Pepsi Partnerships

Pepsi Versus Peltz: The Beginning Of The End?

Activist investor Nelson Peltz's recent highly-visible exit from the board of Pepsi - followed by a slight drop in Pepsi share prices - has attracted the attention of hundreds of media outlets & intrigued millions of readers around the world. Mr. Peltz's fund, Trian Fund Management, joined the Pepsi board in 2012, with the avowed agenda of splitting Pepsi's beverages & edibles divisions into separate financial entities. The explanation for the spat, making the rounds in the international media is that Mr. Peltz locked horns with the Pepsi board over the projected split - which the rest of the board reportedly voted against - once too often & so the other board members decided to resolve the problem & paid Mr. Peltz a 50% ROI for him to simply go away. This might have been a believable story except for the fact that Mr. Peltz had shown signs that Pepsi's steady performance over the last few quarters had apparently convinced him that splitting the company up may not be the only way to maintain (or increase) profit margins.

In short, the board had shown remarkable broad-mindedness for 4 long years of Mr. Peltz's activist investor approach...& when he began to come over to their way of thinking, they suddenly got tired of the whole thing & called it off? Pepsi may not have the impressive global presence of rival Coca Cola, but it is over a century old & consequently isn't likely to hire a board that has the patience & attention span of a toddler. According to most outside analysts, what actually happened is something totally different to media interpretations, which, perhaps, is the reason why Pepsi itself hasn't provided a clear explanation for the friction with Mr. Peltz, till now.

Common Mistaken Assumptions

While Pepsi is seemingly within its rights to keep the inner workings of its board private from the general public, there is no known law against the general public making an attempt to understand the cause of the fight, considering that some of them are shareholders, others are consumers, & all are stakeholders one way or another. In order to do that, it is important to clear the air on certain relevant questions:

1. Size Doesn't Matter

What most people don't realize is that companies, no matter how big they are, can be as susceptible to the tiniest of changes, as the sole trader grocery store down the street from your home. The only difference between the multinational & the mom-&-pop is that the multinational has the means to throw truckloads of money at a problem until it is solved, while the future survival of the mom-&-pop genuinely depends on the strategic skills of the shop management.

2. Wealthy Nations Are Always The Cash Cows

Another common misconception is that multinationals make the majority of their revenues in the Developed World; that isn't necessarily the case. Often, established brands begin to be viewed as "obsolete" in the moneyed & occasionally-faddish Developed World, while it is those brands' very pedigree that earns them the trust & respect of the Developing World.

3. In Competitor Identification, One Size Fits All

A third fallacy is the belief that when it comes to supplementary goods, global competitors are the same as local competitors. Speaking for Pakistan at least, that is mostly inaccurate because rival companies tend to negotiate for sole access to specific swathes of the market, where competitor brands are then strongly discouraged by the local regulatory authorities.

"When You Have Excluded The Impossible, Whatever Remains, However Improbable, Must Be The Truth." - Sir Arthur Conan Doyle

Here's one possible interpretation of the disagreement that covers the facts that have been made part of the public record:

Until last year, fruit juice line "Nestle's Fruita Vitals", was of a fair enough quality, given its price tag. It clearly stated that most of its juice products were not pure juice, but contained other ingredients such as water & sugar as well; but it also promised that there would be enough juice in the mixture that the product would not be reduced to flavored water. But, this year has seen a marked decline in the quality of the Fruita Vitals line. The juice is becoming increasingly thin & runny - the very flavored water that Nestle had promised consumers that it would not devolve into. It is unclear what sparked the decline, but a possible explanation could be the global dairy market crash that has eventually gone public during the last few weeks, could have trimmed Nestle revenues in its primary market segment to the point that management does not have the time to worry about what is happening to the company's reputation in the non-dairy markets. In effect, the status of Nestle's Fruita Vitals is declining from a health drink line to a recreational beverage, best consumed chilled during the hot summer months.

Getting back to the Pepsi situation, Coca Cola is considered the global competitor to Pepsi; but that general principle does not apply in Pakistan, where Pepsi (& not Coca Cola) is the undisputed market leader since decades. Pepsi drinks sold in the local market come from 2 main sources: In bottles from within the country's borders & in cans from Afghanistan. While the local version tastes stronger, it has the unsettling reputation of inadvertently bottling a dead insect in the drink from time to time. The Afghan version is milder in flavor, but hasn't offered up similar protein supplements (at least, so far). Therefore, while the locals do take their chances with the Pakistani version, the increased awareness of the importance of hygiene standards & the declining efficacy of common antibiotics & other pharmaceutical products, are making more & more consumers choose the less-hygienically-questionable option.

The 4-day Torkham Border closure last week generated a lot of interest, especially among local media representatives. It was brief, therefore, most non-traders chose to be optimistic & assume that the Pakistani market dynamic had suffered negligible damage. But the truth is far more sobering: Torkham Border has been closed to the movement of goods since around the beginning of the year (for undisclosed reasons). Its main destination on the Pakistan side, is the Peshawar market, where the shops have been running on fumes since months. Among other items that have been replaced as a result of the supply disruption is Pepsi, whose sales spike noticeably during Pakistan's long summers. The imported version has been in short supply since months. The adventurous minority have switched to the local alternative...but the Pakistani population, in general, lacks the money to be consistently adventurous. Therefore, the majority of consumers have started leaning more heavily on Pepsi's prime Pakistani competitor: Nestle's Fruita Vitals.