Low oil prices are hurting Pepsi's business

Nicole Sinclair
Markets Correspondent

Low energy prices are often thought of as a good thing for consumers, who find themselves with extra money to spend on other things.

However, this years decline in oil prices, which have fallen 18% year-to-date, is hitting an unexpected area: soda and snack sales.

In its second quarter earnings conference call, Pepsi’s (PEP) CEO Indra Nooyi said macro challenges to its business included “the economic impact in a number of markets across the Middle East stemming from consistently low oil prices.”

Specifically, pressure on crude has corresponded with increased currency headwinds. This happens because oil is priced in dollars. When the price of commodities falls, it costs fewer dollars to buy commodities. And so, this leads to strength in the dollar relative to foreign currencies.

REUTERS/Mike Blake

Asia, the Middle East and the North Africa region saw the most significant declines in the second quarter, according to Susquehanna’s Pablo Zuanic.

Oil prices are have been weak this year, despite a deal at the end of 2016 from the Organization of Petroleum Exporting Countries (OPEC) to cut production.

Source: FactSet

Pepsi has relied on international growth due to weakness in the U.S., which has seen a slowdown in carbonated beverages and center-of-the aisle snacks. The company generates 42% of sales from international markets. Last quarter, Pepsi’s international organic revenue growth slowed to 5% year-over-year versus 6.2% in all of 2016.

For now, Pepsi is raising prices to cover the increased cost of doing business in the region, Nooyi said on the call.  And this pricing power has helped to boost results, according to analysts. In fact, that 5% international organic growth in the most recent quarter surpassed US organic growth of 1.6%.

Nicole Sinclair is markets correspondent at Yahoo Finance

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