration need and the recovery after the workout.
At PepsiCo, our investment in insights highlight for us to growing the business will require, addressing both these distinct needs and the common or complementary needs. It is this philosophy coupled with our desire to give consumers a choice that ranges from good to you, to fun for you that underpin our PepsiCo portfolio.
Given these demand insights, let me take a few minutes and highlight a few demand opportunities we are currently targeting. In the morning, the jumpstart demand face, where we have Tropicana, Naked and Quaker brand to leverage and pair together to prepare consumers to start their day.
In the office, school break demand face, we have products like Starbucks Beverages and our Frito-Lay Multipack to help our consumers address their hunger and perform throughout the day.
For our young and hungry consumers, we have the absolute perfect pairing, Doritos and Mountain Dew, which combines two fast-growing brands. And finally to connect and have fun times together, we have our Pepsi CSDs and Tostitos chips and salsa.
The promise of better together is realized. When we innovate for these common or complementary needs, position our brands as a portfolio to meet different needs and drive home merchandising and co-promotional support.
One very successful example that really highlights how insights are driving our promotion is the gaming pairing of the limited edition Doritos Gamer Pack and the Mountain Dew Game Fuel. We activated these products for a promotion where each product sold enabled our consumers to win points and potentially win an Xbox One. We allowed that young and hungry consumer to fulfill some of the requirements by buying Doritos online at Amazon.com. Suffice to say the gamer promotion was a huge success.
Now let me turn to our second priority, innovation. We have leveraged our proprietary demand space insight to step change innovation at PepsiCo. Our record in 2013 has been outstanding. Nine of the top 50 innovations in the U.S. in 2013 were PepsiCo products, nine of 50. We've spoken previously about the successful work we’ve completed with Taco Bell. Tom is going to highlight that later today.
But based on our culinary innovation and expertise across food and beverages, we recently won a foodservice partnership with Buffalo Wild Wings. We’re busy at work right now with Buffalo Wild Wings creating some new excitement for their upcoming menu.
Our third priority is execution. We come together across food and beverage to deliver integrated execution both at the customer headquarters and in each and every store. At the headquarter of our major customers, you'll find joint business planning processes along with dedicated PepsiCo customer teams.
In stores, you see integrated food and beverage displays and promotions. PepsiCo is a company that’s focused on execution and we’re building the appropriate tools and front-line culture to further strengthen our executional capabilities. And one of our customer teams, the Dollar General PepsiCo customer team was awarded the marker of the year. This is just one of the many examples.
We are routinely recognized by our largest customers for our broad food and beverage expertise and our ability to drive growth across their total box. Our PepsiCo sales teams work with our retail partners to leverage our insight, our brands, and our executional capabilities to create excitement for their shoppers.
Now I’d like to show you one of the examples of how we brought insights to media and all the way to the shelf with one of our key customers, Wal-Mart. This is an example of an ad they run for a program they call Game Time. Please run that clip.
Now as you might imagine I actually love that ad and it is the ultimate example of better together at PepsiCo. But I can also tell you no where was our execution more visible than at the Super Bowl a few weeks ago. No company, no company showed up for the big game the way we did, print, outdoor, mobile, digital and outstanding in-store execution.
Finally, all of this has underpinned by our productivity agenda that uses common engines, tools, systems across both snacks and beverage. For example, you have heard about our go-to market engine for Frito-Lay. We call it GES. It stands for Geographic Enterprise Solutions.
GES is a critical investment that drives large productivity across Frito-Lay. We’re making the investments to scale GES across North America and at the same time, we’re now scaling GES to other markets, including some major metro markets in Latin America.
We’re also scaling up our GES like approach in beverages with an investment we call GO Box. In part to these initiatives, we expect to continue to deliver $1 billion of productivity a year through 2019 across PepsiCo. We’ve also spent time wiring PepsiCo again leverage from our scale both in North America and globally.
Our capabilities include global procurement, integrated IT, joint customer teams, global R&D and worldwide talent management, enabling us to provide cross sector experience. Having made these investments, we’re now realizing the benefits, much as you saw with the Wal-Mart ad. With new innovation, we’re bringing to the market as well as margin increases we’re seeing across our total North American businesses.
