Pepsi’s “Perception Pendulum” Problem

By Gerry Khermouch

Perception swings can be a kind of pendulum that defies the laws of physics by sweeping further outward with each swing. During its difficult years, for example, New York, where I’ve mostly lived and worked, never was as dangerous as common perceptions held, nor is it as safe now as most people seem to think. The same phenomenon may be unfolding with PepsiCo and Coca-Cola.

For the past few years, particularly once Muhtar Kent ascended to the CEO job, Coca-Cola has had the wind at its back where investor sentiment is concerned. It’s developed a reputation for aggressiveness, for hewing to an ambitious but  pragmatic plan, for resourcefulness and agility, that has helped buoy its shares to a 40 percent appreciation since Kent was named president.

By contrast, PepsiCo has been increasingly beleaguered, its shares flat, with many on Wall Street clamoring for a breakup of the company, the departure of CEO Indra Nooyi or both. When Nooyi unveiled a plan that calls for building upon thecompany’s undeniable presence and resources in healthy food and beverages, some on Wall Street reacted almost as though she were playing a shell game, as though she was claiming that the $20 billion in sales accounted for by the healthier beverage items represented value she claimed to have created overnight. The leapfrogging of Pepsi-Cola by Diet Coke into the #2 sales spot in the U.S. was treated as an apocalyptic shock, when trends had been pointing that way for a while. Some observers were aghast at sales declines in Gatorade that were an expected short-term outcome of a refocusing away from casual users to active users. PEP was regarded as having bet the ranch with its acquisition of Russia’s Wimm-Bill-Dann dairy conglomerate in Russia, while Coke essentially was accorded a free pass on its pricier (by sales multiple) Vitaminwater deal. (More on that in a minute.) For reasons I don’t quite understand, investors even have abruptly taken to rejecting Pepsi’s Power of One strategy, which melds the retail clout of Frito-Lay with the beverages unit. This is even though, until PepsiCo acquired its biggest US bottlers, it really wasn’t able to put the strategy to a full test.

The disconcerting outcome has been that Pepsi, which probably is guilty of underspending on its North American marketing and overhoping that its bottler acquisitions will have a transformative effect, has been thrown into an abject panic. As I write this, its top brass is holed up in Purchase, NY, rethinking the strategic plan, with reports emerging that it’s considering lopping off 4,000 heads in order to generate some extra marketing cash – “burning the furniture,” as an unnamed source put it to the New York Post. Morale, already poor, has plummeted, and mid-level executives who should be refining their 2012 plans are hamstrung. The new plan is supposed to be unveiled in early February.

So Coke is the company that does everything right these days and Pepsi is the one that can’t do anything right. Where Coke seems always to get the benefit of the doubt from Wall Street, Pepsi never gets the benefit of the doubt. It’s a disparity that seems disproportionate to the actual fortunes and operating acumen of the two companies.

In this light, it’s interesting to look at Coke’s purchase, for $4.1 billion, of Glaceau. I’m one of those who’s been hard on Coke for its post-acquisition management of the Vitaminwater brand, which has been relentlessly price-promoted even as its marketing inevitably has lost the spark of its independent years. It has seemed clear to me that Coke way overpaid for a brand that almost immediately flattened out and lost much of its superpremium allure. (Though, oddly, KO seems to have done well by the sibling Smartwater brand.)

Yet I’m coming to believe that, purely from an optics standpoint, KO actually may have gotten good value for the $4.1 billion. The acquisition seems to have cemented the notion that Coke, spotting an opportunity to plug a key gap in its portfolio, will react decisively, rather than fidgeting around in the manner that caused it to lose Gatorade to Pepsi. Given the increase in Coke’s market capitalization, it may have been money well spent after all.

For any long-term beverage watchers, all this is an unsettling sight. Pepsi, long viewed as the sassy aggressor, is back on its heels, and Coke, despite its sheer mass as the No. 1 player, has usurped that identity. The contrast in image serves to disguise the fact that both probably are still too reliant on their core CSDs and unable to figure out how to play more effectively in emerging segments.

Fortunately, reports suggest that PepsiCo isn’t succumbing to the breakup hysteria sweeping Wall Street. Far from addressing the fundamental issues, that would just leave a weakened soft drink business extremely exposed to Coke’s greater clout. But clearly Pepsi needs to articulate – or re-articulate – a coherent plan that gets it a fairer hearing on Wall Street, so we can all go back to enjoying the cut-and-thrust of two respected, credible rivals. PepsiCo surely deserves more respect than it’s getting now.