PepsiCo to remain intact

by Monica Watrous
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PURCHASE, N.Y. — PepsiCo, Inc. isn’t ready to kiss its North American beverage business goodbye. After a year-long strategic review, the company said Feb. 13 it will not be pursuing a separation of the segment.

Challenges within the carbonated soft drink category prompted PepsiCo to reconsider the role of the beverage business in its portfolio. Adding pressure last July, investor Nelson Peltz recommended the company either break up to create two pure play beverage and snack food companies or merge with Mondelēz International to create a global snack food company and spin off the beverage business.

After studying numerous options, from a full spin-off to shedding elements of traditional bottling operations, PepsiCo concluded the business in its current form maximizes shareholder value.

“…our current ownership structure allows for optimally aligned objectives and execution, allows us to capture potential upsides from innovation and productivity, enables us to continue to benefit from scale advantages and finally, it continues to provide access to the U.S. cash flow that is so important to our shareholder cash return model,” said Indra Nooyi, chairman and chief executive officer, during a Feb. 13 earnings call with analysts.

A spin-off of the business, the company determined, would result in a loss of significant synergies — between snacks and beverages in North America, and between North American beverages and international beverage operations.

A separation also would decrease the company’s relevance to U.S. retailers and jeopardize growth in food service. PepsiCo’s highly integrated food and beverage portfolio has positioned the company as a vital supplier.

“Decoupling our beverage and snack businesses in North America would significantly reduce our relevance to our customers,” Ms. Nooyi said. “Within most of our largest grocery channel customers, we would fall from being the top supplier to a top 4-or-below supplier, and in the mass merchandise and drug channels, we would drop below the top 10.”

While net revenue for the North American beverage business declined 2% during the year, PepsiCo said it saw encouraging progress within the segment, as it retained its value share position while achieving strong net price realization at retail. And looking ahead, the company expects to realize returns on investments it has made in new sweetener technologies. To address dynamic declines in diet drinks as consumers increasingly shun artificial sweeteners, PepsiCo is testing mid-calorie beverages sweetened with stevia and sugar.

“We have several great-tasting cola product variations using zero-calorie natural sweeteners blended with sugar that we’re testing in various markets in the world,” Ms. Nooyi said. “So far, these test results are promising; however, our U.S. launches of these sweeteners will begin this year, primarily with non-cola products to build and test consumer acceptance before we launch lower-calorie, naturally sweetened cola products.”

PepsiCo spent a year exploring options for the beverage business, enlisting the help of bankers and consultants, all with an eye to create long-term shareholder value.

“When we evaluated structural alternatives for our North American beverage business, we established very clear principles to guide our decision,” Ms. Nooyi said. “First, we will not return to the contracted franchisee/franchisor model of the past. We needed a structure that ensures rapid decision-making with low coordination cost and friction. We needed to limit value chain decoupling and operating redundancies.”

PepsiCo also wants to maintain control over core strategic activities of the business, such as marketing, innovation and R.&D. Sacrificing meaningful scale advantages would challenge the company’s ability to maintain or advance alignment with national accounts.

“I think it’s very, very important we return to focusing on running the business, minimize the disruption, but more importantly, I think it will help hugely if we could just let our North American beverage business employees focus on running the business as opposed to worrying about what the future is going to be,” Ms. Nooyi said. “It’s a great business, big, profitable; it generates a lot of cash. Yes, there are segments of that business, large segments of the business, going through a secular change. We have to reinvent it with technology. … I think we have to allow this transformation to play out because it’s too big a business and too profitable a business not to allow the transformation play out.”

Several transformative actions put PepsiCo on track to achieve its financial targets in 2013. Geographic expansion, productivity savings, ramped-up investments in technology and R.&D. and innovation helped the company post 9% growth in income for the year.

“In 2013, we had one of our most successful years ever in new product launches, with six new products in the United States on track to achieve $100 million in annual retail sales, and this is a first for PepsiCo,” Ms. Nooyi said.

A key component of PepsiCo’s portfolio efforts has been balance, represented in efforts to increase better-for-you options by reducing calories and sodium in various products.

“Our product profile has grown from fun-for-you to a more balanced offering of good-for-you, better-for-you, and fun-for-you products,” she said.

For the year ended Dec. 28, 2013, net income attributable to PepsiCo was $6,740 million, equal to $4.32 per share on the common stock, up 9% from $6,178 million, or $3.92 per share, during the prior year. Net revenue for the year rose 1% to $66,415 million from $65,492 million during fiscal 2012.

Net income attributable to the company for the fourth quarter increased 5% to $1,742 million, or $1.12 per share, compared with $1,661 million, or $1.06 per share, during the prior-year period. Net revenue for the quarter increased 1% to $20,118 million from $19,954 million in the same period of the previous year.
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