Tuesday, June 28, 2011

Pepsi Under CEO Indra Nooyi

This morning's Wall Street Journal featured a Marketplace section lead article on PepsiCo's performance under CEO Indra Nooyi.

Specifically, the article detailed the slide of the company's premier brand, Pepsi, to number 3 among US sodas, trailing not only Coke but, now, Diet Coke, too. Still, it was relatively reserved in criticizing the Indian-born CEO.

Nooyi has been CEO of Pepsico since 2007. Googling her yields a series of results which echo the theme of the Journal's article, i.e., that she took pains to herald her change of focus of the firm to healthier drinks like Gatorade, the company's Quaker Oats unit, and, generally, avoid 'selling flavored colored sugar water' charges.

Now, it appears she went too far in ignoring Pepsi's own health, leading to a disappointing performance.

The nearby chart displays the past five years of share price changes for Pepsico, CocaCola and the S&P500 Index. Pepsi has outperformed the S&P by less than 20 percentage points over the five years, but trails Coke by some 40 percentage points.

I don't typically analyze either company, since neither usually survive my equity portfolio selection process. Thus, I've mostly seen Nooyi's appearances on CNBC, which loves to showcase a foreign-born female as CEO of a large, iconic US firm.

Too bad it looks like she's messed up. According to the Journal piece, she starved the flagship brand of attention and ad dollars, resulting in its slipping relative to the two Coke brands.

Further, she more or less prominently dedicated Pepsi to 'healthy' products, resulting in the very profitable and popular snacks and sugary drinks being either mis-positioned or left less-well-attended. Meanwhile, the article reports that the healthy, "good for you" product portfolio at Pepsico accounts for only 20% of revenues.

Perhaps the fundamental question is whether shareholders of the company are well-served when the larger flagship Pepsi and Frito-Lay brands that are salty, sugary, less "good for you" but very much in demand by US consumers, are shunted aside in favor of Nooyi's focus on changing Pepsico's image to that of a healthy food purveyor.

As recently as this late this winter, Pepsi had only matched the S&P in performance over the period since 2007, suggesting that Nooyi isn't doing much for her shareholders. Certainly not compared to CocaCola, the price series for which broke cleanly above and away from Pepsi and the S&P in mid-2007. Coke's share price premium shrunk last year, but never evaporated, and it has enlarged its premium over Pepsico and the Index since then.

It's interesting to me that the Journal piece is the first really negative one about Nooyi since she became Pepsico CEO. It makes one wonder whether the business media have been reluctant to criticize a politically correct CEO, requiring more time and evidence of slack performance for even a relatively weak article like today's to be published.

Given all the adulation Nooyi receives for being an Indian-born woman who is now running Pepsico, one might wonder, given her performance thus far, which is somewhat erratic and far from stellar, just what she can mentor and teach all the women for whom she is apparently now a shining beacon of hope?

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