Firm: PepsiCo
Enterprise: PepsiCo is without doubt one of the world’s largest shopper packaged items corporations, with a portfolio of among the most iconic manufacturers in meals and beverage. Its manufacturers embrace: Lay’s, Doritos, Cheetos, Gatorade, Pepsi-Cola, Mountain Dew, Quaker and SodaStream. Its segments embrace Frito-Lay North America (FLNA); Quaker Meals North America (QFNA); PepsiCo Drinks North America (PBNA); Latin America (LatAm); Europe; Africa, Center East and South Asia (AMESA), and Asia Pacific, Australia and New Zealand and China Area (APAC). FLNA makes, markets, distributes and sells branded handy meals, which embrace branded dips, Cheetos cheese-flavored snacks, Doritos tortilla chips, Fritos corn chips, Lay’s potato chips, and others. QFNA’s merchandise embrace Cap’n Crunch cereal, Life cereal, Pearl Milling Firm syrups and mixes, Quaker Chewy granola bars, Quaker grits, Quaker oatmeal and others. PBNA makes, markets and sells beverage concentrates and fountain syrups beneath varied beverage manufacturers, together with Aquafina, Bubly, Weight loss plan Pepsi, Gatorade and others.
Inventory Market Worth: $211.28 billion ($154.32 per share)
Activist: Elliott Funding Administration
Possession: ~1.9%
Common Price: n/a
Activist Commentary: Elliott is a multistrategy funding agency that manages about $76.1 billion in belongings (as of June 30, 2025) and is without doubt one of the oldest corporations of its kind beneath steady administration. Recognized for its intensive due diligence and assets, Elliott commonly follows corporations for years earlier than investing. Elliott is probably the most energetic of activist buyers, participating with corporations throughout industries and a number of geographies.
What’s occurring
On Tuesday, Elliott despatched a presentation and letter to the board of PepsiCo detailing the corporate’s alternative to reaccelerate progress and enhance efficiency by way of better focus, improved operations, strategic reinvestment and enhanced accountability.
Behind the scenes
PepsiCo is without doubt one of the world’s largest shopper packaged items corporations, with a portfolio of among the most iconic manufacturers in meals and beverage. Globally, the corporate is the primary participant in snacking and the quantity two participant in drinks trailing solely Coca-Cola.
Pepsi is split between its North America enterprise (60% of income) and Worldwide (40%). Inside North America, its segments are PepsiCo Meals North America and PepsiCo Drinks North America, every of which account for about 30% of the corporate’s complete income. Frito-Lay North America, which makes up about 90% of PFNA, is the dominant chief in salty snacks and a constant progress driver. PBNA has a portfolio of iconic manufacturers, like its flagship Pepsi, Mountain Dew, and Gatorade, and a attain that rivals Coca-Cola in a really engaging and high-margin finish market. Regardless of its scale, model power and observe file of progress, Pepsi’s inventory has underperformed, shedding virtually $40 billion in market cap over the previous three years and trailing its benchmark, the S&P Client Staples Index, by 169 proportion factors over the previous 20 years.
Strategic missteps within the firm’s core North America companies are on the root of this underperformance. In 2010, each Coca-Cola and Pepsi acquired most of their bottlers. Nonetheless, whereas Coca-Cola moved to refranchise its bottling enterprise, Pepsi saved these vertically built-in. This determination has confirmed to be a expensive mistake for the PBNA section.
Previous to this strategic divergence, PBNA’s working margins had been 300 bps increased than Coca-Cola. Now, PBNA’s working margins are 1,000 bps decrease, reflecting the associated fee pressures that include retaining these cost-intensive and decrease margin operations in home.
PBNA’s second misstep was its response to the modifications in shopper soda preferences. As soda consumption declined within the early 2000s, PBNA shifted its focus away from soda and in direction of more healthy classes. Whereas this was justified on the time, soda preferences have since stabilized, but PBNA has not been reinvesting into soda. This lack of give attention to its core merchandise has had severe repercussions, together with the delayed launch of Pepsi Zero Sugar and diminished investments in core manufacturers like Mountain Dew. Furthermore, as an alternative of placing cash into these confirmed manufacturers and merchandise, Pepsi has overextended into weaker manufacturers like Starry, Rockstar, and SodaStream, whereas additionally increasing into different stock-keeping items, or SKUs, together with limited-time choices and taste extensions, leading to increased manufacturing and distribution prices. In consequence, PBNA has round 70% extra SKUs than Coca-Cola regardless of producing about 15% much less in retail gross sales.
PBNA’s weaknesses have pressured Pepsi to grow to be more and more depending on PFNA, and its FLNA core, to maintain general progress and meet efficiency targets.
