PepsiCo Inc. rejected a suggestion by investor Nelson Peltz, saying it will not spin off its North-American beverage division. The soft drinks division suffered a sales drop of approximately five percent for the fourth quarter of 2013. PepsiCo shares fell approximately 3.5 percent in early trading on Thursday, even while the company’s strong snack food sales earned the company better-than-expected five percent profit increase.
Soft drink sales have been declining in North America, as healthier alternatives such as flavored water and so-called “sports drinks” like Powerade enjoy greater popularity. Unfortunately for PepsiCo, its own products aimed at the health conscious consumer, Gatorade and Tropicana juices, reported growth well below the five percent needed to compensate for the loss from poor soft drink sales.
Peltz has been advising the giant snack and soft drink company to spin off its struggling soft drink division and focus on its Frito-Lay product lines. In spite of the apparent drain on the snacks division by the under-performance in the soft drink arena, PepsiCo Chief Executive Indra Nooyi said that divorcing the two would have a very negative effect. She claimed PepsiCo would fall from number one supplier to maybe number four among grocery store channels. She went on to say that the company’s role in the drug store arena would fall even further, possibly out of the list of top 10 distributors.
The company said its decision not to spin off the soft drinks division was made after extensive analysis, and discussions with financial personnel and consultants. PepsiCo stated that the firm is now on track to save $3 billion by the end of 2014, thanks to a cost reduction program. The company also predicts annual savings will be $1 billion through 2019, as it closes plants, and improves engineering in the ones that remain. Up to 40 percent of the savings may come from layoffs when the plants close.
In spite of the recent reductions in sales of soft drinks, Nooyi remained confident that alternative sweeteners will help recapture some of the health conscious consumer market. Rivals Coca-Cola and Snapple Dr. Pepper have already begun researching this option. PepsiCo is known for allowing its competitors to have “first mover” status when considering new products or market, as it tends to alleviate associated risk.
Amidst the talk of price cuts and dangers of bad decision-making, the PepsiCo boasted of its recent performance and profitability. Unfortunately, investors aren’t buying it. PepsiCo shares were down by almost three percent to $79.14 in morning trading. Nonetheless, the company retained its confidence. The corporation announced that it will increase its cash returns to shareholders in 2014. PepsiCo expects to increase its annual dividend by 15 percent from $2.27 per share to $2.62 per share. The company predicts it will add an additional $5 billion to its buyback program this year. Perhaps most boldly, PepsiCo predicts a seven percent growth in 2014.
PepsiCo shows some very real confidence, in light of last quarter’s less than stellar performance. However, if the firm proves that not spinning off the soft drinks division helps the company reach its predictions for 2014, shareholders will be pleased. Despite the possible profit increase, the company will want to avoid media relations dilemmas by downplaying plant closings and layoffs. 2014 promises to be an interesting year for PepsiCo’s customers, shareholders, and employees.
By Ian Erickson