In summary, we are truly operating as one PepsiCo and we’re focused on going forward and executing our playbook better together. Through our brand building, driving insight led innovation, enhancing our execution and driving productivity across our system, we’re prepared and ready to win.
Tom is now going to take you through how that playbook unfolds Frito-Lay and then we’ll come back and handle Q&A at the end of Tom’s presentation. Tom?
Thanks Brian and good afternoon everyone. It’s really our pleasure to be here today with you to talk about PepsiCo. As you saw last week, 2013 was a very strong year for Frito-Lay. We delivered balanced performance across each of the key metrics. We are pleased to report volume growth of 3%, net revenue growth of 4% and 6% growth on the bottom line.
Importantly we made excellent progress on market share as we held or gained share in all of the market share metrics we monitor across both the U.S. and Canada. And trust me,. we watch market share every single week. Importantly, we’re very focused on PepsiCo's long-term growth model and the building blocks that are central to the success.
First, building brands that consumers absolutely love. Second, driving excitement to our category by offering differentiated innovation targeted to specific consumer occasions and needs. Third, executing with absolute excellence throughout our supply chain and in the marketplace. And fourth, accelerating productivity to grow.
Since we look at every aspect of our business through the lens of the consumer, let's start with how we create demand. Two years ago, we introduced a new consumer framework, demand spaces. The intention of this work was to go very, very deep on snack occasions. To understand thoroughly and completely what drives choice within the broader macro snacks universe of over $100 billion.
We went deep on how people snack when they're alone, when they're with others. We better understood how health and wellness impacted decision on snacking. The foundational insight here was that drivers of needs differ based on the context of the occasion.
Fundamentally brands and product that deliver against the identified occasion specific attributes drive consumption and market share. Knowing that there are approximately 67 snack occasions per month in America, helped us better understand the size of the price and how to get there.
As you can see, we still have plenty of room to grow with just eight of the 46 macro snack occasions per month. To reinforce, all of our work starts and stops with consumer demand insights. We understand the size and growth potential of each demand space. More importantly we know how and why consumers make choices inside each demand space.
We’ve learnt a great deal about these demand spaces in the past two years with much yet to be learned and applied to our business. These demand spaces inform everything we do. Our innovation agenda, our brand building, our media plans and how we execute in the marketplace. We call this media to shelf.
As an example, Lay’s Do Us a Flavor was a huge brand building investment to capture what we called the enjoy and indulge demand space. What better way to capture this opportunity than to let consumers create their own brand of Lays. Do Us a Flavor invited consumers across North America to submit as a flavor that they wanted us to launch. We expected a big response, but we were overwhelmed when the final submissions were dramatically above our expectations.
This campaign had a terrific blend of brand building elements. Breakthrough digital and mobile engagement was embedded in every single touchpoint, all the way to the shelf. Let me tell you the finalist, Cheesy Garlic Bread, Sriracha and yes, Chicken & Waffles were flying off the shelves when we brought them to market. This year, the program will be even bigger.
Let’s take a look at how we are introducing it. It’s called Choose Your Chip. Let's roll the video.
Believe it or not, on the launch day, we had over 100,000 submissions in 24 hours. Of course, we are no strangers to putting consumers in control of our agenda. Once again, we had great success this year with our Doritos Crash the Super Bowl event. Within the young and hungry demand space, Doritos has a heritage of putting control in the hands of its fans and empowering them.
This year, we went global and we had submissions from all over the world. Two of the 5,400 consumer generated ads finished in the top four on the USA Today Ad Meter. And every year, we run Crash the Super Bowl, we finished in the top four. Time Machine received the most fan votes and cost our winner just $300 to produce. Let's watch.
I think you will agree that Doritos consumers not only love our brand, they're very clever and very creative. In addition to marketing, we’ve also significantly stepped up our investment in R&D to drive differentiated products. And as a result, 2013 was one of the biggest years for innovation in our history.
Our innovation sales as a percentage of revenue increased to full point versus 2012, and it was more incremental than in the past. We captured the party occasion with Tostitos Cantina as Brian mentioned, a blockbuster innovation, which achieved more than a $100 million in sales in 2013. We also had successful Lays Do Us a Flavor and Cheetos Mix-Ups.
