PepsiCo: economies or diseconomies of scale?

Recently I blogged about how PepsiCo are trying to control diseconomies of scale. The topic is worth returning to, as there seems to be an ongoing debate that appears in the Economist which wonders if PepsiCo are big enough to enjoy economies of scale – but have maybe reached the size where diseconomies are really mounting up.

The boss of PepsiCo believes passionately in the “Power of One”, which is how Pepsi describes its power over suppliers, retailers and customers, thanks to its ability to market and distribute several of its brands together. Profits in the business are growing. Surely that proves that the business is trading on powerful economies of scale?

Yet at the same time the CEO has been under fire from investors who say that she has taken her eyes off its core business of unhealthy snacks and fizzy pop, and expanded too far into new healthier markets. The drinks business has lost market share and is dragging down the value of its snacks operation.

So maybe Pepsi should split into two smaller portions, a drinks firm and a snack seller. That way, Frito-Lay (Doritos, Tostitos and Walkers) would no longer support (or get in the way of) Pepsi, Gatorade (a sports drink) and Tropicana (a maker of fruit juice).

The current CEO set the company on a healthier course even before becoming its boss, by engineering the takeovers of Tropicana and Quaker Oats. She is now making Pepsi’s fizzy drinks less sugary and its snacks as much as 25% less salty and 15% less fatty. Her goal is to increase Pepsi’s portfolio of “good for you” products (nuts, oats, fruit juice) from about $10 billion, or one-fifth of revenue, to $30 billion. This might help with CSR, but it has not been good for profits and since the CEO took over Pepsi’s shares have declined by 7%, while those of Coca-Cola, its great rival, have risen by 50%.

Would a split help? Pepsi would certainly be following a trend. Lots of diversified businesses are currently splitting up into separate independent companies. The CEO seems determined to keep Pepsi in one piece. But the opportunity costs are mounting. She has herself admitted that as a stand-alone company, Frito-Lay, the star in her portfolio, might be the best consumer-goods maker in America. It could be sold for a fortune, which along with sales of the rest of the PepsiCo empire might be worth much more than the company is worth in its current form.