Will PepsiCo split itself into two separate entities?

Some analysts have speculated that PepsiCo would split into separate beverage and snacking units to enhance shareholder value. Other analysts have said PepsiCo should not split itself into two pieces because the separate companies would lose the distribution synergies they now enjoy as a unified company. PepsiCo has strongly denied that they are considering a split. For obvious reasons, PepsiCo could not say anything else prior to making a definitive decision.

So will PepsiCo split itself into two separate entities? Euromonitor thinks this is unlikely and explains below.

As a publicly traded company, PepsiCo needs to publicly share enough of its strategic vision with investors to inspire confidence and encourage people to invest in the company. However, they need to strike a balance so as not to tip there hand to competition.

A reason often sighted for keeping the companies combined is the synergy of the distribution network (in North America where PepsiCo owns the majority of its bottlers). While this is certainly true, Euromonitor believes that the synergies of a combined beverage and snacks business go beyond the distribution of products and in-store promotions.

PepsiCo’s competitive environment

Their competition in soft drinks is pretty daunting. The Coca-Cola Company is number one in global soft drinks with a 25.9% off-trade value share in 2010 to PepsiCo’s number two, with less than half the value share, at 11.5%. As the table below shows, PepsiCo only challenges Coca-Cola in North America and Eastern Europe. In every other region of the world PepsiCo trails Coca-Cola by a wide margin.

ScreenHunter_01 Oct. 18 12.47
Source: Euromonitor International

*includes Wimm-Bill-Dann Produkty Pitania OAO for PepsiCo

The competitive picture for snacking could hardly be more different for PepsiCo. Not only is PepsiCo the global leader in Sweet and Savoury Snacks with a retail value share of 27.9% in 2010, there is not another company that competes on a global basis. The number two global sweet and savoury snack company in 2010 was Proctor & Gamble, with a 2.3% value share. However, it is now exiting the snack market entirely following upon its announcement in April 2011 that it will be selling the iconic Pringles brand to Diamond Foods. Furthermore, PepsiCo is number one in every region except Asia Pacific where it is a close number two. Clearly, PepsiCo is a much stronger global competitor in snacking than soft drinks.

While PepsiCo and Coca-Cola are fierce rivals, PepsiCo appears able to be a serious challenger in soft drinks only in North America and Eastern Europe. No doubt both companies realize this.

The way forward

The only way to compete with Coca-Cola is to be able to fully integrate both snacks and soft drinks. Combining the distribution in North America is only the first step. The challenge is to fully integrate the marketing of these two apparently disparate product categories.

PepsiCo has global ambitions and they have in fact told us how they will compete globally. They have told us that they plan to triple the size of their nutritious businesses by 2020. This is likely to be the integrating link between soft drinks and snacks. The strategy will be to develop a portfolio of nutritious soft drinks and snacks that are presented to consumers in a unified format. In this way PepsiCo will be able to leverage the competitive strength of its snacks portfolio onto its weaker soft drinks business. Coca-Cola will not be able to directly match this strategy.

With increasing wealth and urbanization in the developing world causing shifts in consumer habits to packaged products, PepsiCo’s strategy seems well-suited for the long run. PepsiCo may not challenge Coca-Cola globally in soft drinks in the near term but the soft drink wars have been around for a long time. It looks like PepsiCo intends to be here for the long run and they are not conceding anything.