PepsiCo Stock: Business In Russia And My Cognitive Dissonance

My writing for Seeking Alpha has always been about offering a strategy angle for whatever company was the subject of the article. This article may seem no different. But to some extent, it is.

To date, I have written six articles about PepsiCo (NASDAQ:PEP) and all were positive. However, today, I find myself holding two contradictory thoughts about PepsiCo at the same time. Thus, the cognitive dissonance. My belief is the company will continue to be successful, and I am not here to pose a story of business gloom and doom. Rather, I am here to voice displeasure with PepsiCo’s management and, while my sell rating is personal, it is born of the same belief as Nestle’s (OTCPK:NSRGY) Ukrainian workers who questioned their company’s decision to continue to do business in Russia.

In fact, Nestle also received criticism from Ukrainian Prime Minister Denys Shmyhal, who said Nestle showed no understanding of the impact it has on continuing to sell in Russia. Then everyone’s hero, Volodymyr Zelenskyy, called out Nestle and Unilever (UL) and all “large corporations that still sponsor Russia’s military machine and have not left the country.” Even New York’s state pension system called on a number of U.S. consumer product companies to consider the risks of continuing to do business in Russia – including PepsiCo, by name (their world headquarters is located in the state).

I have the same argument with PepsiCo, but it comes from a different perspective than that of the “average” Seeking Alpha author. Allow me to explain.

Background

Once upon a time, before the emergence of big-tech companies, there were five corporations noted for developing leaders and from whom many other companies would poach management talent. Those companies were: General Electric (GE), Johnson & Johnson (JNJ), Procter & Gamble (PG), International Business Machines (IBM), and PepsiCo. While I can only offer anecdotal evidence to support that statement (it was a story with a purpose told to me by a PepsiCo SVP of HR), I can point to something that gives credence to the story.

On December 13, 2021, the Wall Street Journal reported a ranking of the Top 250 companies that, according to the Drucker Institute, were the most well managed. PepsiCo sat at #11 and, interestingly, IBM was at #4, J&J at #7 and PG at #9. General Electric, formerly a top-ranked firm that historically had been cited for its high quality “leadership development programs” copied by many companies over the years, has fallen to #66.

Of the eight categories the Drucker Institute used for ranking the firms, PepsiCo received 5-stars (the highest) for customer satisfaction, innovation and social responsibility, with 4-stars for employee engagement/responsibility and financial responsibility.

In a moment of candor and offering a peek behind my nom de plume, I was once an executive with global responsibilities for PepsiCo. Something that provided me with a sense of accomplishment and satisfaction because, as anyone who has worked there will tell you, if you survived two years at PepsiCo, they had judged you to be a “keeper” and someone to be developed for additional leadership positions. I stayed for twelve years and walked away by choice. Candidly, it was a decision that cost me a substantial amount of money and took me some time to fully come to peace with (though I am not sure my family ever has). Still, whether in the classroom, boardroom, or across a range of businesses as a consultant, that experience granted me credibility. I believe it is a reason that many doors have been opened to me since leaving the company, including the top-rated business school in which I now teach strategy.

I say none of the above to impress anyone, I am long past such need. Rather, I say it to help frame my irritation with how PepsiCo responded to the war triggered by the Russian invasion of Ukraine.

Companies Arrive at a Decisional Point with the War in Ukraine

A Wall Street Journal article surmised that many companies were more prepared to react to the business crisis brought on by the Russian invasion of Ukraine because of their recent pandemic planning. In truth, the big companies that found themselves grappling with the decision of what to do with their business in Russia were not pulling from a pandemic-based crisis playbook. Rather, they have long had a crisis management plan and team in place to deal with various crises – from product contamination to natural disasters to violent events. I know this because I was part of such a team. Consequently, I have more than a passing knowledge of the PepsiCo crisis team and the actions that would have undoubtedly been triggered by the Russian invasion of Ukraine.

Subsequently, a growing list of more than 400 companies has announced they will suspend or cut back operations in Russia, many expressing concern for harm to employees or brand reputation. While we may well think that such a decision was easy, it was not. There is a threat to the businesses that pulled out and it comes from the person responsible for the war, Vladimir Putin. Under the guise of Russian law, Mr. Putin has endorsed a plan to seize assets of companies that left Russia, including their brand and intellectual property. So, the decision to leave comes with no small concern by companies as to whether they would ever be able to return to Russia and do business under their brand name.

