weighing up activist advice for US giant

“We hope this presentation is received in the spirit in which it is shared,” Elliott Investment Management partners Jesse Cohn and Marc Steinberg wrote in a letter to PepsiCo’s board at the start of the month setting out how the activist investor believes the US giant can improve.

That spirit, they added, was one of “a desire to work together to help PepsiCo build on its legacy of success and achieve its full potential”.

They continued: “We have deep respect for the company and its leaders and, while we support the steps PepsiCo has recently announced, we and our fellow shareholders believe that there is an opportunity for much more. Our goal is to collaborate with the board and management to return PepsiCo to its rightful place as a market-leading consumer packaged goods powerhouse with superior results and impact.”

It was, at face value, a constructive opening salvo. “Fortunately for PepsiCo, its problems are within its power to address. Its core brand portfolio remains among the most attractive in the CPG industry and its structural moats are as powerful as ever,” Cohn and Steinberg said.

“Elliott’s goals at PepsiCo are straightforward: help the company sharpen focus, drive innovation, become more efficient and unlock the value that its leading brands, unmatched scale and world-class employees deserve. The path back to winning is clear and achievable.”

However, given Elliott Investment Management’s record at sparking change elsewhere, PepsiCo’s senior leadership would be forgiven if they were a little concerned at what might lie ahead.

A profile of the investor and founder Paul Singer by The New Yorker in 2018 said: “Elliott’s executives say that most of their investment campaigns proceed without significant conflict but a noticeable number seem to end up mired in drama. From the outside, it can seem as if Elliott is causing the drama but the firm argues that it simply identifies pre-existing problems and acts as a check on the system.”

The companies at which Elliott Investment Management has pushed for change include BP (which said it would scale back investment in renewable energy and up spending on oil and gas in the wake of the investor joining its share roster), US manufacturing and tech group Honeywell (which subsequently set out plans to split into three) and Starbucks (which changed CEO; though the activist had not communicated a firm desire for a change at the top but called the move “a transformational step”).

Elliott Investment Management says it manages funds that together hold an investment of $4 billion in PepsiCo. The investor calls the Pepsi Max and Lay’s owner “one of the world’s great consumer franchises” but it wants to see significant change.

The activist wants PepsiCo to review the make-up of its food and drinks businesses in North America to boost its performance after a period of “poor financial results”.

PepsiCo, Cohn and Steinberg argued in their letter and presentation sent to the company’s board, is at “a critical inflection point”.

Describing PepsiCo as “a dramatic under-performer”, they said the company should become “a more focused, streamlined” business.

Cohn and Steinberg said the group’s PepsiCo Beverages North America (PBNA) division – which accounted for 30% of revenue in 2024 – had “underperformed its peers for more than a decade on both growth and margins.

They’ve called on the Gatorade owner to weigh up the potential refranchising of its drinks bottling network in North America and review its beverage portfolio in the region to make that side of the business less complex.

Meanwhile, Cohn and Steinberg believe the performance of PepsiCo Foods North America (PFNA) has “more than offset” results from the drinks arm in the region but added: “More recently, however, PFNA has begun to falter. Growth has slowed due to a challenging consumer backdrop and series of PepsiCo-specific issues, while substantial increases in investment spending well beyond the needs of the current demand environment have meaningfully compressed profit margins.”

They urged PepsiCo to better “align” PFNA’s costs to the “present volume reality” and streamline the division’s portfolio by offloading “non-core and underperforming assets”. The partners said PFNA could be supported by more investment in “proven brands”, improving the “value perception” and pursuing M&A.

Crucially, Elliot Investment Management’s criticism is centred on PepsiCo’s North American operations. The company’s international business is, Cohn and Steinberg, said “rapidly expanding with a significant long-term growth runway”.

