Shake It Up, Pepsi

Battening down the hatches could hurt growth.

PepsiCo may not be the best investment if you're looking for growth, but it might just be the safest bet: That's the message from the soda and snack maker, which reported results Thursday from a ho-hum fourth quarter and painted a bleak picture of the global economy.

While its U.S. business is chugging along, Pepsi CEO Indra Nooyi warned global pressures could bring it to a screeching halt -- prompting the company to issue a cautious outlook for the coming year: 

Over my several decades in business I have never seen this combination of sustained headwinds across most economies combined with high volatility across global financial markets...a combination of geopolitics and oil have created many challenging economic outcomes... increased government regulation including increased taxation, labeling requirements and limitations on social programs are placing further pressure on consumer demand. 

Against that backdrop, Pepsi pitched itself as a safe haven: "In a day where defensive stocks look awfully good, PepsiCo is a pretty attractive choice," its CFO told CNBC Thursday.

The Best (Worst) Choice

Source: Bloomberg

In other words, Pepsi's best argument for investing in Pepsi is that it's doing less bad than the other guys. Sure, over the past two years Pepsi's shares have gone up by 19 percent (with a total return of 26 percent), compared to Coke's 9 percent rise (16 percent total return) and flat performance in the S&P 500 (4 percent total return). The past year? Pepsi's stock is down 4 percent, compared to a 12 percent decline in the S&P 500. 

So to prep investors for choppy markets ahead, the company on Thursday said its top priorities on how to spend its money were investing in its current business and giving cash back to shareholders in the form of dividends. Tuck-in acquisitions ranked third in Pepsi's spending hierarchy. There was no mention of the once-popular idea of separating the food and beverage businesses, nor of a mega-acquisition. 

This is worrisome because Pepsi had been doing well at staying ahead of changing consumer appetites, buying popular companies that make healthier fare such as smoothies and coconut water to replace slumping soda sales. PepsiCo doesn't break out category sales, but said in 2014 that colas make up less than 15 percent of its total North American business. 

Soda Spill

U.S. soft drink consumption per capita

Source: Euromonitor International

And while Pepsi is known for being a fairly conservative company (#puppymonkeybaby advertisements aside), any hint that it's shifting focus from diversifying away from soda could hurt the company in the long run.

Take its failed offer to buy a majority stake in Chobani. While my colleague Gillian Tan explained how Chobani snubbing Pepsi's bid was risky for the yogurt-maker, it was also a really bad sign for Pepsi. If Pepsi wants to keep moving into growing, healthy areas of the food industry -- and it must -- then it has no choice but to buy its way into certain segments. 

In the yogurt category, for instance, retailers are culling shelf space, typically leaving room for just the top two or three brands, according to Bloomberg Intelligence analyst Kenneth Shea. 

Culture Shock

Percentage of market share in yogurt industry

Source: Euromonitor Passport, Bloomberg Intelligence

If Pepsi can't figure out how to make deals like Chobani happen, then it could be shut out of future growth and find its pathways to diversification blocked.

For now, the market has taken news of the Chobani deal failure in stride -- Pepsi shares are flat since Monday. But Pepsi has a history of attracting impatient activists (one of whom sits on its board and still has a small stake in the company), and it's unlikely a strategy of battening down the hatches is going to cut it for too long. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Shelly Banjo in New York at

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    Mark Gongloff at

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