Already a Bloomberg.com user?
Sign in with the same account.
Jan. 27 (Bloomberg) -- PepsiCo Inc. Chief Executive Officer Indra Nooyi has taken over a coconut-water company, acquired a dairy in Russia and spent millions on a philanthropic marketing campaign. Her next big investment has a more familiar name: Pepsi-Cola.
The world’s largest snack-food maker may boost the advertising and marketing budget for its namesake cola and other drinks by as much as $600 million, or 50 percent, to $1.7 billion when it announces the results of a yearlong business review Feb. 9, according to analysts surveyed by Bloomberg.
Nooyi is seeking to take back market share from Coca-Cola Co. and regain the confidence of investors who have questioned whether she has focused too much on healthier products. Some investors and analysts have also recommended splitting the company. PepsiCo’s shares have risen about 2 percent during her five-year tenure while Coke has gained more than 50 percent.
“PepsiCo overall needs to step up investments behind their brands to reinvigorate them,” Bonnie Herzog, a New York-based analyst at Wells Fargo & Co., said in a telephone interview. “If you go back 10 years, they have definitely been under- investing relative to Coke.”
Nooyi took over as Purchase, New York-based PepsiCo’s CEO in October 2006 and sped up the company’s move into healthier snacks and drinks. She set a goal of tripling sales of what the company calls “nutrition products,” including Gatorade, Tropicana and Quaker, to $30 billion by the end of the decade.
To that end, Nooyi, 56, has focused resources on acquisitions, including juice producers.
Meanwhile, Pepsi-Cola advertised less on television and pulled back on direct product pitches; the company’s North American beverages unit didn’t run Super Bowl ads for its Pepsi brand drinks in 2010, the first such absence in 23 years.
The company spent about $100 million on its “Pepsi Refresh” campaign -- with a heavy digital thrust -- supporting good works proposed by customers, which did little to improve share.
“A good amount of the weakness stems from the management’s increased focus on its better-for-you portfolio,” Ann Gurkin, a Richmond, Virginia-based analyst with Davenport & Co., said in a telephone interview. “They took support and focus away from their core beverages -- Pepsi-Cola, Diet Pepsi -- and spent more time and more effort enhancing juices, waters, sports drinks.”
PepsiCo as a whole should spend $579 million more this year than in 2011 to market its products, with most of that going to beverages in North America, estimated Ali Dibadj, a New York- based analyst for Sanford C. Bernstein & Co. Herzog projected between $500 million and $600 million more for beverages overall. Mark Swartzberg, an analyst with Stifel Nicolaus & Co. in New York, estimated PepsiCo will spend an additional $200 million to advertise beverages in the Americas.
North American beverages account for about a third of PepsiCo’s global sales.
Coca-Cola has invested more than PepsiCo as a percentage of its net sales for a decade, Herzog said. The gap widened in 2004 and averaged 5.1 percentage points through 2010, she said. PepsiCo’s advertising spending declined to 4 percent of revenue as of 2010 from 6 percent in 2004, according to Kaumil Gajrawala, a New York-based analyst for UBS AG. That excluded the impact of bottler acquisitions.
“It’s too low, and historically there’s been a clear link between advertising spend and sales,” said Kevin Rendino, managing director for Blackrock Basic Value Fund Inc. in Plainsboro, New Jersey. “Nooyi may have taken her eye off the ball on the North American beverage side.” Rendino manages about 850,000 PepsiCo shares as part of $11.5 billion in assets.
PepsiCo lost share in the U.S. carbonated beverage market to Atlanta-based Coca-Cola from 2008 through 2010, according to Beverage Digest, an industry newsletter. In 2010, Diet Coke -- a regular advertiser on programs including the Academy Awards -- overtook full-calorie Pepsi-Cola to become the second-best- selling soft drink in the U.S. behind Coca-Cola.
Nooyi started fighting back last year, boosting ad spending for North American beverages by 30 percent and focusing on soft drinks including Pepsi Max. The company loaded airwaves with a new Pepsi-Cola campaign that featured Santa Claus, a regular in Coca-Cola’s commercials, shunning the brand for a Pepsi-Cola while on vacation at a tiki bar.
Nooyi also signed a $60 million sponsorship deal with Simon Cowell’s ’’X Factor,’’ an answer to Coca-Cola’s decade-long sponsorship of the hit show American Idol. PepsiCo also will return to the Super Bowl next month with soft drink ads.
The spending hasn’t worked yet. PepsiCo’s share of dollar sales at groceries, drug stores, convenience stores and mass merchandisers, excluding Wal-Mart Stores Inc., for soft drinks carrying a Pepsi trademark declined by half a percentage point last year to 18 percent, according to data from SymphonyIRI Group, a Chicago-based researcher. Trademark Coca-Cola grew 0.3 percentage points to 28.4 percent.
PepsiCo’s struggles have led analysts including Dibadj to suggest that the company’s beverage and snacks businesses would be worth more separate than together. That would follow the example of Kraft Foods Inc., which is splitting in two to help its snack business push products into emerging markets while the slower-growing, higher-margin grocery company returns cash to shareholders.
So far, Nooyi has dismissed such recommendations.
“PepsiCo’s value is maximized as one company,” she said during an October conference call. “It was created as an integrated stack and beverage business and its success is tied to this combination.”
To help pay for a boost in marketing and advertising spending, Nooyi may have to cut costs elsewhere, said Dave Novosel, a food and beverage analyst at Gimme Credit in New York. PepsiCo may fire several thousand employees this year, a person familiar with the plans said earlier this month.
Rendino, who is looking for as many as 5,000 job cuts and $500 million or so in increased advertising, said he bought PepsiCo for the first time recently because of its depressed value.
“We think there’s change taking place,” he said.
--Editors: Kevin Orland, John Brecher
To contact the reporter on this story: Duane D. Stanford in Atlanta at firstname.lastname@example.org
To contact the editor responsible for this story: Robin Ajello at email@example.com