So far, PepsiCo’s public statements on the activist’s investment and advice have been brief. “PepsiCo maintains an active and productive dialogue with our shareholders and values constructive input on delivering long-term shareholder value. We note Elliott Investment Management’s disclosure of its presentation and will review its perspectives within the context of our strategy to drive sustainable growth,” the company said.

In 2024, PepsiCo booked net revenue of $91.85bn, up 0.4% on a year earlier. Operating profit grew 7.5% to $12.89bn. Net income increased 5.3% to $9.58bn.

Chairman and CEO Ramon Laguarta, who has spent three decades at PepsiCo, was appointed to the top job in 2018. Given Laguarta succeeded Indra Nooyi after her 12-year stint at the helm, his promotion sparked speculation at the time that there could be significant change at the company, including, industry watchers mused, an exit from cereal or even a split of the company.

There have been notable corporate moves, including the sale of a majority stake in juice brands including Tropicana and Naked in 2021 and two $1bn-plus acquisitions in the last 12 months: Mexican-American snacks maker Siete Foods and US prebiotic soda brand Poppi.

However, so far this year, PepsiCo’s share price has fallen by more than 5%. Over the same time period, Coca-Cola’s shares are up almost 8%.

In July, PepsiCo reported a 0.3% decline in first-half net revenue, although it saw a 1.7% rise organically. Operating profit dropped 35.4% to $4.37bn. Adjusted for one-off items, “core”, constant-currency, operating profit fell 5.1% to $6.7bn. Net income slid 39.6% to $3.01bn.

Notably, alongside the results, PepsiCo said it would look to boost its productivity and “improve its cost structure” by “integrating” its businesses in North America.

In PepsiCo’s response to Elliot Investment Management’s letter and presentation, the Quaker cereals owner outlined its own strategy. “That strategy includes targeted investments in innovation, portfolio transformation, and international growth as well as corporate-wide, multiyear productivity initiatives,” the company said. “We are confident that the successful execution of these initiatives positions PepsiCo to accelerate growth, strengthen our competitive advantage, and deliver meaningful, long-term value for our shareholders.”

But are these actions enough? Should PepsiCo listen to Elliot Investment Management? It’s understandable if the appearance of an activist shareholder on a company’s roster sparks concern but such investors can play an important role in pointing out weaknesses in organisation or strategy and therefore in exerting some pressure to improve performance.

“I think Elliott’s review of PepsiCo is very accurate,” Stefano Di Napoli, the founder and CEO at UK-based CPGS Consulting, tells Just Food. “The stock is still trading at historically cheap 2009-level valuations, so this feels like a buy-the-dip moment. The underperformer is clearly the North American business, while LatAm and EMEA are already delivering the mid–single-digit growth Elliott is targeting for PepsiCo overall. I actually see the $4bn stake as good news. PepsiCo has what it takes to deliver the 50% uplift Elliott is expecting.”

According to Di Napoli, PepsiCo has clear strengths: scale, “iconic brands” and the company’s investment in the away-from-home market, which, he adds, “could be a major competitive advantage. No-one else is investing as heavily in this channel”.

Nonetheless, he concurs with Elliott Investment Management’s stance that PepsiCo needs to tidy up its portfolio. “The report calls out portfolio optimisation, and I agree – it’s critical to free up resources and bet strongly on the brands that can really win,” Di Napoli says. “Coca-Cola in 2018 and more recently Unilever with the focus on the 30 ‘power brands’ have already taken this path: cut underperforming brands and double down on the core. PepsiCo hasn’t. There’s a lack of clear prioritisation.”

Quaker’s position in the PepsiCo portfolio has long been a talking point. Might the porridge brand go the same way as its fellow breakfast staple Tropicana? “Without Tropicana, we believe Quaker is likely of less strategic interest with fewer commercial synergies,” Elliott Investment Management said in its presentation.

The 2001 deal for Quaker brought with it a clutch of other brands still in the same PepsiCo stable in rice, pasta, syrups and breakfast cereal. Growth from the Quaker side of PFNA has been slower than the snacks business.

