SaaS and Soft Drinks? Maybe Not

Last week, we looked at PepsiCo and its channel strategy for Pepsi True.

A third possibility did occur to me - unsurprisingly, since I spend the bulk of my time in the technology world - that PepsiCo envied SaaS.

Let's look at 2 companies, PepsiCo and Salesforce (numbers as of this writing):

• PEP: Market cap of $139BN, revenues of $66BN, operating profit of $6.7BN, revenue multiple of 2.1, P/E of 20.89.
• CRM: Market cap of $35BN, revenues of $4.1BN, operating loss of ~$232MM, revenue multiple of 8.5, P/E of, well, infinite.

I have no real inside information, but it is safe to assume that the PepsiCo executives are intelligent, worldly and well-read people. I feel confident that they keep track not only of their own industry, but others as well, and regularly read the business pages and journals. I have no doubt that they have been watching the tech sector - they were one of the earlier companies to hire a senior executive as CISO - and understand, as the above numbers show, that tech companies get high multiples, and the recurring revenue of SaaS companies like Salesforce get even higher multiples. The multiples above - 8.5 for Salesforce vs 2.1 for PepsiCo - just reinforce it.

It is possible that PepsiCo's executives looked at the SaaS companies, saw their committed monthly recurring revenues (CMRR) and their impact on cash flow and valuation, and said, "I want that! Let's see if we can find a way to get that sort of revenue." This sort of reaction is natural for executives under pressure from shareholders who also look at those valuations and wonder why their holdings don't have the same numbers.

However, I discount the impact of recurring revenue here for two reasons.

• First, there is no indication that Pepsi True is sold primarily, or even at all, in a "subscription-only" model. While that may happen, and Amazon does have some support for it, subscription-only soft drink is even more radical of a change than online-only, and so is likely to have been reported, if true.
• Second, if the primary interest were subscription, PepsiCo would not sell it through Amazon, but rather directly through its own Web site. Subscription revenue - and SaaS valuations in general - depends entirely on signing up new customers, getting renewals up and churn down. You cannot do that without a direct customer relationship.

Of course, it is possible that (a) the reporters missed this important bit and (b) PepsiCo doesn't understand how important the direct customer relationship is to subscription-based business models and multiples.

Do Pepsi's executives see the valuations? Definitely. Are they envious? Possibly; or possibly they are content to run a beverage company with a 10% operating margin and $139BN valuation. But did SaaS-envy drive the Amazon-move? Nice idea, but likely not.