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Strategy Story
 
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INTERNATIONAL : PEPSICO: REFOCUSING BUSINESS
A toast to the ‘Kraft’ that can set us apart!
Despite growing its sales and profits aided by a great set of brands and considerable international exposure, a growing section of investors feel that the company could do much better by spinning off its snacks business. Is that sensible?
Issue Date - 15/09/2011
 
In business, many decisions that appear out of whack and get only grudging approval initially later go on to win ringing endorsement even from hard-boiled skeptics. When the US food and snacks company Kraft was wooing to win over British confectionery firm Cadbury in late 2009, its overtures were rudely jilted. Cadbury did not seem enamoured by the notion of striking a dalliance with Kraft and the American firm was looked down upon as a low growth business conglomerate. Eventually, Kraft succeeded in winning Cadbury’s affections by making an offer too good to resist: £11billion in cash and shares. But barely 18 months after the purchase, even before Cadbury could be fully integrated into the business, Kraft announced early last month that it intends to slice itself into two conglomerates – one to oversee its international snacks business, including Cadbury, and the other to look after its North American grocery division. The buzz surrounding Kraft’s decision to split itself has barely died down but speculation is already rife about who would be the next giant to go down the road to Splitsville.

Quite a few global analysts are predicting that PepsiCo is quite a good contender in this regard. Of course, the company has denied any such plans and even fielded a spokesperson to lay all such speculations to rest. PepsiCo contends that it has a very different portfolio and strategy to Kraft and the company has no plans to follow the latter. But that has not stopped tongues from wagging and some analysts have even been drawn into painting the possible upside and virtues of a PepsiCo split. Analysts believe that a possible split could unlock value for PepsiCo’s shareholders as the stock is being weighed down by the soft drink business. PepsiCo’s snacks business has significant competitive advantages in brand equity and distribution compared to its soft drink business. But at a time when PepsiCo is busy creating unprecedented value in its global snacks and beverages businesses, would it be beneficial or detrimental to break up its dual snacks-beverages portfolio?

Indra Nooyi, even before she became CEO, played a stellar role in steering the company away from the core carbonated beverages business. As CFO, she structured the deals that brought Quaker and Tropicana into PepsiCo’s portfolio. For all the storied rivalry between Coke and PepsiCo, the former remains essentially a one-product company focused on beverages. PepsiCo, on the other hand, has a much broader product base spawning beverages, foods and snacks. Coca-Cola’s heavy lifting is limited to beverages, particularly carbonated beverages, which has become a vulnerable category with a growing preference for healthier lifestyles.

 
December 12, 2005 was a historic date when PepsiCo’s mcap at $98.4 billion overtook Coca Cola’s at $97.9 billion for the very first time. Things seemed to be playing as per plan, and the world began to believe that whatever distance PepsiCo lost to Coke on the swings, it could well recover on the roundabouts. In recent years, food scientists at the world’s largest food and beverages maker have gone about with a fine tooth comb with these ‘roundabouts’, trying to bring down trans-fats level in its snacks, reducing sodium levels, moving to baked products & lowering sugar levels of its carbonated drinks. The portfolio famously transformed into three categories – fun for you, good for you & better for you.

While the company’s annual revenues have risen by around 72% over the past decade, net profit has more than doubled over the period, grossing $5.6 billion last year. The company has managed to deliver an average increase in EPS of 10.9% per year since 2000. Analysts expect PepsiCo to earn $4.61 per share in 2011. Over the past five years, Pepsi has grown its dividend by nearly 12% annually and outperformed the S&P. Thanks to its steady growth, no less an éminence grise than the world’s most celebrated investor and the largest single shareholder in rival Coca-Cola, Warren Buffett, has gone to the extent of calling PepsiCo a “wonderful” company.

In tune with her vision, PepsiCo has grown its “good-for-you” (read: healthier than average) products like Dole, Quaker Oats and Tazo teas from 11% of the $20 billion portfolio to 21% of a $62 billion portfolio today. Her moves have spurred the company towards focusing more on water, juices, teas and sports drinks. Result: Bottled water (Aquafina), fruit juices (Tropicana & Naked Juice) and nutritious snacks (Quaker Oatmeal & Granola bars) are outpacing traditional carbonated soft drinks and conventional snack foods in terms of growth. Under her watch, PepsiCo’s stable of billion-dollar global brands continues to grow larger. The company currently owns 19 brands with $1 billion or more of annual sales. While Pepsi-Cola, Mountain Dew, Gatorade and Tropicana juices lead the way in beverages, seven of PepsiCo’s snack brands have over $1 billion in retail sales, including Lay’s, Doritos, Tostitos and Cheetos. The company generates about 30% of sales from the developing countries.

          

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