Pressure mounts on PepsiCo to split in two
It’s a bit like whistling in the dark. PepsiCo is busy touting the value of its combined snacks and drinks portfolio, all the while Wall Street thinks the company should consider breaking up.
„I firmly believe that PepsiCo’s value is maximised as one company,“ said Indra Nooyi, the boss of PepsiCo, during the announcement of the company’s third-quarter results on 12 October 2011. What followed was a plea for the „Power of One”. That is how Pepsi describes its clout with suppliers, retailers and customers, thanks to its ability to market and distribute several of its brands together.
Fuelled by growth in emerging markets, PepsiCo’s third quarter results were better than expected. Net revenue rose 13 percent to USD 17.58 billion and operating profit was up by 4 percent to USD 2 billion compared with the same period last year.
However, Ms Nooyi was under flak from investors who say that, in her quest to transform PepsiCo into a maker of healthier foods and beverages by pushing PepsiCo’s portfolio of „good for you” products (nuts, oats, fruit juice), she has neglected its naughty-but-nice core business of sugary soft drinks and salty snacks.
PepsiCo’s critics have a point. Its soft drinks business in the U.S., its main market, has lost share to Coke and is dragging down the value of its snacks operation. PepsiCo has lost share in the U.S. carbonated soft drinks market for 16 periods out of 22 months since 2010, according to Goldman Sachs analysts.
In the second quarter, Pepsi’s drink sales volume rose 5 percent worldwide, but fell 1 percent in North America. Coke’s North American volume was flat, excluding cross-licensed brands like Dr Pepper.
What is worse, since Ms Nooyi took over in October 2006, PepsiCo’s shares have declined by 7 percent, while those of Coca-Cola, its great rival, have risen by almost 50 percent.
PepsiCo’s stock decline has perhaps been exacerbated by unhappiness within the company’s American drinks business, which has lost three marketing bosses in just over three years, it was reported.
In the same period PepsiCo suffered several marketing disasters, including a botched makeover of Tropicana’s packaging in 2009 (costing the company in excess of USD 35 million) and a confusing relaunch of Gatorade.
The Tropicana redesign was a high-profile flop because, while the new packaging aimed to refresh the brand and drive a natural fruit goodness message, consumers thought that the new packaging looked „ugly“, made the juice difficult to differentiate and gave it a „generic bargain brand“ feel.
Wall Street’s solution to PepsiCo’s woes: split the company in two, a drinks firm and a snack company. That way, the snack unit Frito-Lay (Doritos, Tostitos and Walkers) would no longer subsidise Pepsi, Gatorade (a sports drink) and Tropicana (a maker of fruit juice).
The question is: would a split help? Pepsi would certainly be following a recent corporate fashion. In January 2011, Sara Lee, a firm that makes cakes and sausages, said it would split into an American retail and food-service business and a meats business. In August this year, Kraft announced that it would split its international snack brands (Trident gum, Cadbury’s chocolate) from its North American grocery business, including Maxwell House coffee, Jell-O and Oscar Mayer meats. And earlier this month the shares of two companies formed by splitting a wildly diversified group, Fortune Brands, began trading on the New York Stock Exchange. Investors could choose between Fortune Brands Home & Security (locks, windows) and Beam (which makes Jim Beam whiskey).
Not all these splits will work out, the Economist newspaper commented on 14 October 2011. One or two reeked of desperation. It was as if, having ruthlessly cut costs and still not improved their performance, the mother companies had simply run out of other ideas. Pepsi, by contrast, seems ripe for bisection.
A split-up, if it did happen, could make it easier for Pepsi to battle Coca-Cola, better manage its two businesses for their different structural and strategic needs, and allow each to be more nimble in reacting to competitive threats, some analysts said.
„Pepsi’s beverage business is far from dead and we believe it can and should have a vibrant future”, Credit Suisse analysts said.
Credit Suisse analyst Carlos Laboy said PepsiCo needs funding to keep pace with Coke and to make faster growth sustainable. „A spin-off would be optimal,“ Mr Laboy wrote in a research note.
BRAUWELT International thinks that it is just a question of time before PepsiCo capitulates to Wall Street and splits in two.
This will pave the way for brewers keen on taking over Pepsi’s beverage business.
