Major PepsiCo investor launches campaign for overhaul

Is change on the horizon for PepsiCo? Major investor Elliott Investment Management, a hedge fund, recently unveiled a $4bn stake in the company, putting it among the CPG giant’s top five investors. Now, it is calling for a drastic overhaul of its portfolio, an announcement which saw a boost in PepsiCo’s share price. PepsiCo’s latest investor has criticised it for “poor operational results”, pointing out its flagging share price and discounted valuation. Such losses come from underperformance in its North American drinks business – an underperformance which Elliott blames on oversaturation of new brands and poor showings from its vertically integrated bottling structure. The previously well performing North American foods division has also begun to falter, suggests Elliott. Both the consumer environment and PepsiCo’s own investment decisions, “well beyond the needs of the current demand environment”, have squeezed profit margins. Increased spending in the food business resulted from overconfidence due to its previously high profitability, suggests Elliott. Internationally, the company has performed well, but weaker performance in North America has dragged the rest of the portfolio down. In short, PepsiCo’s valuation does not reflect its potential, the investor believes. Elliott makes several suggestions on how to fix the perceived problems. First, it suggests a structural overhaul of the beverage business, refranchising its bottling network. Refranchising bottling is something Coca-Cola has done, Elliott points out, to great success. When PepsiCo’s own bottling plants were refranchised, it outperformed its rival. Secondly, it should review its brand portfolio to refocus the business and make it leaner, freeing up money from marketing to spend on brands with greater scale. It must focus on its core franchises of carbonated soft drinks, while expanding selectively in categories that show signs of growth. It must put its full weight behind a few growing categories, rather than many, thereby saving on production costs, reducing distribution and warehousing complexity, and refocusing on core brands. In food, Elliott suggests an operational review to ensure costs reflect the present volume reality. Furthermore, it should conduct a portfolio review and divest non-core and underperforming assets. As with beverages, it should focus on core brands with proven value. In the challenging consumer environment of today, it should also scale its value brands. Furthermore, it should also pursue bolt-on M&A, securing the company’s position in “the most attractive corners of snacking”. Responding to the events, PepsiCo said that it “maintains an active and productive dialogue with our shareholders and values constructive input on delivering long-term shareholder value. We note Elliott Investment Management’s disclosure of its presentation and will review its perspectives within the context of our strategy to drive sustainable growth.” Its strategy includes targeted investments in innovation, corporate-wide, multiyear productivity initiatives, international growth, and portfolio transformation. “We are confident that the successful execution of these initiatives positions PepsiCo to accelerate growth, strengthen our competitive advantage, and deliver meaningful, long-term value for our shareholders.”