Additionally, we are continuing to build our food and service partnerships through innovation. As Brian said, our beverage relationship opened the door for us with Taco Bell to unlock growth in the huge away-from-home consumption occasion. Doritos Locos Tacos cumulative sales are now over $1 billion. Following the highly successful launch, we are adding six additional PepsiCo beverages to the Taco Bell lineup to help beverage buffs “Live Más” while they sip.
Additionally, Taco Bell will be the first national QSR to offer Manzanita Sol, an apple-flavored soda that has crossed borders. In fact, our 2014 innovation calendar is loaded across our portfolio. As examples, we’ll capture the party occasion with Tostitos Fajita Scoops and Queso Blanco. Both of these products are off to a blistering start.
Young and hungry, Doritos consumers can look forward to three mystery flavors in a bowl flavor experiment. These flavors are so bold. We couldn't go through our normal test protocols. We’re looking for bold taste testers across America to tell us, which one is boldest. Rold Gold provides fun break time snacks that deliver on taste and enjoyment.
Rold Gold Pretzels Thins will deliver on this. It's a thin, flat pretzel with new packaging and Frito-Lay flavor expertise. Squarely on trends for healthier snacks, we continue innovating with our Sabra JV, including new flavors as well as the Sabra Rold Gold GRAB n' GO Package.
Of course, our investments in brand building and innovation are ultimately dependent on wiring our execution. As I mentioned earlier, our ability to execute our plans from media to shelf is a true differentiator for Frito-Lay. Over the past two years, we've made substantial investments in our execution capability. The end result is an integrated execution platform that enables us to celebrate our brands in retail stores and food service operators across the country.
Last year's, Do Us a Flavor captured the nation by storm with eye-catching displays like this. And you can see this year's Choose Your Chip displays on the right and in the marketplace right now. These displays celebrate what Lays is all about, enjoyment, fun and indulgent flavors. Of course, Frito-Lay snacks are always better together when paired with Pepsi. This is exactly what we’ve done with junto disfrutado más, which means together enjoyed more.
We've launched this integrated Hispanic campaign on holidays. This program has been a driver behind driving increased relevance with our Hispanic consumers. Our growth drivers at PepsiCo are very clear. Brand building that breaks through, consumer led innovation and absolutely best-in-class execution.
I will be the first to acknowledge that these skills are not unique to PepsiCo or to Frito-Lay. What I can say is that very few companies can put them together the way we can with the scale brands that we have. We are able to invest in brand building innovation and execution through a robust productivity pipeline. Brian talked about PepsiCo's productivity plans earlier.
Today, I'll talk specifically about GES. GES stands for Geographic Enterprise Solutions and has built a productivity engine and a growth enabler. GES is up and running in four sites across North America. In each case, the project has delivered against our internal hurdle rates.
We monetized GES by realizing lower inventory accelerated growth, reducing costs, expanded SKUs in our DSD network and improved freshness. The terrific thing about GES is our customers absolutely love it. GES eliminates touches. It takes product hot-off the manufacturing lines and delivers it direct to stores where a professional Frito-Lay salesperson merchandises it.
What’s left, you ask? The retailer simply needs to check the product out at their register. Bottom line, GES is an outstanding cash flow story for our customers. Productivity initiatives like this allow us to invest in the business and complete the virtuous circle. So in summary, we are very excited about our current momentum at Frito-Lay North America.
We are fortunate to be participating in an attractive category. We see significant runway to grow in the broader macro snack universe, and our competitive advantage is our ability to integrate the components of our growth model all the way from demand occasion to the store and bring media to shelf to life. Finally, we are in a great position to leverage the strength and scale of PepsiCo.
At this point, Brian and I would be happy to take any questions.
All right. Thank you. I got just two questions. First, there was a whitepaper that was published earlier this morning. So understanding that Pepsi has put out a press release, but to the extent that you all could talk about your response to that if there is one?
Brian, I’d be happy to clear that and answer that right upfront one-time and try to put that to the side for the rest of the Q&A. And the answer is going to be no different than the answer you heard last week. We’ve honestly spent a significant amount of time studying different structural options. We’ve reviewed those from a management standpoint, we’ve reviewed those with the board, and we’ve concluded the best option for the company and for shareholders is to keep these businesses together.
So we're shifting our focus now to running the business and really making sure that the Playbook that Tom and I talked about today. We focused on building our brands, bringing great innovation to both snacks and beverages here in North America, elevating our executional focus and driving productivity across both beverages and snacks. That’s where we’re going to place our focus, but we spent a lot of time looking at it, Brian.
