Analysis-PepsiCo Faces Pressure to Show Elliott-Triggered Turnaround Is Working

PepsiCo faces pressure to show Elliott-triggered turnaround is working

Main Developments and Challenges for PepsiCo

(Corrects spelling of surname in paragraphs 7-9 to Link (not Ling)

By Alexander Marrow and Juveria Tabassum

Background: Elliott's Stake and PepsiCo's Response

LONDON, April 14 (Reuters) - Seven months after activist investor Elliott disclosed a $4 billion stake in PepsiCo, the U.S. beverages giant is under pressure to show a turnaround drive including price cuts and brand relaunches can deliver the volume growth investors crave.

PepsiCo has reported declining annual volumes since 2021 and its shares have lagged rival Coca-Cola over the past five years as inflation-squeezed consumers buy smaller packs and shift towards healthier snacks.

In December, CEO Ramon Laguarta announced a review of the company's North America supply chain and said PepsiCo would aggressively cut costs to revive growth. The move followed weeks of talks with Elliott Investment Management, which has publicly pushed for the company to refranchise or spin off its bottling operations and sell non-core food assets.

Catalysts for Change

CATALYSTS FOR CHANGE

PepsiCo, which reports first-quarter earnings on April 16, said in February it would cut prices on core snack brands such as Lay's and Doritos by up to 15% after a consumer backlash over earlier price hikes. Laguarta said the Frito-Lay snacks division would see double-digit shelf-space growth in March and April.

Investors are now looking for evidence these moves are translating into higher volumes and organic growth in North America. PepsiCo trades at a discount to its historical earnings multiple.

Investor Expectations and Management Changes

If PepsiCo can deliver organic growth of 0% to 2%, investors will be happy, said Stephanie Link, chief investment officer at Hightower Advisors, which holds PepsiCo stock.

Working with Elliott is a positive signal, Link told Reuters, also pointing to the appointment of former Walmart executive Steve Schmitt as chief financial officer in November.

"These are all catalysts for them to kind of get their act together," Link said. "And I think they will."

Elliott declined to comment for this story. PepsiCo did not respond.

External Pressures and Cost Challenges

Iran War Driving Up Costs

IRAN WAR DRIVING UP COSTS

The Iran war threatens to complicate PepsiCo's cost-cutting push. Surging energy costs drove the fastest rise in U.S. consumer prices in nearly four years, data showed last week, with the International Monetary Fund warning that higher inflation and slower growth are unavoidable.

For consumer goods companies, a key knock-on effect is higher packaging costs as rising raw material and logistics prices squeeze margins.

"Pepsi's price-cutting strategy ... can work as a temporary stabilisation of the business - not as a sustainable solution, because in the long run, Pepsi will either have to raise prices again or accept structurally lower margins," said Kai Lehmann, senior research analyst at Flossbach von Storch, one of PepsiCo's top 30 investors.

Consumer prices have also jumped in India.

Impact on PepsiCo India

PepsiCo India has warned of limited liquefied petroleum gas stocks at some food processing plants, possible packaging shortages and higher costs following a government order last month to prioritise domestic LPG supplies, according to a letter seen by Reuters sent to India's Ministry of Food Processing Industries.

Costs Pile Up

COSTS PILE UP

PET resin and aluminium prices are running well above what company guidance implies, said Mark Pacitti, founder and managing director of primary research platform Woozle.

"Quite a few distributors have independently told us on the phone that PepsiCo field reps have been unusually non-committal on giving any forward pricing, or guidance to customers which is always a telltale sign that cost visibility is poor and they are keeping their cards close to their chest in terms of pivoting again on the pricing in the near term," Pacitti added.

Hedging and Future Risks

PepsiCo, like Coca-Cola, typically hedges packaging-related raw materials about nine to 12 months ahead, said RBC Capital Markets analyst Nik Modi. While that could soften the immediate blow, pressure on consumers from inflation could prove the bigger swing factor this year.

(Reporting by Alexander Marrow and Juveria Tabassum. Additional reporting by Aditya Kalra. Editing by Lisa Jucca and MarkPotter)