Inflation and Pricing Strategies: How Beverage Companies Are Adapting

Impact of Inflation on Production Costs

Beverage companies are experiencing increased production costs due to inflationary pressures on materials, manufacturing, and operating expenses. Molson Coors, Coca-Cola, and PepsiCo all report higher costs for goods sold, driven by input inflation, premiumization, and unfavorable foreign exchange impacts.

"On the cost side, we expect underlying cost of goods sold per hectoliter to increase due to continued, albeit moderating inflationary pressure, including material conversion costs, higher costs related to premiumization, and lower volume leverage impact as compared to 2023 and the first quarter of 2024." --- (TAP, earning call, 2024/Q1)

"But in the end, our strategy remains yes, there'll be cost inflation, yes, we'll look to put it through.Yes, we'll work on productivity." --- (KO, earning call, 2024/Q2)

"Obviously, there was huge inflation in our categories driven by input inflation over the last couple of years and operating cost inflation." --- (PEP, earning call, 2024/Q1)

"Cost of goods sold per hectoliter improved 1.9% for the three months ended March 31, 2024 compared to prior year, including unfavorable foreign currency impacts of 0.6%, primarily due to the favorable changes in our unrealized mark-to-market derivative positions of $52.6 million, the benefits of cost savings and volume leverage, partially offset by cost inflation related to materials and manufacturing expenses and unfavorable mix driven by lower contract brewing volumes in the Americas segment." --- (TAP, sec filing, 2024/Q1)

"These impacts were partially offset by certain operating cost increases, a 17-percentage-point impact of higher commodity costs, primarily packaging materials, juices and potatoes, largely driven by transaction-related foreign exchange, a 13-percentage-point impact of unfavorable foreign exchange translation, primarily due to weakening of the Russian ruble, and higher advertising and marketing expenses." --- (PEP, sec filing, 2024/Q1)

Supply Chain Challenges and Solutions

Beverage companies are tackling supply chain challenges through various strategies. Molson Coors has over-delivered expectations despite a strike and achieved consistent supply to retailers. Coca-Cola offers a supply chain finance program to aid suppliers, while PepsiCo expects near-full supply recovery by Q4. Monster Beverage considers hiring external talent to enhance supply chain capabilities.

"The part we weren't expecting is that our supply chain team on a consistent week-over-week basis, I think we're in week nine or 10 of the strike have over delivered our expectations from a supply point of view." --- (TAP, earning call, 2024/Q1)

"Our current payment terms with the majority of our suppliers are 120 days. Two global financial institutions offer a voluntary supply chain finance program which enables our suppliers, at their sole discretion, to sell their receivables from the Company to these financial institutions on a non-recourse basis at a rate that leverages our credit rating and thus may be more beneficial to them." --- (KO, sec filing, 2024/Q1)

"Quaker, you're all familiar with the situation. We're recovering the supply chain by Q4, will be in almost 100% supply and obviously the business at that point will be growing materially, because we're just refilling the shelves and pipeline." --- (PEP, earning call, 2024/Q2)

"While this is good in many respects, how do you think about hiring outside talent to bring in new perspective around capabilities like revenue growth management, procurement, supply chain, etcetera?" --- (MNST, event transcript, 2024/06/13)

"And having a consistent supply chain now where we can guarantee supply to our retailers and distributors who've really wanted to support the brand, but have been concerned about the lack of consistency sometimes in supply chain." --- (TAP, conference, 2024/06/05)

Adjustments in Pricing Strategies

Beverage companies are making small, strategic adjustments in value and execution, leveraging pricing opportunities, and focusing on price/mix effects. PepsiCo and Coca-Cola are driving growth through pricing actions and favorable mix, while maintaining affordability and innovation as core strategies.

"I think it's a small adjustments in value and in execution and in investment in new innovation areas that will drive it, and we feel very strong about our ability to do that, not in the long-term, but actually in the short-term, in Q3 and Q4." --- (PEP, earning call, 2024/Q2)

"Remember that our North American business, a typically compared to the other parts of the world, we consolidate a set of vertically integrated businesses and a set of franchise kind of concentrate businesses, such that the growth of a channel or a category can produce a mix effect independent of pricing in the marketplace. As you look at the 11 points of price mix in the second quarter in North America, it's important to understand that, only half of that is actually price." --- (KO, earning call, 2024/Q2)

"And in principle, we have really worked hard at really coming to decision that a pricing opportunity is out there." --- (MNST, earning call, 2024/Q1)

"We look at that very carefully. Now why are our margins expanding internationally because as we gain scale and obviously, that our fixed cost leverage is much better, and that's how we're getting to more profitable businesses in international markets, especially the large markets, whilst we keep affordability at the center of our strategy because that's long-term, including other things that we do, obviously, with availability and with innovation." --- (PEP, earning call, 2024/Q1)

"Price/mix grew 6%, driven by pricing actions across most markets as well as favorable mix." --- (KO, press release, 2024/04/30)

Impact on Consumer Behavior and Demand

Consumers are becoming more cautious and selective in their spending, focusing on value. Inflation and high gas prices are reducing store visits, while premium segments see shifts in purchasing behavior. Companies are adapting by understanding and segmenting consumer responses to maintain demand.

