A worker walks towards a PepsiCo Inc. delivery truck (Photographer: Caitlin O’Hara/Bloomberg)

PepsiCo Deal Doesn’t Mean You’ll Be Able to Make Dew, Pepsi on Your SodaStream

(Bloomberg) -- PepsiCo Inc. told bottling partners its planned acquisition of SodaStream International Ltd. isn’t a sign it’s turning away from them, even as sustainable packaging becomes a global flashpoint, a person familiar with the situation said.

The beverage giant, which announced plans to buy the maker of at-home fizzy-drinks dispensers for $3.2 billion, sent a letter Monday to franchise bottlers to assure them that the deal won’t impact their operations, said the person, who asked not to be identified.

In fact, PepsiCo has no plans to offer its own namesake flavors on the SodaStream platform -- meaning consumers won’t be able to make their own Pepsi or Mountain Dew at home, the person said. It will also continue to invest in its biggest brands.

“PepsiCo is as committed as ever to investing in and growing our trademark brands on all fronts -- from continued innovation to product delivery,” plus advertising and marketing support, according to an excerpt of the letter obtained by Bloomberg News.

In-House Competition

PepsiCo’s reassurances come as the SodaStream deal left some wondering if it signals a change in packaging strategy ahead for the soda and snacks behemoth. PepsiCo, which reacquired its two largest bottlers in 2010, also works with several independent bottlers in regions of the U.S. and in other parts of the world.

PepsiCo has shrugged off calls to spin off the in-house bottlers again, arguing that having sodas, snacks and much of its bottling all under one roof gives it more clout with the grocery stores. Then it bought a company that sells at-home soft-drink machines that don’t require any bottling.

“It’s inconsistent with Pepsi’s traditional business of making finished product,” Ken Shea, an analyst at Bloomberg Intelligence, said of the deal. “On the surface it’s in direct competition with Pepsi’s bottlers.”

Rather than giving PepsiCo a way to go around its bottlers, the deal gives it a way to grow in nations like Germany and Japan, where PepsiCo is relatively small and seeks to expand, according to the person familiar who asked not to be named because he’s not authorized to speak on the record.

A spokesman for PepsiCo declined to comment.

Bottling History

PepsiCo purchased back its two largest drink distributors, Pepsi Bottling Group Inc. and PepsiAmericas Inc., about eight years ago to increase sales in the U.S. and take greater responsibility for delivery. The takeovers gave Purchase, New York-based PepsiCo control of about 80 percent of its North American beverage market, it said at the time.

Rival Coca-Cola Co. recently completed the refranchising of its bottling operations in North America, putting that business in the hands of independent operators. The process took about a decade and there have been calls for PepsiCo to take a similar path -- a move that would potentially free up capital to invest in other areas of the business.

“There has been chatter about selling off bottling operations, though this has mostly come from the market rather than from Pepsi,” Neil Saunders, Managing Director of GlobalData, said in an email. “The general view is that Pepsi might follow Coke and offload some operations especially as sales of soda weaken. However, to-date Pepsi has been quite tight-lipped over its plans and the general impression given is that they’d prefer to maintain the status quo.”

Several years ago, activist investor and Trian Fund Management founding partner Nelson Peltz tried to break up PepsiCo, challenging the soda and snack giant to prove that Chief Executive Officer Indra Nooyi’s acquisitions of bottlers weren’t a mistake. Though the company rejected his breakup proposal, it settled with the investor in January 2015 and added Trian adviser Bill Johnson to its board.

Hedging Strategy

Still, SodaStream may represent a hedging strategy for the company in the event the business of selling bottled soft-drinks continues to decline. Overall U.S. soda consumption has dropped to its lowest level in more than 30 years as consumers try to avoid sugary drinks, and PepsiCo has been pushing deeper into the sparking water segment as a result.

SodaStream, which bills itself as a purveyor of healthy sparkling beverages in reusable bottles, lines up with what outgoing CEO Nooyi has said are company priorities: making healthier products and reducing environmental impact. Ramon Laguarta will replace Nooyi in October.

Single-use plastic is increasingly coming under fire as debris flows into the world’s oceans, rivers and lakes, and major companies such as McDonald’s Inc. and Procter & Gamble Co. have announced initiatives to increase recycling and reduce waste. SodaStream has long touted itself as an environmentally friendly alternative for consumers wishing to avoid soft drinks’ ubiquitous plastic bottles.

“Pepsi bottlers may have some concerns, but the deal is not intended to take Pepsi in a new direction nor to dilute the existing business,” Saunders said. “It is an additive acquisition intended to allow Pepsi to enter a new market.”

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