If I could just ask a follow-up about the process, there has been a lot of discussion about the beverage business and the effect of the beverage business. But from your perspective, as the company went through that process and you had to look at the prospect or potentially look at the prospect of operating a food business, a snack business without the beverage business. Could you talk a little bit about maybe what insight you’ve learned, what’s different, what you’ve learned through that process and what led you from the food side to on a snack side to come to conclusion that you are better off together?
Let’s step all the way back and really talk about the power of the PepsiCo portfolio today in a market like North America. And as you know very well, beverages continue to be the largest subcat across North American food and beverages. It is a very big category. It's going to be big in 2014. And if I come back and talk to you 5 or 10 years from now, we will continue to talk about the importance of the beverage business in the U.S.
So, a scale business. It provides leverage across our entire portfolio. As a combined food and beverage company, we are the number one supplier to our customers here in the U.S. and across North America. It brings benefits to our snack business in many of the challenges or channels where beverages have a very strong level of penetration. Channels like c-store. The opportunities that we've talked about in foodservice where based on our beverage relationship with the company like Taco Bell, we’ve been able to expand our snack in culinary presence. The same thing is going to take place with many other foodservice operators.
So this is a big important category for retailers. It wasn't that long ago I was sitting in one of those retail chairs. Every week you talked about how you're going to advertise, merchandise, and promote beverages. So it gives us a very important seat at the table. We also have a very attractive position as you know in the LRB category. We have brands that are in the growth space. Brands like Lipton where we’re seeing great performance with pure leaf. Brands like Starbucks that are driving growth in ice coffees. Great trademarks like Gatorade in sports. So we have a great portfolio of LRB products that are pointed in the right direction today. And we think across North America, the combination of snacks and beverages gives us a very unique position with our customers but importantly with the consumer.
All the demand space work we've done, it’s really given us clarity around how well snacks and beverages work together. In the AM daypart in that break time occasion at the end of the day and we think it puts us in a much stronger position to operate as one company, continue to leverage the scale to drive procurement savings, savings in our IT and back-office services and continue to make sure that we’re sharing insights and leverage across our go-to-market systems.
So we've done the evaluation. We've got a lot of input from others from the outside, we’ve looked at this from every single angle, and we’re absolutely convinced this is the right decision for the company. It’s going to make us a stronger snack food business. We are going to continue to strengthen our beverage portfolio and we're going to focus right now on really operating these businesses and rolling out on Playbook.
Tom, clearly North America margins are at the high end of your CPG peers. You talked about productivity in the GES Program. Are you comfortable you can get significant margin expansion as you look out over the next few years or should we expect a lot of that productivity to be reinvested back behind the business?
And then from a top line perspective, you’ve obviously had strong performance in 2013 which you highlighted particularly with the innovation success. As you look out to 2014, are you comfortable that can continue particularly with some of the U.S. consumer spending weakness we’ve heard about at the conference so far this week?
Sure. But maybe I will answer your second question first. I think the top line were very bullish. The way we reconstructed our agenda is really around this broader macro snack look. And I would describe it as, if you take food and beverage in just the U.S., including away from home, its $1.3 trillion, okay. That’s the size of the food and beverage business, kind of split little bit half at home, half away from home.
So in the at home space, we’ve really used the demand space framework that I described to drive our agenda, separating our brands so that they are really moving away from being on top of each other which had been a challenge for us in the past. So now when Tostitos goes after which you saw earlier the party or the get-together occasion, there's nothing kind of tripping over top of it from a portfolio standpoint. So, very clear positioning of the brand inside of our demand space framework, also looking at where they are situated within mainstream value and premium space, and therefore which channel, which customer makes the most sense to drive that business.
We are pretty excited about the progress that we've had to-date. 2013, all of the trademarks that Brian showed up there were going mid-to-high single digits and we see continued growth really sourcing from other macro snack competitors in the broader space with our core businesses. So we’re pretty confident of our ability to drive the at home.