Some companies have said they were going to remain in Russia for humanitarian reasons. Pfizer (PFE) indicated the decision was based on a need to provide essential drugs, pointing to a logical reason for remaining. This begs the question – what might be considered essential? As we have learned from the pandemic, that is not an easy question to answer.

Besides Pfizer, other companies involved in medical, pharmaceutical and healthcare equipment argue their decisions to continue to do business in Russia are justifiable. Even those involved in agriculture might see the matter as a moral dilemma, concerned that the Russian food supply would be impacted and the people not responsible for the prosecution of the war would suffer. Based on their actions, this is where PepsiCo believes it stands.

Having decided to suspend sale of its beverages, a staple in the Russian markets since 1974 and source of some 4% of its $79.4 billion revenues, in the face of a crisis created by the war, I believe PepsiCo’s management blinked when it did not pull out all its businesses.

(For those unfamiliar with my clever “blinked” reference, “The Other Guy Blinked” was the title of the 1986 best-selling business book by the late and former CEO/Chairman of the board of PepsiCo, Roger Enrico.)

As anyone who has been involved in dealing with crises knows, management and their decisions matter. As evidence, I offer the actions taken by Johnson & Johnson (JNJ) in the 1982 Tylenol crisis that will be forever considered the “gold-standard” of crisis management and served as the foundation for crisis management plans of myriad companies.

However, in 2011, a different CEO and senior management team at J&J displayed the antithesis of their “gold-standard” crisis decision-making, when it dealt with a series of crises and came up small.

So, we can say with confidence that context and management matter. It is why, when Russia invaded Ukraine and PepsiCo’s management announced they were pulling all their drinks out of Russia but were not ceasing all business activity, it begged the question – Why not?

Let’s look at the facts! At the start of 2022, PepsiCo had about 20,000 employees in Russia, which was the third-largest market for the company, following the U.S. and Mexico. With twenty-four manufacturing plants and three R&D centers, the company made soft drinks, potato chips, milk, yogurt, cheese, as well as baby food and formula. Beyond drinks and chips, the next largest segment of PepsiCo’s business revenue in Russia was the result of a $5 billion acquisition PepsiCo made in 2011 of conglomerate OAO Wimm-Bill-Dann, a Russian dairy & juice company.

Knowing its deeply embedded ethics, I believe PepsiCo’s senior management labored over the decision about what to do, as the company sought to balance its sense of moral and fiscal responsibility. But they equivocated and made no decision until they had to decide, after hearing business icon McDonald’s (MCD) was closing its restaurants (franchised at that) and their longstanding rival, Coca-Cola (KO), was suspending all business operations.

Only then did PepsiCo CEO Ramon Laguarta announce they would stop selling drinks in Russia but…were not pulling out completely. Under the logic of their argument, PepsiCo was going to continue to sell “essentials” to the Russian people who, after all, were merely victims of governmental actions.

An Ethical Choice

Yes, I know PepsiCo is helping the Ukrainian people (and management would be the first to tell everyone). But that relates to what they are doing outside of Russia. My issue is with what they are doing inside Russia, which Laguarta argues is humanitarian. He reaffirmed this belief in the March 8, 2022 letter to employees…

As a food and beverage company, now more than ever we must stay true to the humanitarian aspect of our business. That means we have a responsibility to continue to offer our other products in Russia, including daily essentials such as milk and other dairy offerings, baby formula and baby food. By continuing to operate, we will also continue to support the livelihoods of our 20,000 Russian associates and the 40,000 Russian agricultural workers in our supply chain as they face significant challenges and uncertainty ahead.

Sorry, but I find the statement duplicitous and outright misleading.

Who would be against selling baby food and formula to families in times of need? However, if one is paying attention to what PepsiCo is actually selling, it includes Frito-Lay potato chips; which, even to most PepsiCo employees, would not qualify as daily essentials. Moreover, PepsiCo has agreed to purchase 2,200 tons of seed potatoes from Scotland to be exported to Russia; which ties to the CEO’s point about supporting 40,000 Russian agricultural workers. Although I see the delicate balance Laguarta is seeking, it misses the point of the sanctions that governments have imposed on Russia for its maligned behavior and the reason many companies have decided to cease doing any business in the country.

