PEP's Margins Under Pressure: Will Productivity Play Deliver Relief?

PepsiCo, Inc. PEP entered the back half of 2025 navigating a challenging cost landscape, but with renewed confidence in its productivity initiatives. In third-quarter 2025, the company delivered nearly 3% reported net revenue growth, with particular strength in international markets, which marked its 18th consecutive quarter of at least mid-single-digit organic revenue growth. However, profitability remains under strain.

PepsiCo’s gross margin came under pressure as higher supply chain costs, primarily from global inputs, ingredients and tariffs, weighed heavily on results. Management noted that these elevated costs created roughly a three-percentage-point drag on margins, partially offsetting benefits from pricing actions and cost optimization. While the company’s PepsiCo Foods North America business showed improvement in its core operating margin trend, overall margins remain compressed, underscoring the urgency of the ongoing productivity push.

Still, PepsiCo is taking deliberate action to rebuild profitability through an aggressive cost-reduction and automation agenda. Its “productivity play” spans multiple fronts: reducing more than 35% of SKUs since 2022, expanding automation in plants and warehouses and right-sizing its labor force, with Frito-Lay alone cutting about 7% of full-time headcount year to date. These actions have improved service levels and order rates, and reduced per-unit costs. The company’s emphasis on SKU rationalization, simplified operations through Global Capability Centers and the deployment of AI-driven efficiencies signal a deep operational transformation designed to stabilize margins and fund growth.

Looking ahead, PepsiCo targets stronger margins, with PBNA aiming for mid-teens profitability and Foods North America focused on cost discipline. Expected low-single-digit revenue growth and ongoing productivity gains will be key to restoring margins toward pre-inflation levels.

How Are KO & KDP Navigating Margin Pressures?

Both The Coca-Cola Company KO and Keurig Dr Pepper Inc. KDP are showcasing their margin management capabilities amid a challenging cost environment, leveraging pricing power, productivity gains and disciplined cost control to sustain profitability.

Coca-Cola delivered strong margin expansion in third-quarter 2025, showcasing its ability to manage costs and drive profitability despite currency headwinds. Operating income surged 59% year over year to $3.98 billion, even after a 4-point drag from currency impacts, while comparable operating income rose 8% to $3.96 billion. The company’s operating margin jumped to 32% from 21.2% a year ago, with the comparable margin up 115 bps to 31.9% and the currency-neutral comparable margin expanding 270 bps to 33.4%. This margin growth was fueled by strong organic revenue gains across most segments, disciplined cost control and the timing of marketing investments, all reinforcing Coca-Cola’s ability to sustain profitability in a volatile environment.

In third-quarter 2025, Keurig Dr Pepper delivered solid profit growth despite margin pressure from lingering inflation. Adjusted gross profit rose 7.9% year over year to $2.35 billion, though the gross margin slipped 100 bps to 55%. Adjusted operating income increased 3.9% year over year to $1.09 billion, driven by higher sales and productivity savings, partially offset by cost inflation. As a result, the adjusted operating margin declined 170 bps to 25.3%, reflecting ongoing input and logistics cost pressures even as operational efficiencies continue to support overall profitability.

PEP’s Price Performance, Valuation & Estimates

Shares of PepsiCo have gained 5.1% in the past three months compared with the industry’s rise of 2.7%.

From a valuation standpoint, PEP trades at a forward price-to-earnings ratio of 17.70X, slightly below the industry’s average of 18.31X.

The Zacks Consensus Estimate for PEP’s 2025 earnings implies a year-over-year decline of 0.6%, whereas its 2026 earnings estimate indicates year-over-year growth of 5.6%. The company’s EPS estimates for 2025 and 2026 have moved northward in the past 30 days.

PEP stock currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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