On the other hand, the away from home, think about that $650 billion, we’ve really opened up a new door with Doritos Locos Tacos. It’s far exceeded our expectations. We built out the culinary center down in [Plano] to really better understand how our brand can potentially connect with other QSR propositions. You may have seen on the Olympics we had a Chicken Enchilada -- Fritos Chicken Enchilada stuff with Subway. We are working with Subway on a bunch of other ideas. You saw the Buffalo Wild Wings piece. So in that broader away from home space, $200 billion is roughly QSR. We see some room to really make some pretty big gains in there.
So collectively across the entire space, we feel pretty good about our ability to drive both volume and revenue growth. And last year, we ended up delivering at the very high end of NCPG company within food and beverage. I think we had the highest absolute dollar growth of any company.
On the productivity side, we see productivity as analysts at Frito-Lay and at PepsiCo. We have a robust agenda that ties to the $1 billion a year agenda that has been outlined by the company last week or extended by the company last week. We play a key role in that agenda and we know exactly what our platforms are to achieve it. Largely, GES is obviously a big contributor to our productivity agenda. Automation is a big contributor to the agenda. And then, we’ve got a very significantly Lean/Six Sigma effort going on. We have 60 black belts in Frito-Lay, we have Kaizen Leaders and we focus very carefully on every single line in the P&L. So we are confident in our ability to deliver the productivity as well.
Okay. Can you talk about how much of that flows through the bottom line if you continue to expand margins given the high level you are at today versus how much of it may be need to be reinvested?
Well, first, I will say we’ve been reinvesting obviously in A&M, we’ve got a significant uptick in A&M in 2012 and we built on that in ’13, we built on that in ’14, similarly R&D, similarly our execution capability. So we've been making big investments in those three areas. We don’t give specific guidance for divisions on that topic, but obviously we’re balancing the investment with our ability to expand margins.
Yeah. I think the -- because we get the question a lot about the absolute margins which are really attractive. But I think, Frito, is really a pretty unique business in terms of its market position and brand portfolio.
We watch what’s happening with competitive price gaps and we’re very comfortable with where price gaps are right now. And we’re able to generate a lot of productivity and support the margins we have and expand the margins because of all this big scale advantages that Frito has.
So I think if you look at 2013, it was a pretty attractive year for Frito, good topline growth, good share performance and margin expansion and that sort of model we run. But we run the overall company as a portfolio and we make investment decisions market, one market versus another one, business versus another and overtime now we would expect Frito to have margin accretion. [Alex]?
Thanks. Two question, one is, clearly, hear the enthusiasm about being part of PepsiCo and better together and now the work that you have done in past six months. So can you help us quantify what your sales growth and bottom line growth would have been if you weren’t together?
We are sitting here today, we’ve focused our time and attention as we built our plans for 2014 as one company and that’s a perspective we’re taking. And we’re going to continue to focus on how we build and drive our volume and revenue and profit as one company.
So I’m not going to spend a lot of time looking back. We’re spending our time looking forward right now. And we’re not going to give divisional guidance, what our outlook is for next year.
But our focus right now from a North American standpoint is how we optimize our volume profit in share and operating cash flow as one PepsiCo company, it’s in both snacks and beverages.
So that’s the approach we’re taking. We’re going to look forward. We’re not going to spend a lot of time with what is looking back and hopefully we can appreciate that point of view. But we’re focused right now on optimizing our operational performance and we’re going to look forward and continue to drive things forward as one PepsiCo and one company.
Okay. And then looking forward, something that you’re facing in both businesses is kind of margin headwind, right. So from the beverages perspective it’s clearly the volume deleverage in North America? Can you talk a little bit about that, I already know we trust that too, but can you talk a little bit about that as you go forward and the impact that is on your business given the secular trend you are seeing in volumes that for the beverage business and the Frito-Lay business, it’s the mix of fact of definitely having much higher margins in the U.S. and emerging markets which are lower margin and growing much faster. So if you could help us quantify that and think about that going forward that would be helpful?
Let me step back and I might have Jamie jump in here, but as we think about some of the key to success, the things that were embedded in our discussions today. And I think specifically about the North American environment, which we know has been challenging from a growth standpoint, but there's still growth in North America.
And one other things that we really have tried to understand through the demand space work is where are those growth trends, where are their pockets of growth, where we deliver on that consumer demand. We’re going to continue to unlock profitable growth.
How do we make sure we take those insights to really drive the innovation we are bringing to market? Innovation that could be both product, it could be package, it could be different forms, they allow us to make sure we're delivering channel by channel, market by market what that consumer is looking for. So, I think, that is a significant unlock for us since we think about improving margins.
