Snack and beverage giant PepsiCo has considered buying another large company, but so far it just hasn’t found one that would deliver the long-term growth it needs to justify the purchase.
“There isn’t a large company that we have not looked at,” Indra Nooyi, chairwoman and CEO of PepsiCo, told an audience at the Beverage Forum in Chicago. For a deal to make sense, she said, it would need to create more value for PepsiCo than would be generated by the company being acquired.
“So far, of all the companies we’ve seen, we don't see too many opportunities,” she said. “There’s not too many of them with robust portfolios that are better than ours. We have to be very judicious on what we take on, but more importantly we have to make sure we integrate the acquisition to derive long-term growth out of it.”
Nooyi didn’t close the door on a mega-deal outright if she found the right company. But for now, PepsiCo will most likely focus its attention on smaller acquisitions.
"So far, of all the companies we’ve seen, we don't see too many opportunities."
Pepsi's deal-making strategy appears to mirror that of top rival Coca-Cola.
Sandy Douglas, president of Coca-Cola North America, said at the conference that the beverage maker would look for businesses to buy that are attractive financially and help generate growth. "If I were to look into the crystal ball, I would predict we'll still continue to do geographically relevant bolt-ons," Douglas said.
PepsiCo, which hasn’t made a large deal since its $13.4 billion purchase of Quaker Oats in 2000, is facing many of the same challenges as other businesses in the food and beverage industry — most notably, a push by the consumer toward healthier-for-you foods and away from those containing trans fats, sugar and artificial colors and flavors.
The comments by Nooyi come as food and beverage giants have been under significant pressure to boost sales and make inroads against more nimble upstarts grabbing market share. Mergers are one option being discussed, but some industry watchers have echoed Nooyi in noting that consolidation itself is unlikely to foster long-term growth or suddenly help the companies address changing consumer demands. Just this year, Kraft Heinz proposed to buy Unilever for $143 billion this February but the deal was quickly scuttled over price.
PepsiCo, whose roster of brands include its namesake soda, Gatorade and Doritos, has focused on developing "guilt-free" food and beverages, like sparkling waters and reduced-fat snacks. These products have buoyed the company as the soda industry struggles — though its North American beverage segment still posted a 1% drop in volume during its most recent quarter as consumers continue to flee sugary drinks.
The real issue: Sugar
Nooyi was quick to defend the drop in the carbonated soft drink market — which has fallen for 12 consecutive years and recently was surpassed by bottled water in 2016 as the largest beverage category in the U.S.
“Sparkling is not the issue. Anything with bubbles — actually, in the United States more than any other country, people love bubbles,” she said. “The real issue we are addressing is sugar.”
The outlook for carbonated soft drinks isn't getting any brighter going forward.
"Our expectation is the category is going to continue to decline," Gary Hemphill, a managing director and chief operating officer with Beverage Marketing Corporation's research unit, said at the conference. "The challenge is really is developing a natural, stable, zero-calorie sweetener that takes like sugar, which seems like a simple goal but has proven to be very, very daunting ... and may never be perfectly accomplished."
To address the issue, PepsiCo wants two-thirds of its beverage portfolio to consist of products containing 100 or fewer calories from added sugar per 12-oz serving by 2025. There are plenty of all-natural, zero-calorie sweeteners already available, Nooyi said, but many of the products already in the marketplace — most notably in soda — “don’t taste that great.”
“We have to make sure we don’t just launch these products and say, ‘Oh my gosh why isn’t the consumer drinking these?’"
Moreover, she warned against unveiling a product with these characteristics too quickly; instead embracing a gradual step down that would use sweeteners to reduce calorie levels by about 20 or so every few years. Stevia, monk fruit and agave syrup are among the sweeteners being used by food and beverage companies in place of sugar.
“We have to make sure we don’t just launch these products and say, ‘Oh my gosh why isn’t the consumer drinking these?’ We have to nudge the consumer down,” she said. “The consumer’s taste buds have to get used to the new taste.”
The soda industry is lacking a breakthrough product innovation that could help ignite growth, according to Bonnie Herzog, a managing director with Wells Fargo Securities. It's similar to what is taking place is taking place in the tobacco industry with so-called reduced-risk technologies such as cigarettes that heat up but don't burn.
"A lot of the exciting and interesting stuff is coming from the small, independent players," she said. "That's why the big companies do talk about looking at and eventually buying, like Dr Pepper's strategy with buying Bai Brands."