The case for smaller portions

“I FIRMLY believe that Pepsico's value is maximised as one company,” said Indra Nooyi, the boss of PepsiCo, during the announcement of the company's third-quarter results on October 12th. What followed was an impassioned plea for the “Power of One”. That is how Pepsi describes its clout with suppliers, retailers and customers, thanks to its ability to market and distribute several of its brands together.

Fuelled by growth in emerging markets, Pepsi's results were better than expected. Net revenue increased by 9%, excluding the impact of the company's recent takeover of Wimm-Bill-Dann, a Russian food firm. Pepsi's operating profit was up by 4% compared with the same period last year.

Yet perhaps Ms Nooyi protests too much. She has been under fire from investors who say that, in her quest to transform Pepsi into a maker of healthier wares, she has taken her eyes off its core business of pushing tasty stuff that's bad for you. Its drinks business has lost market share and is dragging down the value of its snacks operation. The carpers suggest a solution: Pepsi should split into two smaller portions, a drinks firm and a snack peddler. That way, Frito-Lay (Doritos, Tostitos and Walkers) would no longer subsidise Pepsi, Gatorade (a sports drink) and Tropicana (a maker of fruit juice).

In her former role as Pepsi's chief strategist, Ms Nooyi set the company on a healthier course even before becoming its boss, by engineering the takeovers of Tropicana and Quaker Oats, which makes breakfast cereals. 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.

Virtuous this may be, but it has not been good for the bottom line. Since Ms Nooyi took over in October 2006 Pepsi's shares have declined by 7%, while those of Coca-Cola, its great rival, have risen by 50%. This failure has perhaps been exacerbated by unhappiness within the company's American drinks business, which has lost three marketing bosses in just over three years. In the same period it suffered several marketing flubs, including a botched Tropicana makeover and a confusing relaunch of Gatorade.

Would a split help? Pepsi would certainly be following a trend. In January Sara Lee, a hawker of cakes and sausages, said it would split into an American retail and food-service business and a meats business. In August, Kraft announced that it would split its international snack brands (Trident gum, Cadbury's chocolate) from its North American grocery business, including Maxwell House coffee, Jell-O and Oscar Mayer meats. And earlier this month the shares of two companies formed by splitting a wildly diversified group, Fortune Brands, began trading on the New York Stock Exchange. Investors could choose between Fortune Brands Home & Security (locks, windows) and Beam (which makes Jim Beam whiskey).

Not all these splits will work out. One or two had a whiff of desperation, says Aswath Damodaran of the Stern School of Business. It was as if, having ruthlessly cut costs and still not improved their performance, the mother companies had simply run out of other ideas. Pepsi, by contrast, seems ripe for bisection.

Ms Nooyi seems determined to keep it 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. So far activist investors such as Nelson Peltz and William Ackman, who have successfully pushed for the split of several consumer-goods companies, have left Pepsi alone. But they may not do so for much longer. It may be time to crack open Pepsi.