And price stag architecture, revenue management can be critically important. We’re obviously committed to accelerating productivity and that's across all of our business in North America. And sharing some of the best practices we talked about really lifting GES across not snacks only but snack and beverages.
Looking at opportunities for greater automation, as well as improving the effectiveness of our front-line organizations, now how do we make sure that we really transfer the capabilities from those insights all the way to the front-line organization, so we can be much more surgical, much more granular with our executional capabilities.
And I think if we stay focused on those key areas and the key is staying focused on those areas. We’re going to continue to find opportunities to unlock growth in this market. We are going to improve our share performance. We’ll turn that into profit margin accretion and we’re going to run these businesses by leveraging that focus and the scale benefits that we can bring across all of our business.
So we’re going to look to say very focused on those key areas where we think, we can really unlock growth in a profitable way and continue to refine our playbook across both snacks and beverages. Jamie, I will appreciate also you want add?
Yeah. Just so, Alex, if you take the two pieces of your questions, North American beverages is going to be a big contributor to the billion dollars year productivity. So we’re absolutely all over making sure that business is scale to the growth. And then on the margin geographic mix question, there is a natural drag, you are right, so the faster growth markets have lower margins than the portfolio average.
But over, if you kind of extend the point of time, right, there is going to be volatile in those markets, but they are going to have the highest rate of margin expansion as those markets scale up and we always like to point to is you can take a market like Mexico, which has a lot of the challenges of a developing market in terms of inefficient sort of infrastructure.
But that’s the business where you’ve got a nice market position and we built for caps and the margins in our Mexican Snack business are not too far off of the really attractive margins that we have at Frito-Lay North America.
Let me go back and build on that, this is the conversation you and I had before. As we think about margins in our snack business a how we’ve really taken learning from our Frito-Lay business in North America transfer that down to Mexico. And now as we don’t breakout margins by country but we’ve talked about we are delivering very attractive margins in Mexico. And we really use Mexico as what I describe as the model market for the rest of Latin America.
So the margin improvement we’re seeing in Latin American foods, started with really taking best practices from Frito down to Mexico. In Mexico building the model market for developing and emerging snack business, we’re transferring that learning and in some cases we’re transferring the talent from Mexico to Columbia, from Columbia to Brazil, down to the South cone to really make sure that playbook that we’ve developed in Mexico. Those best practices are use throughout our developed and emerging markets in Latin America.
So, overtime, you’re going to continue to see that improvement, you’re right there is a mix pressure we face, but we’re quickly transferring those best practices from Mexico to Brazil, which performed very well for us last year to markets like Columbia and Ecuador and Peru where we’re seeing very strong growth and market share improvement and we’re going to transfer that throughout Latin America. Okay, Judy, we will just keep going around the horn I think.
I have two question, first, Brian, just in terms of your progress you have made in looking at the share demand face and capturing your share within because couple of years ago, I think you weren’t capturing your fair share and I think you’ve tried to really improve on that. So just wanted to see how much improvement you have gotten on that front. Can you talk about what more you can really do to be dominant in capturing that demand -- shares demand space? And then the second question is just in terms of the Mexico tax situation…
… and what kind of impact you are expecting specific to the food business.
So [Julie], we would start and talk about another journey we’ve been on with demand spaces and while we are in, really, now a year and three of that work at Frito and we’re quickly transferring that to beverages. We are still in the early stages. If I can use sports analogy, if this is a nine-inning game, we are in inning two. It’s -- lot of work to really refine the methodology, embed that and how we think about the business, how we make decisions.
Tom talked about the important work we did its really beginning to break our brands apart, understand what demand space they set in, where we had share opportunities, where we had opportunities to bring innovation, where we have opportunities to source volume from other macro-snack occasions. So we are in the early stages but we are actually now looking at market share in each one of those key demand spaces to really understand where we over-index but importantly where we under-index and that’s going to give us a much better roadmap to guide our brand investments, how we talk to consumers and importantly it’s going to guide our innovation going forward.
But we are in the very early stages. That’s why I am so excited about the work. We’ve got the methodology in place. It’s guiding us to make much better choices around our brands and innovation, how we begin to unlock that growth and it’s going to be a measurement for us to say how we would continue to grow market share in each one of these key demand spaces.
