'Pepsi's been outmaeuvered by coke, outshone by dr pepper' - crusading investor

‘Coke has mediocre PepsiCo on its heels’: Peltz’s withering verdict


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‘Coke has mediocre PepsiCo on its heels’: Peltz’s withering verdict

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Nelson Peltz insists that Coke has PepsiCo on the back foot and says the latter is even outshone by Dr Pepper despite a stellar beverage portfolio including Gatorade, Tropicana and Mountain Dew.

BeverageDaily.com has seen Peltz’s letter to Ian Cook​, PepsiCo presiding director, which says that muted 2013 earnings and disappointing 2014 guidance “reinforce our view that now is the time for decisive action”​ in terms of autonomous beverages and snacks management.

Attacking CEO Indra Nooyi’s insistence that a standalone beverage business cannot compete effectively against Coke, Peltz says PepsiCo has lost $15bn in market value since July 2013 (when his investment fund Trian Partners publically pressed for a divorce), and delivers a coruscating verdict.

“We disagree…PepsiCo has not competed effectively against Coca-Cola for many years, even with snacks in its arsenal. Dr Pepper Snapple has shone since it was spun-off from Cadbury in 2008 (in the middle of a financial crisis) and has outmaneuvered both Coke and Pepsi over the past five years.”

Peltz’ says DPS grew earnings per share (EPS) more than PepsiCo in 2013 and forecast similar 2014 growth despite a portfolio without such stars as Gatorade, Tropicana, Mountain Dew and Pepsi.

Old entrepreneurial Pepsi used to be ‘industry disruptor’

The transition of ‘Power of One’ from marketing slogan to strategy from 2006 increased the power of corporate ‘connnected autonomy’ – and Peltz blames this for a “diminished PepsiCo culture and deteriorating performance”.

“Separating snacks and beverages would create a clean structural break that would eliminate corporate bureaucracy, return power and autonomy to the operating divisions, increase accountability and re-energize division management,” ​he writes.

Peltz says his recommendations for a separate beverage business tally with a successful blueprint that PepsiCo used for decades as an “industry disruptor”​, the No.2 player that kept Coke off balance.

“Now Coke has PepsiCo on its heels and PepsiCo has too much bureaucracy to compete more effectively. This is a recipe for mediocrity at best,”​ he writes.

PepsiCo’s board argues that pairing beverage and snacks provides critical scale that makes the firm more relevant to customers and gives synergies – in terms of customer insights, advertising, co-ordinated national account activity and international expansion.


Outgunned by Coke in foodservice?

Yesterday, PepsiCo execs speaking at CAGNY conference in Florida hit back at Peltz’s letter by insisting that a split would spoil its vital relationship with foodservice operators such as Taco Bell.

In an irony that Peltz himself would have rued, given his insistence that PepsiCo underinvests in managerial talent on the beverage side, the firm fielded two top executives from its snacks division – Brian Cornell, CEO of Pepsi Americas Foods and Tom Greco, president of Frito-Lay North America.

Describing beverages as a “scale business”​ in North America, Cornell said they benefited snacks in channels like C-stores where they have high penetration levels.

“The opportunities that we’ve talked about in foodservice were based on our beverage relationship with a company like Taco Bell, where we’ve been able to expand our snacks in a culinary presence.”

“The same thing is going to take place with many other foodservice operators,”​ Cornell said, during a session when he and Greco did little more than restate PepsiCo’s on-message case for unity.

But noting that his fund is the largest shareholder in restaurant chain Wendy’s, Peltz said he had seen “first-hand how PepsiCo has been outmaeuvered by Coca-Cola in the foodservice market”.

“The most glaring example is the Coke Freestyle machine…Pepsi’s version…has yet to materialize, even though Nelson was told by the CEO in mid-2012 that 1,000 units would be in the market by the end of 2012,”​ he wrote.

“This is another example of PepsiCo’s ‘connected autonomy’ slowing down innovation and negatively impacting the ability to compete.”

Sweetener technology push would fit ‘standalone management’

Peltz also dismissed Nooyi’s insistence that separating beverages and snacks would forfeit the value Pepsi believes it could draw from new new sweetener technology.

Developments in this sphere are secretive, but products could include sweet taste modifier S617 developed with Senomyx, new steviol glycosides (stevia) or even ingredients that Pepsi holds patents for that are currently non-GRAS, such as high-intensity natural sweetener monatin.

“We believe the probability of productivity hitting the bottom line and sweetener technology having a material impact increases if there is a standalone management team with ‘no place to hide’,”​ Peltz wrote.

But…Analyst still believes in ‘Power of One’

After watching the CAGNY session yesterday, Wells Fargo senior analyst, Bonnie Herzog, said in a note that she believed the Peltz letter “was no doubt meant to weigh on today’s presentation”.

“PepsiCo spent a substantial portion of time continuing to justify the ‘Power of One’ both in prepared remarks and the Q&A,”​ she wrote.

She noted Cornell’s comments that 65% of US retail sales of snacks, beverages and breakfast products have complimentary needs across its four major demand spaces – ‘Prepare’ (breakfast occasions) ‘Perform’ (office/school) ‘Reform’ (snacks/drinks for young and hungry), ‘Connect’ (social occasions.

We believe keeping the business together is ultimately the right decision for now and we think PepsiCo continues to do a relatively good job of justifying its decision,”​ Herzog added.

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