The Cola War Is Over for Pepsi

One of the world's most familiar food and beverage companies is PepsiCo (NYSE: PEP). Its brands are known all across the globe including Frito-Lay, Gatorade, Tropicana, Quaker and, of course, the iconic cola brand Pepsi.

Pepsi is also famous for the decades-long battle to be the top-selling carbonated beverage with its bitter rival, Coca Cola (NYSE: KO). The conflict between the two rivals raged back and forth for years across the country's grocery shelves. Coke usually held the upper hand but, at times, Pepsi would put its nose in front as smarter and more aggressive advertising campaigns worked their magic.

But then with the arrival of former management consultant Indira Nooyi in 2006 as CEO, the game changed. She decided to not fight Coke directly, but to try and redefine the playing field by making a push into healthier snack foods and drinks among other initiatives.

And she is still trying to redefine the playing field. The latest move by Ms. Nooyi involved asking Wall Street analysts and investors to look at Pepsi in a different way. She wants everyone to see the company's overall beverage portfolio – the “total liquid refreshment” market – rather than just looking at its carbonated soft drinks business.

Many investors remain unconvinced, as evidenced by its poor stock performance over the past few years, as Pepsi basically ignored the core of the company – the carbonated soft drink market – in favor of other endeavors. Investors holding Pepsi stock for the past five years are still underwater.

Pressure from disgruntled shareholders did force Pepsi management to announce in February a restructuring plan which cut costs while reinvesting $500-$600 hundred million into 12 core megabrands like Pepsi Cola. The plan is being implemented as just this week the company launched its first global advertising campaign for its flagship cola. Pepsi is also, for the first time ever, integrating its snacks and beverage marketing. Its Frito-Lay business needs help too with North American sales slowing due to strong competitive headwinds.

Pepsi has to act and soon because its rival Coke is not sitting by idly. Take the total liquid refreshment market that Ms. Nooyi is fond of speaking about. Rumors are that Coca Cola is eying a major move there and contemplating an acquisition of the energy drinks company, Monster Beverage (Nasdaq: MNST), formerly known as Hansen Natural. Coke already distributes the company's drinks across the nation. The only question is whether it is willing to pay the steep price necessary to take over the company.

Monster definitely has attractions to entice Coca Cola. The energy drinks category of beverages is especially popular among younger people looking for that extra jolt of caffeine. Last year Monster Beverage had net income of $286 million on net sales of $1.7 billion. According to data from Beverage Digest, the company in 2011 accounted for 1.2 percent of total carbonated drink sales. However, sales volumes for the company jumped by 15 percent while the rest of the carbonated drinks categories declined or were flat.

Against increasing pressure from Coke and other rivals, what should Pepsi do?

It should not do what some analysts believe it plans to do...sell its PepsiCo Americas Beverage business and lose exposure to the emerging markets of Latin America. It is believed that Anheuser-Busch InBev ADR (NYSE: BUD) is eager to take the business off Pepsi's hands. BUD is looking to achieve greater soft drink and beer penetration into the fast-growing Latin American market. And BUD has the necessary size and expertise in Latin American markets to make the needed investments into the business.

Perhaps the best move for Pepsi, if it does not want to continue the cola wars, is to simply break the company along the lines that Kraft Foods (NYSE: KFT) is planning to do. Kraft will split into two world class companies later in 2012. The North American grocery company, with roughly $18 billion in sales, will retain the Kraft Foods name. The global snacks business, with about $35 billion in sales, will be called Mondelez International and will trade under the symbol MDLZ.

Pepsi split into two companies – a beverage company and a snacks company – would likely be worth more than the company is right now. That would be a welcome reward for increasingly impatient PepsiCo stockholders.

This article was originally written for the Motley Fool Blog Network. Make sure to read my daily articles for the Motley Fool at http://blogs.fool.com/tdalmoe/.