The activist investor added: “There are few, if any, synergies between the Quaker foods portfolio and Frito-Lay. It’s time to focus on PFNA’s core strengths in salty snacking.”

It’s not just from food that Elliott Investment Management believes there should be disposals. The investor praised the recent move to sell the brand rights to energy-drink Rockstar in the US and Canada to Celsius Holdings as “a step in the right direction”, adding: “There are more opportunities to simplify the portfolio.”

But the fund argues PepsiCo doesn’t necessarily have to find buyers for some drinks assets: the company, the investor says, should simply do away with some products, pointing to the positive impact on Coca-Cola’s margins when PepsiCo’s great rival cut its portfolio in 2018.

And Elliott Investment Management’s other notable suggestion is for PepsiCo to refranchise its bottling business in North America. “From the time PepsiCo refranchised its bottlers in 1999 until it repurchased them in 2010, the PepsiCo system significantly outperformed the Coca-Cola system,” the investor said in its presentation. Between the late 2000s and 2017, Coca-Cola went the other way: returning the ownership of its bottling operations in North America to its bottlers and, the investor argued, saw the benefits. “The Coca-Cola system’s refranchising is a well-known case study in the power of focus and improved execution,” Elliott Investment Management said.

Di Napoli underlines critical to any such move would be to get the new organisation running fluently. “PepsiCo already uses this system in Europe, most notably with Carlsberg Britvic in the UK, so I don’t think structure alone is the answer,” he says. “The bigger challenge is operational: how the model works day-to-day. Coke needed years to make the system work smoothly. For PepsiCo, the focus has to be on the operating model, ways of working, and execution – not just structure. The advantage is they already have experienced people with the bottling system in Europe who can help guide the North American transition.”

A break-up of the company was a subject that raised its head a few times in the 2010s, perhaps most notably in 2014 when Nelson Peltz’s Trian Fund Management said it was “encouraging” PepsiCo to go down that path.

Kellogg Co.’s split into two and Kraft Heinz’s decision to do the same has, inevitably, raised speculation PepsiCo might break up.

The idea, though, has largely gone off the agenda and it wasn’t mentioned in Elliott Investment Management’s presentation.

The real challenge is not whether PepsiCo should break up, but whether it can execute better with the scale it already hasStefano Di Napoli, CPGS Consulting

“I actually agree with Elliott not mentioning separation in the report,” Di Napoli says. “PepsiCo’s international scale and the combination of food and beverages are real strengths.

“You could argue a split might unlock some short-term value if investors put higher multiples on a pure-play snacks or beverage business but I think the current discount is more about recent performance than about structure. There are big synergies between snacks and beverages and splitting them would mean losing that. The real challenge is not whether PepsiCo should break up, but whether it can execute better with the scale it already has.”

TD Cowen analyst Robert Moskow believes Elliott Investment Management “may spur positive change” at PepsiCo. “In our experience, presentations like these increase the sense of urgency for management teams to boost their stock by demonstrating forward progress on initiatives or introducing new ones. This would come as a relief for investors, some of whom view PepsiCo management as overly complacent,” Moskow says. “Regarding the specific recommendations, we believe PepsiCo management concurs with Elliott on the need to push down Frito-Lay’s costs but we don’t know how they feel about the rest.”

The US investment bank has canvassed investor opinion in the wake of the activist going public. “In our calls with 17 investors, we heard a high degree of scepticism about Elliott Investment Management’s proposals to PepsiCo to create value,” Moskow says. “Most viewed the overture as too ‘friendly’ to spur change, or too unlikely to materialise – i.e. re-franchising the bottlers – or already in process i.e. boost Frito’s margins. We are incrementally more positive, albeit cognisant of the challenges.”

“Putting fizz into PepsiCo: weighing up activist advice for US giant” was originally created and published by Just Drinks, a GlobalData owned brand.

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