PepsiCo is facing pressure from an activist investor to make a broad series of strategic changes, including restructuring its beverage division to welcome franchise bottlers back into the fold.
Elliott Investment Management, which holds a $4 billion stake in PepsiCo, sent a letter to Pepsi’s board of directors on Tuesday morning outlining a five-point plan to address “poor operational results, sharp stock-price underperformance and a meaningfully discounted valuation.” If enacted, the firm said, the changes could send Pepsi shares up at least 50% and restore organic growth revenue to mid-single-digits.
“PepsiCo finds itself at a critical inflection point. The Company has an opportunity – and an obligation – to improve financial performance and regain its position as an industry leader,” read the letter, signed by Elliott partner Marc Steinberg and managing partner Jesse Cohn.
The letter criticizes Pepsi Beverages North America (PBNA) for lagging behind chief rivals Coca-Cola and Keurig Dr Pepper (KDP) by continuing to “underinvest” in its core CSDs; there’s also several billions in impairment on the books from its purchase of Rockstar and Sodastream. Dr Pepper notably surpassed Pepsi as the second most-popular soda by market share in 2023, and despite big-ticket category acquisitions like Poppi, analysts cited in Elliott’s presentation are skeptical PBNA has a path to hit its long-term target for mid-teen operating margins (currently 11%).
Specifically, innovation under new acquired or launched brands has “fallen short” despite high SKU proliferation: according to Elliott’s presentation, PBNA has approximately 70% more SKUs than Coca-Cola but is generating roughly 15% less retail sales.
Pepsi’s latest release, Pepsi Prebiotic, is set to launch online this fall.
In response, Elliott is pushing for Pepsi to explore potentially shifting back into a franchise bottling system as a means to “allow each business to focus on its core competencies.” The soda giant transitioned to a network of corporate-owned bottlers, buying Pepsi Bottling Group and Pepsi Americas in 2009, as a means to tighten control over operations, but the result has been “weaker price-pack management, slower regional innovation and poorer in-store execution,” according to the presentation. The lack of checks and balances from a third-party partner has contributed to PBNA losing “focus and discipline.”
That should be complemented by a review of brand and SKU portfolios with an eye towards “reducing operational complexity,” while also divesting non-core and underperforming assets to help boost profit margins and freeing up capital for redeployment elsewhere.
Pepsi upped its stake in energy drink brand Celsius last week to 11% (+$585 million); as part of the deal, Celsius Holdings will manage the business for Alani Nu and Rockstar Energy and its namesake brand, with Pepsi distributing the full portfolio in the U.S. and Canada.
PepsiCo Foods North America (PFNA) should also be recalibrated, Elliott argued. The company’s aggressive investment strategy (criticized as “well beyond the needs of the current environment”) has failed to generate the anticipated growth and subsequently compressed margins. Yet the answer isn’t necessarily to spend less, but more strategically. Cutting operational costs and spending will free up capital for reinvestment in core brands and bolt-on acquisitions, said Elliott, noting it’s a model that already once helped PFNA jump-start growth in the early 2010s.
As for which brands should be on the chopping block, Elliott’s presentation notes that although its acquisition brought Gatorade into the fold, Quaker’s portfolio has “few, if any, synergies” with Frito Lay’s salty snacks, an area where PFNA has “true competitive advantage.”