News & Analysis

Pepsico plays it cool with sale of Tropicana; share prices at almost 6-month high

Andrew Saks, Wednesday, 4 August 2021

The soft drinks business is in some respects the culinary equivalent of the oil industry. Unfashionable yet more popular than ever.

During the 1980s, daytime television advertisement slots, especially during the school recess periods in the summer, were proliferated with an absolute deluge of commercial promotions featuring high sugar content fruit flavoured drinks, all of which were utterly delicious.

As a child of the mid 1970s, I have more than a soft spot for all of those household-name soft drinks to this day.

The 1970s and 1980s were hedonistic years of sensory indulgence. The 'Cola Wars' almost 50 years ago pitted the carbonated soft drink types against each other, with millions of people worldwide often discussing which is their favourite, and spending the remainder of their free time listening to the addictive soundtrack of the V8 engine in their car whilst it did 15 miles per gallon.

All that imagery has now been banished to the history books in the name of political correctness and public health, and children of this era are not bombarded with soft drink commercials, whilst their parents are now subjected to adverts for green initiatives rather than being shown that conspicuous consumption is the height of cool.

It's all a thin veil though. The posturing is lip service, because soft drinks are flying out of the supermarkets just as quickly as internal combustion engine-powered performance cars are flying out of the showrooms, and whilst perhaps there is less likelihood of younger people associating them with their childhood, there are plenty of late-40s die-hards like me.

Oil companies and soft drink manufacturers alike have been doing so well recently that it is as if time has stood still and the 1980s never ended.

The only difference between then and now is ownership. Two giants, Pepsico and Coca Cola Corporation, have been buying all of the independent manufacturers and gaining global supply chain agreements for the bar and restaurant industry too.

Therefore, Pepsico is a gigantic force in the soft drinks industry, and today its stock is somewhat volatile which, for such a well-capitalized company, is interesting.

At close of business yesterday in the US trading session, Pepsico's stock had risen to a peak of 156.67 before slightly tailing off, however this is almost a six-month high.

The company, whose stock is listed on the NASDAQ exchange, has sold its Tropicana orange juice brand to a private equity firm, netting it £3.2 billion, which is big news for the company.

There is a line of thinking which assumes that consumers have been cutting their sugar consumption, hence Pepsico saw an opportunity to exit that sector of the market and raise some capital in doing so, but that would be far from the reality. During the lockdowns in several Western countries in which the Tropicana brand is sold, demand for the orange juice increased. Some say this is due to breakfast having been made at home, but we have all seen the bottles of Tropicana in various office refrigerators too.

Quite simply, people like orange juice, and sugary drinks in general, which is the real reason for the high sales, it’s just not politically correct for manufacturers or media outlets to admit it. Therefore, when PAI Partners approached Pepsico to buy Tropicana, it was a deal worth doing on the basis that the Tropicana division has been doing well and it’s now time to sell for a good price.

The Pepsico share price reflects that, as it is standing proud following the news of the deal. Tropicana has a high sugar content and is not marketed as a 'sugar free' soft drink in the way that some of Pepsico's core product ranges are, however, there are a number of consumers who prefer sugar to saccharin and aspartame, hence the loyal following.

When looking at the value proposition of manufacturing beverages, it is a consideration that most soft drinks are mostly comprised of water and yet cost more than gasoline, which has to be extracted, transported, processed, stored, transported again and finally sold, all for a profit at each stage, therefore it does not take a keen mathematician to work out the profitability of such a business.

Pepsico stock stands at $156.67 per share following the close of business on the US session yesterday.

If you are wondering about my own progress, my car is electric, but my soft drinks are still very much full fat.

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