PepsiCo treading on unsafe grounds

photo source: MYCHELE DANIAU / AFP

After last year’s rather weak financial performance, snack food and beverage titan PepsiCo finds itself facing political recrimination for its household cleaning—and for things wholly beyond its control.

Closing shop in Peterlee

Beneath the gloss, PepsiCo’s 2015 financial report does not paint a very bright picture. While still striking an impressive figure, the company’s net revenue was $63.1 billion, 5 per cent less than in the 2014 financial year. On other fronts, such as operating profit, core earnings, and free cash flow, the corporation cited similar losses of 4, 1, and 2 per cent.

To lighten investors’ mood, PepsiCo still decided to increase dividend payments by 8 per cent, expressing a hope that its luck will turn for the better soon. Now this hope might seem a little farther away as despite the fact that the 2016 annual report is not published yet, the company has vexed British public opinion by announcing to close its factory in Peterlee and relocate production to other locations within the UK.

As previously reported on VIR, the move would threaten 355 manufacturing site jobs and 25 transport worker positions. Understandably, the news hit the alarms for workers and labour unions.

Tracey Foster, manufacturing director at the Peterlee factory said taking production elsewhere would serve streamlining the company’s manufacturing operations and that it presents “significant productivity and efficiency savings crucial for ensuring the long-term sustainable growth of our business in the UK.”

The news comes just weeks after PepsiCo reported an 18 per cent drop in fourth quarter net income to $1.4 billion from $1.7 billion during the same period in 2015.

Previously, it was also reported that PepsiCo is now in full momentum implementing its productivity plan, investing in automation technology and optimising its global operations as well as closing certain facilities.

Troubles in India

The beverage giant has also encountered troubles in India recently, when trade unions in Tamil Nadu state called for a boycott of Pepsi and Coca-Cola products after authorities issued a ban on a traditional bull-wrestling festival known as Jallikattu.

While the ban was issued after a legal challenge lodged by People for Ethical Treatment of Animals (PETA), with which PepsiCo had nothing to do with, the enraged local populace called a vendetta on US firms.

"There are multiple reasons behind the boycott, but most important is how PETA tried to kill Jallikattu," T. Vellaiyan, president of Tamil Nadu Traders Associations, told AFP. "We have appealed to traders to stop selling products from Coke and Pepsi from today to make this campaign a success."

Despite the efforts of India’s leading beverage association to call off the boycott, there is strong opposition against both PepsiCo and Coca-Cola products as only recently the two corporations were invited blame for draining groundwater in Tamil Nadu, despite a 2-year drought.

This local opposition peaked in violent protests in front of PepsiCo and Coca-Cola factories in the state and resulted in at least three new facilities being withdrawn.

However, PepsiCo’s troubles in India started earlier, as the 2015 annual report cited a 4 per cent decline in net revenue for the Asia, Middle East and North Africa (AMENA) region. This the corporation put down to the impact of refranchising a portion of its beverage business in India and the Middle East.

In addition, the company’s beverage volume grew by a single per cent in the region, but the overall regional growth was positive despite single-digit decline both in China and India.

It would be interesting to compare the performances of the AMENA and the Latin America regions. While the AMENA region holds roughly 50 per cent more in asset value than Latin America (9 per cent of the PepsiCo total against 6 per cent), its net revenue was about 30 per cent less. The AMENA region earned $6.375 billion, while Latin America $8.228 billion, approximately 10 and 13 per cent of the PepsiCo total, respectively.

Tax dispute in Vietnam

While safely holding the number one position in Vietnam through its subsidiary Suntory PepsiCo Vietnam, the company has its fair share of troubles here as well—though it might come as a refreshing change that its disputes are with only local authorities.

The company’s primary trouble in Vietnam revolves around the unsettled preferential treatment its Can Tho production plant receives from local authorities. The $30-million plant received its investment certificate in 2008 from the Can Tho Export Processing and Industrial Zones Management Authority. As summarised by an earlier VIR article, at the time the plant was categorised as a “new investment project” and was entitled to a preferential corporate income tax (CIT) rate of 15 per cent for 12 years, three years of tax exemption, and a 50 per cent reduction over the next seven years.

However, Suntory PepsiCo Vietnam has been complaining of inconsistencies in these tax incentives after the General Department of Taxation in 2014 reclassified its Can Tho plant as an “expanded investment project,” whittling down on its privileges (three years of CIT exemption and 50 per cent CIT reduction in the seven following years).

Afterwards in 2015, the General Department of Taxation billed the company for VND24.3 billion ($1.1 million), including VND18.04 billion ($823,744) in tax arrears and VND6.26 billion ($285,844) in late payment fees and a charge for declaring the wrong tax liability.

The last time the general public could hear from PepsiCo in relation to this seemingly endless dispute was in June 2016, when the company (again) requested meetings with the relevant local authorities.

Perhaps only a minor disturbance compared to its unsettled tax performance in Can Tho, but in November 2016, Suntory PepsiCo Vietnam had another, more amicable run-in with local authorities over its product testing methods.

Drawing a fine of VND25 million ($1,140) from the inspectorate of the Ministry of Health, the company was found in violation of product testing regulations.

“Suntory PepsiCo Vietnam tested one representative package of each product formula, instead of all packages,” noted the ministry’s Chief Inspector Dang Van Chinh.

While all product samples tested were found to be sufficient, the inspectorate ordered Suntory PepsiCo Vietnam to pay closer attention to its own testing methodology and ensure that it meets Vietnamese regulations.

In short, PepsiCo’s performance has been relatively poor in the 2015 financial year and information from 2016 does not suggest marked improvement. The company still feels the need for intensive restructuring as well as streamlining and added troubles in the UK and India will definitely not help these efforts.

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