Pepsi’s new challenger isn’t Coke — it’s Elliott

For decades, Pepsi played the charming runner-up. Coke was tradition; Pepsi was "the choice of a new generation": Britney, Beyoncé, halftime shows, and Super Bowl ads where the point wasn’t to be No. 1 but to make No. 2 look cooler. That schtick worked (for the most part) as long as Pepsi was close enough to Coke to call it a rivalry.

Not anymore.

By last year, Dr Pepper and Sprite each had outsold Pepsi Cola in the U.S., turning Coke’s rival into America’s fourth-favorite soda. The “Pepsi Challenge” is starting to look like a participation ribbon, and this is before 50% aluminum tariffs that are tightening the screws and weight-loss drugs that are changing consumers’ behaviors entered the chat. Investors can forgive being second. Third is harder. Fourth is a problem.

Enter Elliott Investment Management, a hedge fund with a taste for fixer-uppers. On Tuesday, it revealed a $4 billion stake in Pepsi and a very thick set of instructions: fix North America beverages, reevaluate who owns the trucks and canning lines, publish harder targets, and stop letting chips subsidize soda. Doritos are a fortress, Mountain Dew is a mess, and the board has let one division paper over another for too long. The message isn’t subtle. But it’s not meant to be. Elliott says there’s 50%-plus upside if Pepsi trims the corporate storyline and tightens the operating one. That’s the tone of the letter and board presentation the fund delivered, and it immediately reframed Pepsi’s fall agenda.

Pepsi’s response — essentially, “We’ll engage” — is polite. The clock Elliott brought is not. Elliott doesn’t “advise” companies so much as co-sign their to-do lists. At Southwest Airlines, it ended up with directors in the boardroom. At Crown Castle, it pushed the company into a fiber divestiture. At Starbucks, it forced a governance rethink. Pepsi knows the pattern: You get one shot at calling it an engagement. By round two, this becomes a performance review.

Snacks pay the rent, soda eats the margins

Everything starts with the split personality on Pepsi’s income statement. On paper, PepsiCo is a diversified consumer-goods giant. In reality, it’s a snacks empire with a drinks side hustle. In 2024, Frito-Lay North America generated 43% of the company’s division operating profit; PepsiCo Beverages North America contributed 15%. It’s an old imbalance that’s gotten harder to ignore. That imbalance has been tolerated for years. But Wall Street doesn’t love cross-subsidies, and activists loathe them.

Elliott’s pitch is to stop hiding the underperformer inside the overachiever and force PepsiCo Beverages North America (PBNA) to stand on its own two feet — public targets, public deadlines. Pepsi doesn’t have to love that framing. It does have to answer to it.

The market has noticed, too. Coke trades at a premium multiple — roughly 21x forward earnings — while Pepsi sits closer to 18x. Analysts might call that a “conglomerate discount.” Elliott calls it dead weight, thinking that if Pepsi can’t earn its keep, it should at least have to publish harder numbers and clearer timelines.

Meanwhile, Dr Pepper’s jump into the No. 2 cola slot isn’t just a statistic; it changes how Walmart and Kroger negotiate floor space. Sprite’s edge over Pepsi means the Pepsi logo is no longer guaranteed a top-three placement in cold cases. That forces deeper promotions, fatter trade spending, and thinner margins. When aluminum goes up or freight goes sideways, the brand further down the leaderboard has less room to nudge prices without getting punished. Market share isn’t theology; it’s leverage. Lose share, lose leverage; lose leverage, lose margin. That’s the loop Elliott wants the board to break. 

Pepsi does have one real counterpoint: energy drinks. Energy drinks remain one of the few beverage categories still setting the pace, and Pepsi just tidied its energy story into something a shopper — or a category buyer — can actually understand. Last month’s expanded deal with Celsius gave Pepsi an 11% stake and reorganized its energy portfolio so that Celsius becomes the U.S. strategic lead with rights to Rockstar (U.S./Canada) and Alani Nu (U.S.), while Pepsi remains Celsius’ exclusive U.S. distributor. That’s a cleaner architecture, and it might finally give PBNA a lane where it can claim genuine growth instead of borrowed relevance. Elliott’s line will be: Great, now prove it quarterly.

The cola story, as awkward as it is, still matters because cola is the company’s billboard. It’s the reflex purchase. It’s the cultural shorthand. Elliott’s bet isn’t that Pepsi can — or even should — abandon cola; it’s that cola performance becomes a governance item rather than a marketing aspiration. Stabilize share, protect price architecture, and stop asking Frito-Lay to fund the same turnarounds twice. 

Bottling is practically a religion in this industry, and Pepsi’s doctrine has long been about control. In 2009 and 2010, it wrestled back control of its biggest U.S. bottlers, believing that end-to-end ownership would speed innovation and sharpen execution. Coca-Cola chose the mirror image: pushing bottling back into the hands of local partners and running a leaner, asset-light parent. Coke finished its U.S. refranchising in 2017 and saw the sort of corporate margin profile Wall Street likes to reward.

