PepsiCo’s Shares Drop On News Of CEO Indra Nooyi’s Departure

by Trefis Team
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PepsiCo‘s (NYSE:PEP) stock ended down over 3% the day after CEO Indra Nooyi’s resignation was announced. Nooyi will step down on October 3, after 24 years at the company, 12 of which she was the CEO, and will remain Chairman until early 2019 to ensure a smooth transition process for incoming CEO Ramon Laguarta. Nooyi started PepsiCo on its track to be a company focused on healthier, more nutritious products, transforming the business into one which garners almost 50% of its revenues from its ‘Good-for-You’ and ‘Better-for-You’ portfolio, up from 38% in 2006. The company carried on its tradition of appointing a CEO from within the organization by selecting Laguarta, who was promoted to President last year, and has been at the company for 22 years. He has tremendous international experience, and has a proven track record for growing businesses, having been at the helm of the European Sub-Saharan African segment previously, and is widely expected to continue PepsiCo’s focus on its healthier portfolio.

We have a $122 price estimate for PepsiCo, which is higher than the current market price. The charts have been made using our new, interactive platform. You can modify the different driver assumptions by clicking here for our interactive dashboard  Our Outlook For Pepsi In 2018, to gauge the impact on the revenue, earnings, and price per share metrics.

Bold Moves Led PepsiCo On Its Path To Strong Growth

Despite receiving an enormous amount of criticism and being accused of neglecting PepsiCo’s bread and butter brands, Nooyi continued on her mission set in 2010 to triple the company’s revenue from nutritious products to $30 billion by the end of the decade. Although this has been reduced to achieving a sales growth of healthier products that outpaces traditional drinks and snacks by 2025, it is one Laguarta says he is targeting. Below we’ll highlight some of the key steps Nooyi took as CEO of one of the largest consumer packaged goods (CPG) companies in the world.

1. Shift To Healthier Fare: Soon after becoming the CEO, Nooyi hired Mehmood Khan as Pepsi’s first Chief Scientific Officer, as well as Derek Yach as the first Director of Global Health Policy, driving home her dedication to healthy eating. Under her leadership, PEP tripled its investments in research and development to expand its more nutritious offerings and minimize its environmental impact. Keeping in mind the rising obesity levels, and consumers moving away from eating unhealthy products, Nooyi realized that having a diverse portfolio would be better for the company. Today the company derives approximately 45% of its revenues from “Guilt Free Products” indicating that it has transformed its portfolio toward healthier products according to the new customer preferences. These products include “diet and other beverages that contain 70 calories or less from added sugar per 12-ounce serving and snacks with low levels of sodium and saturated fat” as well as “everyday nutrition products” – products with nutrients like grains, fruits and vegetables, protein, unsweetened tea, and water.

2. Holding Off Activist Investor Nelson Peltz: In 2014, activist investor Nelson Peltz called for the CPG giant to spin off its snack business, claiming that the drinks business was holding back the food segment, and also that Nooyi was ignoring its core brands, which were the cash cow for the company. Nooyi successfully resisted this, arguing that the company is better together as it makes it easier to cross-promote products and wields greater power with retailers. She instead focused on a $1.5 billion cost-cutting program, and made plans to increase the marketing and advertising support to its global brands by about $500-$600 million, in a bid to deliver top-line and bottom-line growth.

3. Key Acquisitions: In 1998, as Senior Vice President of Strategy, Nooyi played a key role in the acquisition of Tropicana, which placed PepsiCo in a strong position to compete with rival Coca-Cola’s Minute Maid brand. A few years later, Nooyi was also instrumental in the takeover of Quaker Oats, which gave the company control over sports drink Gatorade, which held 83.6% of the U.S. sports drink market at the time of the acquisition. Since becoming CEO, she has been a part of 80 deals, particularly those aimed at the healthy food and drinks segment, such as Naked Juice, Bare Foods, and KeVita. Such acquisitions have helped to diversify the business of the company, and gains made through their sales may help to offset some of the weakness in the core portfolio.

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