"The increase in U.S. volume was impacted by the continued shifts in consumer purchasing behavior largely within the premium beer segment and the building of distributor inventory levels to support the peak summer selling season and to mitigate the impact of the Fort Worth brewery strike that commenced in mid-February 2024." --- (TAP, sec filing, 2024/Q1)

"So do you see different behaviors happening everywhere, I think the connecting line it would be, the consumer is more cautious, the consumer is more choiceful, but the consumer is willing to spend in areas where they see value and we see it in our category, right, the more -- the parts of the category there I was referring to." --- (PEP, earning call, 2024/Q2)

"We think that inflation and high gas prices are having an effect on the number of consumers that are going into the stores, traveling." --- (MNST, earning call, 2024/Q1)

"Like we're distributed across them. We're very focusing on understanding them and then breaking them down into how different consumers are acting and responding within the segments." --- (KO, conference, 2024/06/20)

"So I wouldn't pin it on that. It's more around consumer behavior and our belief that around consumer confidence, as I alluded to a little earlier." --- (TAP, earning call, 2024/Q1)

Competitive Landscape and Market Positioning

PepsiCo is enhancing its e-commerce and direct-to-consumer channels to adapt to retail changes, while Coca-Cola leverages local hedging to stay competitive. Molson Coors benefits from a market shift in premium light beer, and Monster Beverage sees positive international reception for new products. PepsiCo also focuses on attracting top talent to strengthen its market position.

"We continue to monitor changes in the retail landscape and seek to identify actions we may take to build our global e-commerce and digital capabilities, such as expanding our direct-to-consumer business, and distribute our products effectively through all existing and emerging channels of trade and potentially mitigate any unfavorable impacts on our future results." --- (PEP, sec filing, 2024/Q1)

"So, that's one set of markets, and we essentially have put ourselves in a position through the hedging program that we can compete locally and do what's necessary to continue to win in those marketplaces, which is generally what happens." --- (KO, earning call, 2024/Q1)

"And then there's obviously the big structural shift in the premium light space moving from our biggest competitor to ourselves." --- (TAP, earning call, 2024/Q1)

"Initial acceptance from retailers and consumers has been positive. We are pleased with the rollout of Predator and Fury, our affordable energy drink portfolio in a number of markets internationally, including the launch last month of Predator in a non-carbonated formula in 500 ml PET bottles in selected provinces in China." --- (MNST, earning call, 2024/Q1)

"We are adapting our portfolio to that. Our ability to attract the best talent in the markets where we participate and build really capable teams is better than ever." --- (PEP, earning call, 2024/Q1)

Innovation in Product Offerings

Beverage companies are driving innovation not only in product offerings but also in packaging, marketing, and equipment. They are confident in their new innovations and premium portfolios, with robust pipelines planned for the future. Efforts include reducing sugar and introducing new products, supported by strategic investments in production equipment.

"So I want to drill in a bit on innovation, but not just on product innovation, because you've also looked to drive bigger and smarter innovation across packaging, across marketing sorry, across equipment we find in the market." --- (KO, conference, 2024/06/06)

"One is we are very confident in our plans that we have behind not only our big core brands, but also our new innovations and our Above Premium portfolio, not only in the US, but also in Canada and also across the pond." --- (TAP, earning call, 2024/Q1)

"Looking ahead, we have a robust innovation pipeline planned for 2025 in North America as well as internationally." --- (MNST, event transcript, 2024/06/13)

"We're constantly transforming our portfolio, from reducing sugar in our drinks to bringing innovative new products to market." --- (KO, press release, 2024/04/18)

"We expect to continue to use a portion of our cash in excess of our requirements for operations for purchasing short-term and long-term investments, leasehold improvements, the acquisition of capital equipment (specifically, vans, trucks and promotional vehicles, coolers, other promotional equipment, merchandise displays, warehousing racks as well as items of production equipment required to produce certain of our existing and/or new products) to develop our brand in international markets and for other corporate purposes." --- (MNST, sec filing, 2024/Q1)