BREAKINGVIEWS - Pepsi owners face the Indra Nooyi challenge

Mon Jul 30, 2012 11:49pm IST

PepsiCo Chairman and Chief Executive Officer Indra Nooyi speaks to reporters during PepsiCo's 2010 Investor Meeting event in New York, March 22, 2010. REUTERS/Mike Segar/Files

PepsiCo Chairman and Chief Executive Officer Indra Nooyi speaks to reporters during PepsiCo's 2010 Investor Meeting event in New York, March 22, 2010.

Credit: Reuters/Mike Segar/Files

Related Topics

Stocks

   

(The following column appears in the July 30 edition of Newsweek magazine. The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

By Rob Cox

HONG KONG (Reuters Breakingviews) - Whenever a big new job opens up just about anywhere in the world, Indra Nooyi's name enters the frame. Last year, scuttlebutt in Mumbai had the PepsiCo (PEP.N) chief executive returning to India to run the powerful Tata group. Earlier this year, Nooyi was floated as a candidate to run the World Bank. Her recent recruitment of a former White House official even had some pegging her for a big job in Washington.

As flattering as such prospects may sound, they make an already challenging job more difficult. Nooyi, who is determined to stay put, is still working to convince shareholders to back her vision for an integrated Gatorade-to-Doritos snack-food giant. Not that her reign has been a disaster. Since she became the first female to lead Pepsi in late 2006, the company's earnings per share have gained around 36 percent and its sales have nearly doubled to $65 billion. The problem is that the stock has done relatively poorly - gaining just around 10 percent during that time. By comparison, Coca-Cola (KO.N) has done nearly 10 times better.

Investors just haven't given the high-margin, cash-generating soft-drink business sufficient credit. In part, that's because Nooyi has actively worked to dispel the notion that Pepsi is a junk-food pusher, emphasizing its healthier victuals. Yet its greatest recent successes have been products like a 24-ounce can of Mountain Dew. As a result, Pepsi suffers from what brokerage Sanford Bernstein called "a tale of two companies" problem. The analysts reckoned splitting food from soft drinks would create more than $10 billion of extra wealth for shareholders.

As a consequence, when Relational Investors, a hedge fund run by activist investor Ralph Whitworth, popped up with a $600 million position in Pepsi two months ago, Wall Street was atwitter with talk of a Pepsi breakup. So far, Whitworth has not said much about his aspirations. But he has pushed for breakups before, occasionally fighting to replace corporate directors with his own representatives to make that happen.

True, a carve-up doesn't have to spell the demise of a CEO. Irene Rosenfeld, who once ran Pepsi's Frito-Lay arm, even championed one at Kraft KFT.O. But a public battle with an uppity investor who galvanized Pepsi's shareholders against her would undermine Nooyi's leadership. And caving to a breakup would be a repudiation of her "Power of One" strategy.

Given this backdrop, a position working for a re-elected President Barack Obama might appeal to Nooyi, a Democrat, as a chance for a graceful exit. But the better option for her manifold career possibilities is to stick it out and close the performance gap with Coke. To do that, she will need to stay another couple of years and ensure that Pepsi, whose earnings are expected to decline some 6 percent this year from last, gets back in growth mode in 2013.

That's going to take selling a lot more Doritos Locos Tacos with Taco Bell washed down with Mountain Dew. It may not be a recipe for good health, but unqualified success is always satisfying.

Sign up for breakingviews email alerts: www.breakingviews.com/TOPNewsSubscription

(Editing by Jeffrey Goldfarb and Martin Langfield)

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

  • Most Popular
  • Most Shared

Market Eye

Sensex, Nifty rise to second consecutive record high

Sensex, Nifty rise to second consecutive record high

The BSE Sensex and Nifty on Friday rose to their second consecutive record highs. The 30-share Sensex surged as much as 1.3 percent to an all-time high of 27,706.80. The broader Nifty gained as much as 1.28 percent to a record of 8,275.15.  Full Article 

REUTERS SHOWCASE

Cost Cutting

Cost Cutting

PM Narendra Modi boots officials out of the first class cabin  Full Article 

Airtel Profit Jumps

Airtel Profit Jumps

Bharti Q2 net profit more than doubles   Full Article 

Leisure Riding

Leisure Riding

Harley-Davidson woos affluent young Indians with bike culture  Full Article 

Maruti Earnings

Maruti Earnings

Maruti Suzuki net profit up 29 percent, beats estimates.  Full Article 

ICICI Results

ICICI Results

ICICI Bank Q2 profit up 15 percent, beats estimates.  Full Article 

Moody's on India

Moody's on India

Moody's welcomes India's policy steps, but wants to see more.  Full Article 

End Of QE

End Of QE

U.S. Fed ends bond buying, exhibits confidence in U.S. recovery.  Full Article 

Cook Comes Out

Cook Comes Out

Apple's Cook: "I'm proud to be gay"  Full Article 

Refining Margins

Refining Margins

BPCL aims to double refining margins with refinery expansion.  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device  Full Coverage