Should a company be supporting anything that lessens the pressures on a government involved in needless but purposeful tragedy and loss of life that may well be crimes against humanity, particularly as it relates to the care and feeding of that country’s population? The potential isolation of Russia from the world is supposed to create hardships for the people! It is supposed to pressure the Russian government! And yet, with its decision to continue to deliver “essentials” to Russians, PepsiCo is mitigating the very hardships that were designed as leverage to end the war. Nestle’s management finally got it. PepsiCo management needs to get it. Right now, they are on the wrong side of the equation.

Since my knowledge of Russian history is more up-to-date than my faded language skills, the reality is that for more than 250 years, the country has been ruled by autocrats, despots, fools or kleptocrats. Yet, I know from my time there that the people rejoiced at the end of the Soviet rule and embraced the opportunity to be part of world commerce. I believe with the end of the war and a return to normalcy (at least for Russia), the people will heartily welcome back Western businesses.

Moreover, if history is any indication of what PepsiCo’s investors might expect, the company will return to Russia with their full complement of products and use their mighty marketing arm to let everyone know they are back. PepsiCo will flourish as a business, in Russia and elsewhere. It’s what it does.

As for me, someone who benefited from executive stock options and thought so well of the company that I even bought shares with my own money, I see it differently today. After more than 30 years as an owner of shares, PEP will not be in my step nor in my stock portfolio. After thoughtful consideration, I sold it all. Roger would understand.

Let’s Conclude with a Point of Note

One of the points for any Seeking Alpha article is to pose an investment angle, which raises the question: What qualifies as an “investment angle?” Sometimes this is not clear. So, a few words about that as it relates to this article, in case I have been too obtuse.

I began with the three bullet points setting up the general concept of investing logic (with subtle humor, in case it was missed), and followed with the first paragraph indicating I have written six positive (BUY) articles about PepsiCo. Further, in what has to be a clear investment angle, I say…

My belief is the company will continue to be successful, and I am not here to pose a story of business gloom and doom. Rather, I am here to voice displeasure with PepsiCo’s management and, while my sell rating is personal, it is born of the same belief as the Nestle’s Ukrainian workers who questioned their company’s decision to continue to do business in Russia.

Relatedly, I talk about PepsiCo’s actions to suspend beverages but not food, setting up the discussion about what they are doing, including buying seed potatoes from Scotland (for farmers to plant), which they are going to export to Russia. Investors should recognize that, in the light of day, this looks bad…how bad? With the news and pictures from Ukraine resembling what was seen during World War II, the story of being a U.S. company continuing to do business in Russia is getting optically worse by the day.

I think a reasonable PepsiCo investor will recognize this is a decisional point for the company…and them. With each passing day PepsiCo continuing to do business in Russia is transitioning from thoughtful logic to questionable actions that are anathema to the ethical company I once worked for.

In fact, one of the reasons I felt respected as a former PepsiCo executive was that I not only knew how capable employees are but how ethical they are expected to be. No one survived a violation of PepsiCo’s ethical standards. Yet here we are. The company is still operating in Russia and missing a blinding flash of the obvious.

Is management not watching what is happening? Is management not aware of the pressures that finally caused Nestle to submit and remove all business operations from Russia? Will President Zelenskyy have to call out PepsiCo by name, as he did to Nestle, to get it to stop supporting the Russian infrastructure?

What will happen if Pepsi pulls out of Russia? How about a quick look at the Nestle’s share price at the time pressures were put on the company to cease all business operations in Russia? We can see the price was lowering amidst the angst following Mr. Zelenskyy’s statement. However, after the decision to pull out of Russia, the share price went up. Whether this is an example of what PepsiCo investors might see is unclear, as the share price for PEP seems largely unaffected by the company remaining in Russia. Even my selling had no effect (that was humor).

I conclude the article with this…

If history is any indication of what PepsiCo’s investors might expect, the company will return to Russia with their full complement of products and use their mighty marketing arm to let everyone know they are back. PepsiCo will flourish as a business, in Russia and elsewhere. It’s what it does.

Personally, I think that is as clear an investment perspective (angle) as can be provided.

Yes, I sold my shares. But do I really need to state the obvious? That I can always buy them back if Pepsi gets on the right side of the equation?

Was I too subtle in this article about an investment angle? Was the proverbial forest not visible for the trees? For the aware investor, I think the message was clear! But it remains that I write about factors related to strategy for the companies that are the subject of my articles. I do not give investment advice. If anyone is looking for that, you are reading the wrong writer.