Trucks, can lines, depots, headcount — the gritty things that turn syrup into a P&L — live inside PBNA, not across a patchwork of franchisees. But control is capital, and capital has a cost. Elliott is asking Pepsi to prove — on paper and on a timeline — that the integrated model still earns its keep. Map territories; publish scenarios that show how each path (integrated, hybrid, asset-light) would move margin math; and tie each to route productivity, service levels, capex needs, and PBNA margin lift. Pepsi already has a hybrid case study in Pepsi Bottling Ventures, its long-running joint venture with Suntory.

The activist version of 2025 is all about targeted capital discipline. That means keeping A&M pointed at energy, hydration, and zero-sugar routines that hold up under GLP-1-shaped demand curves, while refusing to let PBNA raid the pantry because a spreadsheet got optimistic. 

The new costs of control

Then, there’s the macro mess. In June, the White House doubled aluminum tariffs to 50%, an immediate cost hike for every can. A separate set of “reciprocal” tariffs slapped 10% on imported concentrate — a quirk that hits Pepsi harder than Coke (because Pepsi sources more concentrate from Ireland). A U.S. appeals court ruled most of those broad tariffs illegal last week — but left them in place until Oct. 14 while the administration seeks Supreme Court review. In other words, real costs today, a maybe-reprieve tomorrow, and a capricious middle in between. Try pricing a promotion calendar around that.

Pepsi isn’t waiting for clarity to arrive by courier. According to Beverage Digest, it will raise U.S. carbonated-soft-drink concentrate prices by 10% starting Sept. 7. That stabilizes corporate P&Ls but stresses bottlers, irritates retailers, and tests consumer habits that have already endured years of sticker shock. Elliott can’t repeal tariffs. But it can force a system-wide re-tune: where the profit is taken, who absorbs it, and how quickly the math is made visible to investors. That’s why activists love cost shocks — they turn five-year plans into deadlines. 

One cloud, at least, has cleared. In May, the FTC dismissed its Robinson-Patman case against Pepsi, which accused Pepsi of giving a mega-retailer better pricing and promotional allowances. That doesn’t end private litigation or make big-box negotiations a hug-fest. But it removes the specter of a federal lawsuit hovering over every promotion while management tries to redraw price architecture for a tariff era.

So what does “good” look like from here for Pepsi and Elliott? At a minimum, a cooperation agreement that preempts the proxy circus and replaces it with process: a board refresh; a formal PBNA review that includes refranchising options; published, segment-level KPIs; and compensation that forces the story to show up in the numbers. In other Elliott campaigns — Southwest, Crown Castle, Starbucks — that cadence produced actual decisions: new directors, asset dispositions, the kind of operating oversight that keeps “strategy” from dissolving into quarterly excuses.

Expect Pepsi’s stock to start pricing on the assumption that something — anything — changes on a deadline, because that’s exactly what Elliott’s presence signals. Stock was up about 2% midday on Tuesday after the announcement.

The trick for Pepsi is to keep authorship. There’s a version of this story where management moves first: announces a dated PBNA plan, pilots refranchising in the capital-hungriest or lowest-density territories, and proves the Celsius-led energy architecture with mix and margin down to the decimal. There’s another version where Elliott writes the rubric and Pepsi spends the next two years executing a plan that might as well have been drafted in the activist’s conference room. One is partnership; the other is permission with quarterly check-ins. The market will reward either — just not equally. 

The danger, as always, is over-optimizing the spreadsheet and under-investing in the brand. Kraft Heinz is now the cautionary ghost story at every boardroom lunch. But Elliott’s Pepsi thesis reads more like a familiar private-equity memo: focus the portfolio, sharpen incentives, fund the winners, and show the cash. 

Deadlines, dividends, and discipline

The macro picture isn’t entirely grim. If the tariffs get rolled back, Pepsi can stage a visible give-back — the kind of gesture that buys back goodwill with retailers and reminds households that not every price hike is permanent. If the relief doesn’t come, the company will have to prove it can protect revenue with tighter pack sizes, smarter promo timing, cleaner route economics — not just constant markdowns that cheapen the brand. Either way, it needs a real playbook. Not a mood. Not slogans. A plan.

Dividends are the quiet politics of staples. Pepsi’s investor base isn’t here for the drama; it’s here for the quarterly check. Elliott’s promise of 50% upside only works if that check stays safe. The way to square the circle is a PBNA rerate built on cleaner incentives, not slash-and-burn austerity. Chips keep compounding, soda stops apologizing, and the stock trades like a disciplined consumer platform instead of a muddled conglomerate. If Pepsi wants to claim it’s a platform, not just a portfolio, this is the moment to prove it.

The easy story here is culture clash: Pepsi, the halftime show brand, colliding with Elliott, the spreadsheet brand. But the real story isn’t cultural, it’s arithmetic. The company’s board has to move Pepsi from promises to proof: market share that stops falling; an energy portfolio that behaves like a single product with three labels; a bottling structure that pays for its control or makes room for partners who will; and a tariff playbook that looks like it was written by people who remember what it costs to lug cases into a 7-Eleven cooler at dawn.

Elliott has turned years of investor muttering into a public deadline. Pepsi can resent the pressure or use it. If it acts first — publishes the PBNA plan, pilots refranchising, and shows energy-led mix gains — it keeps the microphone. If it waits, the market will hand the microphone to the person with the stopwatch. Either way, the binder on the boardroom table isn’t a suggestion. It’s the season’s agenda. And the deadline ink isn’t going to smudge.