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U.S. Business PepsiCo says higher advertising costs, new product investments will dent profit this year

PepsiCo Inc. said on Friday that increased investments in advertising and products aimed at boosting sales growth would lead to a fall in profit this year.

In his first major strategic move after taking over as chief executive officer, Ramon Laguarta unveiled plans to cut jobs and restructure plants to save US$1-billion annually through 2023 and fund its investments in a bid to claw back market share from larger rival Coca Cola.

Shares of PepsiCo were up 2 per cent in late morning trading as the company also reported better-than-expected core revenue growth, driven by higher demand for its Frito-Lay snacks and its beverages in North America.

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Pepsi and Coca-Cola are spending heavily to market low-sugar colas and flavored waters to keep up with changing consumer preferences towards healthier beverages.

Although increased advertising is helping sales, it is pressuring margins that are already squeezed by rising commodity and freight costs.

“While organic sales growth guidance suggests top-line strength should continue, earnings per share suggests the cost of achieving that growth is increasing,” Wells Fargo analyst Bonnie Herzog said.

The company said it expects 2019 adjusted profit per share to drop 3 per cent to US$5.50, while analysts on average had expected a 3.5-per-cent rise to US$5.86 per share, according to IBES data from Refinitiv.

The forecast also takes into account a higher tax bill and a 2-percentage-point hit from a stronger dollar.

Coca-Cola also warned on Thursday that its earnings per share could fall in 2019, citing a stronger dollar. The forecast pushed its shares down nearly 9 per cent.

Sales in PepsiCo’s North America beverage unit, the company’s largest revenue contributor, rose 1 per cent in the fourth quarter, benefiting from demand for Pepsi sodas, LIFEWTR and bubbly sparkling water and Gatorade Zero.

The investments in advertising and innovation is driving strong growth for core products, Chief Financial Officer Hugh Johnston told Reuters.

“(This) has caused us to want to invest more money back into the businesses in 2019 and that is why our guidance has landed where it has.”

Stripping off the forex impact and acquisition costs, PepsiCo forecast a 4-per-cent growth in operating revenue this year, higher than the six-year average growth rate of 3.8 per cent.

Revenue and profit were in line with expectations for the quarter ended Dec. 29. The company also announced a 3-per-cent hike in annual dividend to US$3.82 per share.

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