🥤 Is PepsiCo Running Out Of Juice?

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🥤​​ PepsiCo: Running Out Of Juice?

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PepsiCo (PEP) is selling its key juice brands – Tropicana and Naked among others to French PE firm PAI. The company claims it’s a move consistent with its increasing focus on healthier products. However, the underlying reason may well have to do with underperformance – a lot of it! (Tweet This)

The One Upmanship Game

Coca-Cola (KO) and PepsiCo have been at each other’s throats forever – each trying to outdo the other although, in terms of revenue, PepsiCo has been the clear leader. In the mid-90s, under then CEO Roger Enrico, PepsiCo spun off Pizza Hut, KFC, and Taco Bell, and brought the snack business under the Frito-Lay umbrella. And then in 1998, it acquired Tropicana for $3.3B in cash.

The Tropicana deal allowed PepsiCo to go head-to-head with Coke’s Minute Maid brand, which was already the #2 player in the US juice market. At the time, both analysts and shareholders had cheered the Tropicana acquisition – expectations were high on where this would take PepsiCo in the years to come.

When Indra Nooyi took over as CEO in mid-2006, she put healthier beverages front and center in her strategy for PepsiCo. Later that year, Pepsi acquired California-based Naked Juice Company for an undisclosed sum. Naked’s USP was the fact that its juices had no added sugars or preservatives.

In spite of shareholder exuberance, the juice business didn’t really take off as expected. Take, for instance, Tropicana. Back in 1997, it had revenues of $2B. After more than two decades within the  PepsiCo fold, Tropicana’s revenues were $3B last year. That’s a paltry 1.8% CAGR. The business was also a drag on PepsiCo’s overall profitability.

Punished For Underperformance?

As consumers became more health-conscious, both Coca-Cola and PepsiCo tried to position themselves as the alternative the consumers can’t afford to ignore. And thus came a slew of new products from both these players – zero-calorie drinks.

This was also an opportune time to conduct portfolio triage and identify the weak links pegging the company back. Coke, for its part, discontinued its TaB diet soda, the various energy brands, and Zico coconut water. With Coca-Cola taking action, can PepsiCo be far behind?

PepsiCo’s CEO Ramon Laguarta has been scouting for opportunities to sell the perennially underperforming juice business. It found the ideal partner in the French PE firm, PAI. PAI bought 61% of PepsiCo’s juice brands for $3.3B, effectively returning the cash that PepsiCo spent more than 20 years ago.

PepsiCo will retain a 39% stake in the new joint venture and have exclusive US distribution rights for the brands. The company has already said these funds will be used to continue building its portfolio of health-focused snacks and zero-calorie beverages.

Some of this work had got started back in 2018 with the acquisition of SodaStream for $3.2B. Energy drink maker Rockstar was added to PepsiCo’s portfolio for $3.85B last year. Freed from the clutches of Tropicana and its sister brands, the company can now go about building the product portfolio that it deems exciting for GenNext.

Shareholders had a ho-hum reaction to this announcement, perhaps because the deal is not really a clean break from the juice business altogether. Even so, PepsiCo’s shares have certainly enjoyed a better fizz YTD (5.6% increase) this year compared to those of Coke (4% bump up). A healthier product portfolio is a welcome change, after all!

Market Reaction
PEP ended at $156.67, up 0.22%.

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PEP $156.67 +0.35 (0.22%)

Analyst Ratings (24 Analysts) BUY 54%  HOLD 42%  SELL 4%

Newsworthy 📰

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Hurdle: DoJ considering lawsuit to block UnitedHealth bid for Change Healthcare (UNH +1.52%)

Caution: Lyft posts adjusted profit ahead of target, but warns of driver shortage, Delta threat (LYFT -1.11%)

Later Today 🕒

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  • Metlife Inc. Earnings (MET)
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  • 5:45 PM IST: ADP Employment Report
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Fun Fact of The Day 🌞

Everyday, 1% of the world’s population is served at McDonald’s every single day

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