In 2020, anticipating elevated demand from Covid, Pepsi started to pursue aggressive funding in PFNA, with capital expenditures rising from $3.3 billion in 2018 to $5.2 billion in 2022. There was some logic to this determination on the time, however the Covid-fueled progress did not final. But capex has continued to rise to $5.3 billion in 2024, regardless of FLNA gross sales truly contracting 0.5%.
To make issues worse, Pepsi was not simply rising capex, however promoting, common and administraive prices as properly and PFNA’s working margins fell from 30% to 25% over this time interval.
These issues have closely weighed on Pepsi’s general efficiency, because it has brought on the market to largely overlook its affluent worldwide enterprise, which is rising rapidly with increasing margins. As soon as a premium progress providing, Pepsi at the moment trades at 18x P/E versus a ten-year common of 22x, and an over 4 flip low cost to its benchmark in comparison with a historic 1.4 flip premium.
Elliott, who has introduced a $4 billion place in PepsiCo, issued a letter and complete presentation detailing its alternative to reaccelerate progress and enhance efficiency by way of better focus, improved operations, strategic reinvestment and enhanced accountability. For PBNA, Elliott believes step one is refranchising the bottling community. This transfer makes a number of sense – returning to a system that traditionally outperformed its closest competitor – from the time PepsiCo refranchised its bottlers in 1999 till it repurchased them in 2010, the PepsiCo system considerably outperformed the Coca-Cola system.
Subsequent is portfolio optimization. PBNA merely has too many merchandise and must rationalize its SKU depend and divest from underperforming manufacturers. Elliott factors to the current sale of Rockstar to Celsius as a first-rate instance of the alternatives that exist to simplify the portfolio.
Each of those steps ought to liberate PBNA’s spending energy, which Elliott believes must be reinvested within the core soda franchises and choose new progress classes (i.e. protein and probiotics). For PFNA, given its vital deceleration in top-line progress, Elliott believes it’s time to halt this aggressive progress technique and realign its value base and optimize the portfolio.
Elliott particularly factors to Quaker as a possible divesture, highlighting its middle of the plate merchandise that relaxation exterior FLNA’s snack core. Strikes like these would enable PFNA to focus on areas the place it has true aggressive benefit, particularly in its FLNA merchandise, in addition to assist restore margins and liberate capital for reinvestment in each natural progress and accretive bolt-on M&A. Elliott believes that these modifications to the North American enterprise wouldn’t solely enhance the corporate’s operations but in addition assist reset the better Pepsi funding story.
At present, it is a story of underperformance and poor execution, which has weighed down on the corporate’s valuation and left the worldwide enterprise missed and at a reduction.
Particularly, Elliott believes that if this plan is carried out successfully, it might present at the least 50% upside to shareholders. Elliott is without doubt one of the most prolific activist buyers at present and has the assets and observe file to affect significant change at a lot of these megacap corporations.
However observe file and assets are meaningless if you don’t current a complete plan that demonstrates a considerate path for long-term worth creation, and Elliott’s 74-page presentation does simply that.
Moreover, whereas activists are sometimes unfairly stereotyped as short-term buyers due partly to some who’re sometimes appropriately characterised that approach, this presentation must be seen as “Exhibit A” in how activists like Elliott have developed over time to be long-term minded in alignment with shareholders. Elliott’s plan consists of suggestions like: “Reinvest to Revitalize Core and Develop with Focus,” “Pursue Natural and Inorganic Funding To Drive Lengthy-Time period Progress,” “then use the incremental proceeds from these actions to reinvest to drive long-term progress,” and “By right-sizing prices and shedding non-core belongings, PFNA can unlock capital to reinvest each organically and inorganically to gasoline long-term develop.”
In actual fact, in 74 pages, Elliott makes use of the phrase “reinvest” 54 instances and never as soon as makes use of the phrase “buyback” regardless of acknowledging how undervalued Pepsi shares are actually. Sure, share buybacks now may be nice for the short-term, however Elliott’s reinvestment plan is what shall be finest for the long-term.
For all of those causes, it’s laborious to argue with Elliott’s evaluation or suggestions and we’d anticipate that shareholders and administration agree with a lot, if not all, of it. Assuming that, the subsequent step is execution of the plan and this may be probably the most understated, however necessary, a part of Elliott’s presentation.
A great activist and good board members assist administration in executing their plan however holds them accountable in the event that they fall quick. That’s precisely what we anticipate Elliott to do right here. At this early stage, Elliott’s plan seems simple sufficient that we don’t anticipate there to be a lot pushback, and governance modifications don’t appear mandatory at this level to make an influence. That being stated, we anticipate Elliott to repeatedly monitor the scenario and progress of administration and maintain them accountable in the event that they fail to ship on strategic actions and up to date monetary targets.
Ken Squire is the founder and president of 13D Monitor, an institutional analysis service on shareholder activism, and the founder and portfolio supervisor of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.
