A delivery driver loads Pepsi products on a cart to be delivered to a convenience story in Orlando, Fla.John Raoux
Last August, PepsiCo announced what would become one of the most highly discussed deals in the business world: the $7.8-billion acquisition of its two largest bottlers -- Pepsi Bottling Group and PepsiAmericas.
Completed in March, the deal has been hailed as one of Pepsi's shrewdest business moves. "With consumers in North America migrating from soda to healthier beverages, we think that owning its bottlers should allow Pepsi to be nimble in its route to market and give it the ability to react quickly to shifting consumer tastes," Morningstar analyst Philip Gorham recently said in an equity research report.
As predicted by many, it wasn't long before its arch rival Coca-Cola announced a bottling acquisition of its own: that of Coca-Cola Enterprises'(CCE) North American bottling operations in February 2010. The announcements by two of the most dominant forces in the beverage industry set off what many loved to call "the soda wars."
But PepsiCo's new CFO and 23-year company veteran Hugh Johnston said that while he understands why it can be fun to pit two of the most successful beverage companies in the world against each other, a direct comparison between Pepsi and Coke isn't really that useful, given that Pepsi's scope stretches far beyond beverages.
"When it comes to the everyday lineup of beverage portfolios -- sure -- it's good fun and I think consumers find it interesting. And if they find it interesting, we find it interesting," Mr. Johnston told TheStreet when he was in New York City last month for a UN business leaders conference. "But if you really think about where we are as a company -- half of our business is in snacks and foods -- outside of the beverage space. So we really are, I think, far more diverse than Coke is."
Buy Rating
Indeed, Goldman Sachs recently reiterated its conviction buy rating for PepsiCo, believing that the market has been undervaluing the company's Frito-Lay business despite its better growth and profitability outlook when compared with the other packaged food companies in Goldman's coverage universe.
If there's anyone who can define what Pepsi is today -- and where it's come from -- Mr. Johnston certainly fits the bill. Joining Pepsi straight out of the University of Chicago in 1987, where he studied finance and accounting, has more than two decades in the company, and has worked with Pepsi chairman and CEO Indra Nooyi for 15 years. He succeeded Richard Goodman when he stepped down as CFO at the end of March. Before becoming CFO, Mr. Johnston was vice president of global operations with additional responsibilities for the post-merger integration of the two bottling companies. He has served in mergers and acquisitions, general management and finance positions throughout his career at Pepsi.
And these are not uninteresting times for PepsiCo: the bottling acquisitions, the expansion into the world's most populous and coveted China market, and the ambitious plans to grow the company's $10 billion nutrition business into a $30 billion business by 2020.
Under the plan, Pepsi wants to respond to its increasing health-conscious consumers with the following goals:
- Reduce the average saturated fat per serving in key global food brands in key markets by 15% by 2020
- Reduce the average added sugar per serving in key global beverage brands in key markets by 25% by 2020
- Reduce the average sodium per serving in key global food brands in key markets by 25% by 2015. TheStreet spoke with Johnston on June 23, a day before he was to appear at the UN Global Compact Leaders Summit 2010 and meet with hundreds of other global leaders to discuss environmental and social responsibility. During the interview, he spoke about the Pepsi-Coke rivalry, the euro, China, Pepsi's ambitious plans for its nutrition business, the bottling acquisitions, his relationship with Ms. Nooyi, the threat of soda tax hikes, the UN conference and, of course, what it's like to be the CFO of a cultural entity and one of the world's most famous food and beverage companies.
TheStreet: Is the rivalry between Pepsi and Coke real or perceived
Mr. Johnston: Certainly the fact that we've been the two most successful companies in the world in the beverage industry -- it's logical for people to think about it that way. People love to see a good competition and a direct rivalry's the most interesting way for them to see it, so it's certainly not surprising. But since you go back to the early beverage days, we've become so much broader as a company in so many ways.
So when we talk about ourselves to a broader audience, we just like to talk about the things that we do and what we think is important. When we talk about day-to-day beverage rivalry, sure it's fun and interesting to talk about. But that's the way I tend to think about it more than anything else.
TheStreet: It's been suggested that Coke is merely following Pepsi's lead with its Coca-Cola Enterprises acquisition plans. Is there any truth to this view?
Mr. Johnston: I'll let you all comment on that! The timing of that would certainly seem to suggest that -- that they followed us. But beyond that as I said, we're really interested in doing mostly what we think is right. We didn't do this with the thought that Coke would follow us. We did it with the thought that this is the most efficient and effective way to operate within the North American space -- predominantly North America since that's what the bottling acquisition primarily was.
Over the course of the coming years, you have a market that isn't growing as quickly as it used to; you have customers that have consolidated and have become clearly interested in a more efficient supply chain. And as a company with a heavy operating legacy, it was something we were quite comfortable with getting more and more involved in. It's not as if these were companies that were unknown to us to begin with.
The management of PBG (Pepsi Bottling Group) and the management of PAS (PepsiAmericas) -- we've all worked extremely closely together for years -- but the conclusion that we drew was the combination of the needs and the opportunities with customers, combined with the opportunities that an integrated supply chain would present us in terms of speed and efficiency and effectiveness -- and then take with that the broader opportunities that we have with our Frito-Lay business in terms of where there might be logical overlaps ... and when I say that I'm not talking about combining trucks and all of that stuff.
You're probably familiar ... we did an alliance with AB InBev to do some procurement things. We're open to doing those types of things with other companies as well. And frankly I expected there might be ways we can do more things with AB InBev. We've defined a narrow set of procurement categories. We'll probably look at more categories over time, assuming that we're successful with this.
If Coke sees some things, great, that's good for them. You know, obviously they are a different company. They're not nearly as significant an operating company as we are, but I'm sure they see strategic logic in what they've done and we'll see how it all turns out in the marketplace.
TheStreet: It's been suggested that the bottling acquisitions have exposed Pepsi to greater input, commodity and capital costs, on top of concerns that the bottlers are less profitable businesses. Have the acquisitions been a painful, but necessary hit to take?
Mr. Johnston: No. I don't think so at all. The construct of PepsiCo's financials are very attractive to most investors. They were, previous to the acquisition and they are still very attractive. Are there certain realities in terms of the asset intensity of this business? Yeah, clearly there are, but if you look at the strategy and ask, 'is this a value creating strategy?' The answer, we very much believe is yes. And does that then enhance the value of Pepsi pre to post? The answer to that we believe is yes. So are there certain realities in terms of the way that our math is going to look for a period of time? Yeah, there absolutely are.