From a Mexico standpoint, I start, [Julie], by saying, first obviously it’s very early. I think we are in week number seven now of the new tax increases. But for anyone who is doing business right now in Mexico, this is a consumer that on January 1st woke up to the realization that while all the reforms long term are going to be in the best interest of Mexico and the Mexican consumer.
Short term, they have seen significant increases in food pricing and really increases across all packaged foods in Mexico. So they are absorbing that. They are adjusting to that. They have seen prices go up with package foods. They have also seen a significant increase in fuel cost.
So it’s a consumer right now that’s trying to figure out how do they work with the Pesos that are in their pocket. Our retailers are trying to adjust to this new environment particularly the traditional trade and for those of you, who have spend any time in Mexico, the traditional retail in Mexico is usually mom and dad, brother and sister who manage that cash box really carefully. Well, they seem to contract short term.
We certainly expect as we work through the first half of the year that the overall Mexican economy is going to improve that the consumers are going to work their way through this and that we are going to see a rebound. But the start of the year has been challenging for that Mexican consumer and it has been challenging across food and beverage overall. But we are confident that by the second half of the year, these changes will continue to take shape and will see a restoration of growth in the Mexico market.
Thanks. Brian. We haven’t -- we didn’t hear much about Quaker today and that’s one part of the portfolio that has had some struggles. Can you talk about that a little bit and then Tom last year you have talked about segmenting the Frito-Lay portfolio and premium versus value, can you talk about that a little bit as well in terms where we are with the development.
Let me start by talking about Quaker and you have sat through many of our presentations this week. I think you’ve heard some of the challenges in center or store categories. And Quaker certainly has been caught in some of the headwinds that we are seeing with traditional center store categories. And that has really been a tail of multiple stories. Our innovation at Quaker continues to really perform well with today’s consumer.
I feel great about innovation like Real Medleys, areas where we brought yoghurt to bars and some of things that we have done across our portfolio. But while the hot category continues to perform well, ready-to-eat cereals has been a challenged category over the last several years and we have a significant ready-to-eat cereals business.
The snack-bar business has seen some additional headwinds. So we are stepping back, we are continuing to focus on how we really build that Quaker trademark, how we make sure we bring the right innovation at same demand space work to understand how do we unlock pockets of growth in that Quaker portfolio.
So its work has progressed right now, but what is working is innovation, which tells me as we look forward, we had a better understanding on what the consumers looking for. We have a very trusted brand and we want to make sure that we find ways to unlock and make the brand even more relevant going forward.
Yeah. And just quickly the work on mainstream premium values really getting more and more granular, we feel really good about it. We obviously start with demand, but then stratify the occasion by mainstream premium and value. And our innovation on specific demand space, Stacy’s as an example for premium, which is in the [Mid-Life Treat] treat segment.
We focus it on really hitting the demand space drivers within that space. But recognizing that it is a premium priced product, we are going to put in premium channels, we are going to put it in premium stores granularly, ultimately. Mainstream, lots of success in the past year, most of our core brands are in there, so a brand like Cheetos Mix-Ups sourced from a lot of big products within mainstream and then, value, we have had tremendous success in last year with Funyuns, Chester Popcorn, Cracker Jack. We sort of repositioned those brands to compete very vigorously at a Wal-Mart or a dollar Store.
So it’s got to Caroline and then John, over on now.
Christine Farkas - Merrill Lynch
Thanks so much, Christine here. Two of the, the quick one is if you could update us on Brazil because you said, you had a record year in 2013. The consumer was very stressed, so does that all go well for the Mexico situation that your categories do okay in tough consumer environment?
I think it’s a good proxy. I think obviously, the per caps and the category in Mexico was much more developed than Brazil. We saw very strong performance in 2013 in Brazil. It was really one of the highlight markets I think across PepsiCo. And the playbook that we have been bringing to the Brazilian market, again, it’s lifting and shifting some learning from Mexico. We spend time really focusing our portfolio. In some cases, rationalizing our portfolio. We brought very selective innovation to the market that has been very well received. We have really expanded from being a salty snack player in the Mexico to a broader macro snack player with the acquisition of Mabel and now the introduction of Quaker cookies and other products that we brought down from our portfolio in Mexico.
