PepsiCo's Q3 2025: Contradictions Emerge on Productivity, Volume, and International Market Performance

The above is the analysis of the conflicting points in this earnings call

Guidance:

• Expect to return to long-term net revenue growth algorithm during 2026 (timing within the year TBD).
• PBNA to accelerate net revenue; margins to expand in Q4 and deliver full-year 2025 expansion despite Q3 tariffs.
• International expected to run mid- to high mid-single-digit growth for the balance of 2025.
• Frito-Lay North America to bend margin curve in 2025; further productivity actions in 2026.
• Total company margins to improve in 2026, driven by international scaling and cost actions.
• Major brand relaunches (Lay’s, Tostitos now; Gatorade in Q1–Q2 2026) and innovation to drive volume.
• Testing One North America in Texas; broader rollout will be market-specific.
• 2025 cost resizing actions provide significant carryover benefit in 1H26.

Business Commentary:

• Volume and Revenue Trends:
• PepsiCo's beverages segment grew volume in Q3, with brands like Pepsi showing improvement in net revenue and market share.

• The food segment experienced a decline in volume, attributed to a shift in promotional strategy and price realization.

• Innovation and Product Portfolio:

• PepsiCo highlighted robust innovation in permissible snacks and functional hydration, which are expected to drive growth in the future.

• The company is relaunching top brands like Lay’s, Tostitos, and Gatorade with an emphasis on functional benefits and clean labels.

• Cost Management and Margin Expansion:

• PepsiCo is aggressively addressing cost structure, particularly in the Frito-Lay division, with actions including optimizing supply chain and go-to-market costs.

• The company is expecting margin improvement next year, driven by portfolio transformation and cost efficiency.

• International Business Performance:

• PepsiCo's international business experienced a mid-single-digit growth rate in September, recovering from weather-related impacts in the summer.
• The consumer environment is stressed globally, but PepsiCo is seeing growth in markets like India and Brazil, maintaining market share despite macroeconomic pressures.

Sentiment Analysis:

• Management expects a return to the long-term algorithm in 2026 and cited improving execution: “We should see an acceleration in PBNA… optimistic about the top line growth on both businesses.” International is “back to mid-single digit, high mid-single digit.” Margins: “PBNA… Q4 an expansion… positive margin expansion for the full year,” and total company margins to improve next year with productivity and portfolio actions.

Q&A:

• Question from Bonnie Herzog (Goldman Sachs): What’s driving volume declines (smaller packs vs category softness/share), and when can volumes inflect given your innovation pipeline?
  Response: Beverages grew ex case-pack water; food volumes were hit by promo strategy changes, but with 97–98% service levels and innovation, volumes should improve and top line balance between volume and price.

• Question from Daryl Moshidi (Morgan Stanley): Which initiatives most impact accelerating revenue into 2026 and can you return to your long-term algorithm?
  Response: They expect to return to the algorithm in 2026 via basics execution, relaunches of Lay’s/Tostitos/Gatorade, growth platforms (away-from-home, zero sugar, permissible snacks, functional hydration), and targeted M&A.

• Question from Lauren Lieberman (Barclays): Cost implications of cleaner labels/protein and brand support; impact on margins and A&M?
  Response: Despite higher COGS, margins should expand via productivity and pricing; savings will be redeployed to A&M, with PBNA margin expansion in Q4 and 2025 and further improvement in 2026.

• Question from Steve Powers (Deutsche Bank): Details on productivity/right-sizing in PBNA and status of One North America?
  Response: Shuttering least efficient plants, rationalizing/automating warehouses, right-sizing go-to-market, with more benefits in 2026; testing integrated snacks/bev distribution in Texas with a nuanced rollout.

• Question from Filippo Falorni (Citi): Health of international consumer and confidence in acceleration given macro pressures?
  Response: Q3 softness was mostly weather; September was strong, and international should run mid to high mid-single-digit despite varied regional macro conditions.

• Question from Michael Lavery (Piper Sandler): What’s driving Pepsi brand momentum and are you cutting or optimizing marketing?
  Response: Growth is led by zero sugar, flavors, and meal occasions with increased but more efficient marketing; focus remains on ROI, not broad cuts.

• Question from Peter Grom (UBS): What drove the PBNA improvement (lapping vs actions) and confidence in near-term trends?
  Response: Sequential improvement is primarily from better basics—service, pricing, execution—with signs of sustainability rather than simple comp effects.

• Question from Andrea Teixeira (J.P. Morgan): Impact of SKU rationalization and results from price investments/entry price points in PBNA?
  Response: Cutting the long tail boosts efficiency and service with minimal loss; sharpening price-pack in mainstream take-home is the priority to drive demand, while permissible continues to perform well.

• Question from Peter Galbo (Bank of America): Why pursue protein with Muscle Milk/Propel (organic) versus acquisitions/partnerships?
  Response: Leveraging enhanced Muscle Milk and Propel offers better ROI and brand stretch; acquisitions like Poppi are used where internal platforms don’t exist.

• Question from Robert Ottenstein (Evercore ISI): Is the issue cost structure vs top line, and thoughts on hiring an external CFO?
  Response: They are simultaneously transforming portfolio and costs using technology for agility; an external CFO (Steve) will help execute Strategy 2030 as Jamie retires.

• Question from Kaumil Gajrawala (Jefferies): Openness to refranchising beverages to accelerate agility and innovation?
  Response: Open to all options; solutions will be market-specific, designed for future demand, enabled by technology, and optimized for total PepsiCo P&L.

• Question from Chris Carey (Wells Fargo): Structural vs cyclical consumer changes by geography (healthier eating, value)?
  Response: Structural trends—digital purchasing, cleaner labels, and affordability—are global and are shaping brand relaunches and cost structure changes.

• Question from Robert Moskow (TD Cowen): Will you engage with the activist and set targets (e.g., Frito-Lay margins)?
  Response: They’re engaging constructively with Elliott; most proposals align with Strategy 2030 and will help accelerate value creation.