In the Spotlight - PepsiCo puts North America back on the agenda

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Two major US announcements from PepsiCo in the last few weeks have set tongues wagging in the industry as to the motivation behind the decisions and what the firm's next move might be.


This month, PepsiCo has unveiled a number of senior executive changes, most significantly the appointment of Albert Carey, currently Frito-Lay North America president, as CEO of PepsiCo Americas Beverages. A week later and the soft drinks firm announced the formation of a 'council' to bring together its food and beverage units in the US.

While the council may help PepsiCo to leverage its scale in North America to improve profits, as well as breathe new life into the firm's sluggish soft drinks business there, there is speculation that the move is more reactionary than proactive.

The timing of the announcements look like a vote of confidence for North America at a time of macroeconomic weakness. Perhaps, too, the company's new council will silence rumours of a possible break-up of its own business.

It is no secret that PepsiCo, alongside Coke, face struggles in its home market, where a still shaky economy has dulled sales of soft drinks and global commodity pressures continue to bite.

As a result, PepsiCo, along with other multinationals, has turned to the developing economies for growth. Last year, the company pledged a US$2.5bn investment in China over the next few years, on top of a $1bn investment announced in 2008.

There are, meanwhile, signs of industry frustration in the US. Last week, Coca-Cola's chief executive, Muhtar Kent, told the Financial Times that the US is becoming "a less friendly business environment" than China, likening the emerging economy to "a well-managed company". Kent put the problems in the US down to political gridlock and an antiquated tax structure.

Even so, for Coca-Cola, its issues with North America appear to be dissipating, after it reported sales, volume and net profit growth in the region in its last quarter. PepsiCo on the other hand, reported flat first-half profits. The company conceded that the operating performance of its North America beverage division was "well below expectations" in the second quarter. PepsiCo CFO Hugh Johnston blamed "exceptionally high" levels of commodity inflation, poor consumer category demand and a tough pricing environment.

Bernstein Research analyst Ali Dibadj believes PepsiCo is feeling the pressure in North America.

"Although part of what we believe is going on is that Coca-Cola has used currency and bottler synergies/accounting to reinvest back into the North American business, Pepsi could certainly have been more focused on beverages," Dibadj told just-drinks this week.

"It felt like Pepsi senior management was ashamed at times of selling carbonated soft drinks...this isn't the case at Coca-Cola, and, to be fair, we think it is improving at Pepsi," he added.

Dibadj believes that one of the benefits that PepsiCo has not leveraged is the cross-selling of food and beverages. Its formation of a 'council' for North America sends out a strong message in this regard. "To us, beyond signalling that they are not so keen to split up, they are saying they are going to try this cross-selling very seriously," Dibadj said.

Power of One - Americas Council, is designed to take advantage of the combined scale of PepsiCo's food and beverage businesses. The company has said, for example, that it hopes to drive sales of soft drinks by bundling them with the snacks it sells, or save time and money by having one person service a particular retailer for both snacks and drinks.

In addition to the council, PepsiCo is to create a global snacks group in order to improve its portfolio of snack food brands. The firm already has similar groups for its beverage and nutrition businesses.

"The theory of the group is that snacks has an opportunity to globalise that has not yet fully been tapped," Dibadj said. "We'll see if this helps."

At the same time, though, there continues to be speculation about whether PepsiCo could achieve more value for shareholders by splitting its business.

Analysts and investors have often discussed PepsiCo as a "tale of two companies" - snacks and beverages. And given the slew of large companies, including Kraft Foods, Fortune Brands and Sara Lee Corp, that have all successfully navigated their way through a split, speculation is only likely to be fuelled further.

Dibadj believes a split is logical and would make strategic sense for PepsiCo, providing it with additional value from a focus on two pure-play businesses.

Some other observers agree. Dividing PepsiCo's drinks unit from its snacks division could value the combined entity at $90 per share, Edward Jones & Co analysts told Bloomberg. Shareholders could stand to reap a 49% gain, he said.

"We do believe that there is value that could be captured in keeping the company together but if, and only if, they improve on their food and beverages cross-selling," Dibadj said. "They have not done a good job so far, so if they are unable to, there is no reason to keep the company together."

Inside PepsiCo HQ, however, this option does not look to be on the table for the time being. Analysts will be watching closely to see what material gains the company's Americas Council can achieve.

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