So we launch the brand called Toddy, that’s been incredibly successful in Chile and Argentina and now in Brazil, big focus on productivity. And really making sure that we refine our supply chain and get ready for growth and we've spent a tremendous amount of time really refining our go-to-market systems.
So the Brazilian story in 2013 is really a back to basic story. We refined our focus on core brands. We bought very select innovation to the market including a successful launch of Lays at the end of year, which is off to a great start in Brazil. We've really dialed up our focus on getting our supply chain capabilities in place to support the future growth and we step back and really rewired our go-to-market systems.
And the prospects in Brazil despite the economic headwind for us, I think are very strong because of the price point of our products in this Brazilian market. We bring great value to the customer. We have significant headwinds to capture as we build per caps in salty and across macro snacks. And we're continuing to build out and refine our go-to-market systems.
So the overall macros in Brazil, as you know slowdown dramatically across 2013 and I think we've had to recognize that it’s going to be a slow growth market in 2014 but I think we've got the right playbook, I think our brands are well focused there. We've get select innovation, we're improving our productivity and we're certainly enhancing our go-to-market systems.
Christine Farkas - Merrill Lynch
Thank you so much. The other question is much broader. If you look at the consumer understandings that you’ve had in the food business, why is that in beverages you're seeing sugared sodas under pressure, juices under pressure that the apparent health impact of the way people want to live their lives being quite crushing even on diets and yet you're performing incredibly well in the food side. Can you help us, if you dug into that at all and if you could bring any learning to help the beverage business?
And that’s certainly the work that's underway right now. I think if we step back and we do talk about what's happening in the LRB environment, there are clearly still pockets of growth. We've talked about what's happening with categories like tea and coffee, what's happening in sports and sparkling water, what's happening in flavored CSDs. We certainly recognized right now if you look at LRB, the challenge has been not just CSDs, it's really the challenge with cola. And part of that is sugar; part of it is the pressures we're seeing across the diet side of cola as consumers express even more concerns with artificiality.
So we've been very public about the work we're doing on sweeteners and really looking at the next generation of sweeteners. We think that's a key unlock. But we certainly think there is growth across LRB. And as we take the demand space work, we did understand how to separate those brands and drive growth across tea and coffee and sports and other non-carbs, continue to maximize great brands like Mountain Dew, which still have tremendous runway.
And then really step back and think about through price pact management, the right form function, how do we continue to find pockets of growth for CSDs including cola. So it's work-in-progress, it's certainly a challenge, but we're putting resources and attention against that. And we're certainly committed defining the way to optimize the growth in those categories.
One more -- time for one more over to John, and then Tom and Brian are going to be joining you off for the breaks so there will be more time to interact with the folks out in the [Hallway].
Thanks. Couple of quick questions on GES. So you've got four facilities up already. The results seem to be solid. And I guess, is there a bottleneck in terms of accelerating this if you are getting more top line and more savings? Then the second question would be, can you talk to us about what's really generating the top line, is it better out of stock, is it better servicing of individual customer demands? And then whatever color you can give us on the beverage aspect if this thing you're looking at in terms of particularly channels, which channels you're thinking about going in beverages? Thanks.
Well, GES is really exceeding the hurdle rates. We're very excited about the performance in the four sites and each time we start going up, it gets better. So there is a learning curve that we're building there. The reason why to a year is kind of the pace that we've been on John is just our ability to manage the change inside the organization and managing capital and spending judiciously. So that's really yet, I mean we've got -- we start to really see a ramp up here in terms of the returns on this over time because this is an upfront investment associated with it obviously, but very excited about it.
The top line piece, we’ve studied the future and extraordinary detail and we sort of back cast our world from 20-20 and really gotten focused on how do we sustain the growth that we need to go get and we know those drivers innovation, execution and brand building all need to play a role. So each one of those has played roughly an equivalent role to be blend in the last year, we measure this rigorously. We've got a crack analytic team that looks across the whole portfolio every quarter and deconstructs our growth. And innovation, brand building and execution were all around the same level. And that's kind of where we wanted to be because trade spending, promotional spending, those types of things, we won't be able to sustain. We're very confident when we drive the growth the right way through innovation, execution and brand building.
I think that's all the time we have. I want to thank PepsiCo again for the snacks and drink this week and your long time support of the conference. Thank you.
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