Elliott Proposes Strategic Overhaul for PepsiCo to Boost Growth and Profitability

Activist Elliott Calls for Strategic Reset at PepsiCo

Elliott Investment Management, a prominent activist investor with approximately 1.9% ownership in PepsiCo, has formally presented a comprehensive plan aimed at revitalizing the consumer goods giant’s growth trajectory and operational performance. The proposal, communicated through a detailed presentation and letter to PepsiCo’s board, emphasizes the need for sharper focus, operational improvements, and strategic reinvestment.

Background: PepsiCo’s Market Position and Challenges

PepsiCo is a global leader in the food and beverage sector, managing iconic brands such as Lay’s, Doritos, Cheetos, Gatorade, Pepsi-Cola, Mountain Dew, Quaker, and SodaStream. The company operates mainly through two North American segments—Frito-Lay North America (FLNA) and PepsiCo Beverages North America (PBNA)—which together contribute about 60% of total revenue, with the remaining 40% generated internationally.

Despite its scale and brand recognition, PepsiCo’s stock has underperformed over recent years, losing nearly $40 billion in market capitalization and lagging the S&P Consumer Staples Index substantially over the past two decades. Elliott attributes this underperformance primarily to strategic missteps within the core North American business.

Key Strategic Missteps Identified

One principal issue highlighted is PepsiCo’s decision to retain ownership of its bottling operations, unlike Coca-Cola, which refranchised its bottlers. This vertical integration has burdened PBNA with higher costs and lower operating margins—now approximately 1,000 basis points below Coca-Cola’s—compared to a prior advantage of 300 basis points.

Another critical miscalculation was PepsiCo’s pivot away from its soda franchises amid shifting consumer preferences. While the initial shift toward healthier categories was reasonable, soda consumption has since stabilized, yet PepsiCo has not adequately reinvested in core soda brands. Instead, resources have been allocated to less successful ventures like Starry, Rockstar, and SodaStream, alongside an expanded and costly product portfolio with approximately 70% more SKUs than Coca-Cola, despite generating less retail sales.

Elliott’s Strategic Recommendations

Elliott’s plan centers on two primary initiatives: refranchising the bottling network to restore operational efficiency and rationalizing the product portfolio by divesting underperforming brands. The recent divestiture of Rockstar to Celsius is cited as a positive precedent.

Reinvesting the freed capital into core soda brands, such as Pepsi Zero Sugar and Mountain Dew, alongside select growth categories like protein and probiotics, forms a crucial part of the strategy. For FLNA, Elliott suggests curtailing aggressive capital expenditures, which have increased significantly despite flat or declining sales, and refocusing on core snack products.

The activist also identifies Quaker Foods North America as a candidate for divestiture, enabling PepsiCo to concentrate on its competitive advantages within the snack segment and improve margins.

Potential Impact and Outlook

Elliott estimates that effective execution of this plan could unlock at least 50% upside in PepsiCo’s stock, which currently trades at an 18x price-to-earnings ratio—below its decade average of 22x and at a discount to its sector benchmark.

Notably, Elliott’s approach favors long-term value creation through reinvestment rather than share buybacks, emphasizing operational improvements and strategic portfolio management. The firm’s 74-page presentation underscores reinvestment 54 times and avoids advocating for buybacks despite acknowledging undervaluation.

While the plan appears straightforward and aligns with shareholder interests, its success hinges on disciplined execution and ongoing accountability. Elliott is expected to actively monitor management’s progress and hold the company to its financial and strategic commitments.

Ken Squire, founder of 13D Monitor, highlights Elliott’s plan as a prime example of evolved activist investing focused on sustainable growth rather than short-term gains.