Pepsi, Poppi, and the Creosote Bush
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Dylan Lewis: Does that sound like future growth? Motley Fool Money starts now. I'm Dylan Lewis, and I'm joined over the airwaves by Motley Fool analyst David Meyer. David, thanks for joining me today. David Meyer: You're very welcome. It's great to be here.

We have a fun one this Monday. We got some retail numbers, not so much fun. But then we also have a Monday morning jolt of natural caffeine, courtesy of Pepsi, and some M&A activity. That'll be fun to dive into. We're going to kick off with the update on the big picture, though. Fresh retail numbers out for February. U.S. Census Bureau reporting that retail sales up 0.2% last month over January. And, David, a lot of the coverage here continuing to flag tight consumer spending situation.

Yeah. You're exactly right, 0.2% growth. Expectation was 0.6%, though. After January's decline, economists were expecting a pick back up in February. It did happen, just not to the extent that they wanted. It's the extension of a theme that's been going on.

Earlier in the month, we saw the Confidence Board, their consumer index fell a bit. We recently got some data from the University of Michigan Consumer Survey that their confidence is down a bit.

According to both surveys, consumers are starting to worry about inflation popping up in the rest of 2025. We're seeing lots of numbers that basically are saying the low-end consumers are really feeling the pinch. There were basically two of the same quotes, one from the CEO of Dollar General, one from the CEO of Walmart, who said...

Their low-end consumers are extended. They're buying smaller quantities in the back half of the year. Their money's not going as far as they want. There's tariffs and trade wars, that bit of uncertainty that businesses are saying, "Hey, we don't know how to plan for this." And, oh, by the way, retailers, Best Buy came out recently and said, "Hey, we're going to have to raise prices," which is the exact wrong thing if consumers are feeling the pinch.

So yeah, this is, like I said, an extension of bad news. Obviously, we're still seeing growth, but it's just not as much as we want. And hopefully, it won't turn negative.

You brought up tariffs. I think there was some expectation that there may be inflation concerns anyways, regardless of the tariff environment. Just because of where we've been over the last couple of years, tariffs seem to add a necessary price hike to what a lot of retailers will be passing along to consumers, which is another way of saying inflation. We'll start to maybe see that come out as we start seeing March

and April numbers from retailers, and they start to anticipate some of what's going on with tariffs. We didn't really see a lot of that in the February numbers. Aside from what we're seeing here from U.S. Census Bureau, you named some of the other data sources. Where else are you looking to get a sense of consumer appetite and really how businesses are handling this? I think the best way to get that data is, quite frankly, next quarter's earnings reports. We're going to have enough

Time go by, as the businesses will be able to see and tell us exactly what happened to them in January, February, and March. They'll also have started their planning process. What are they going to see for second quarter?

We'll continue to get the monthly economic data. We'll continue to get survey data, which is all good stuff. That can give us a sense of what's happening. But I'm definitely looking forward to all the retailers, consumer products companies, all the things like that who are going to say, hey, here's what our businesses did. Here's where we think we're going. And hopefully it's up and to the right.

Speaking of those consumer products companies and consumer packaged goods companies, we got some news from Pepsi today. I kicked off the show opening up a can of poppy. They are buying a lot of cans of poppy, David. They are buying that prebiotic soda company for almost $2 billion. That's one of the big headlines out today. Is this a brand that you've tried before? Is this a soda drink that you're familiar with?

Actually, no. The worst part of it is, I'm actually a soda drinker. Some at The Motley Fool have even said, "I have a problem." We've discussed this in the past. I was chided and berated for how many Diet Mountain Dews I used to drink.

I don't drink as many anymore. But no, this isn't one that I have tried directly. So I will say this, I'm definitely going to go out and give it a try. I'm a very price-conscious soda buyer. So I'm looking for things that are on sale. I have no problem with the white label, private label brands from the local supermarket. That's kind of my go-to.

And these are a little expensive for my taste, but definitely going to give one a try. My daughter, who is not a soda drinker and has also not tried one, one of the brands that we actually drink

is a brand called Zevia. It's a soda that's sweetened with stevia as opposed to sugar. And she's like, I like that one better. It's got fewer things in it. In some sense, it could be better for you. But it's hard to argue with the success of Poppy and other competitors in the space that's happened recently.

I could not believe how serendipitous the timing was for this. I literally had my first poppy soda this weekend. I have it in hand here as we're taping today's show. For folks that haven't had it or maybe haven't had one of these soda alternative-type drinks, I almost think of them as adult sodas, David. They're kind of what sodas were maybe before high-fructose corn syrup ever existed. It's more natural ingredients, a little bit more of a natural, less punch-in-the-mouth sweet flavor.

I like them, but I think you're dead on here. They are a more expensive product, and they are not something that is going to necessarily appeal to every consumer, but they may appeal to people who are regular soda drinkers looking to make a healthier choice every now and then. I almost equate it to the space that Beyond Meat was in early on with meat eaters. Try not to go full replacement, but try to offer alternatives.

Yeah, I think that's, I think that's spot on. As I was doing a little more reading and I shared this article with you,

I'm actually quite surprised to see that Olipop, at least according to the article that we read from Bloomberg, Olipop and Poppy made up 2.7% of the carbonated beverage market. If you think about it, that's enormous. These have been around for, let's call it five to seven years. I don't know exactly when they started their businesses. I think Poppy was like 2018, maybe.

Yeah, two to three years. That is incredible. They have done a good job of, one, designing their product, marketing their product, making it available. Maybe it's not a surprise that Pepsi is buying them, because they, Pepsi, can actually

push this trend forward, given the amazing amount of distribution that they have, as well as the increased marketing budget that'll be available to the product now that it'll be under the Pepsi umbrella.

Looking at the way that the market is digesting this news, shares of Pepsi up about 2%. Pepsi is, after all, a $200 billion company. This is about a $2 billion acquisition. I think the excitement is going to be a little muted. How do you see this fitting into their overall strategy? It's difficult for them and for a competitor like Coke. It's difficult for them to actually develop new products. They just have an amazing stable of brands. In some sense, it's almost like

It's almost like the pharmaceutical industry where you let smaller folks do the innovating and you buy them later and bring distribution and marketing power to that equation. I think it fits in. It's definitely a trend.

It's bigger than I thought, so there's a there there, let's say. It's not like they're taking a flyer. They, Pepsi, are taking a flyer. This is an established brand. Again, they can bring some heft, bring some strength with their marketing and distribution, put it behind it. Basically, if you think about what the 2% market up, if it's 1% of the market cap,

Right. The market is 2% up. Essentially, the market likes this acquisition. I think I do, too. Yeah, they're down to taste. I did look at Pepsi's overall portfolio in prep for today's show. They have their drinks business, they also have the Frito-Lay snack business.

Looking through all the properties they have there, there's a little bit of a trend graveyard with some of the brands that they have. These consumer things that were really big for a short period of time and have fallen off as the next thing has come along. They own Propel, they own Sobe, they own Naked Smoothies. A lot of drink categories that are good. There's a dedicated group of people who really like them.

Once they got past some of that fast-growing period, they stalled out a little bit and met their final market. I was thinking, is there a bit of a venture cap-style investing to this for these drink makers, where they see growth and they have to have their hand in the ring there? Pepsi's not the only one. Coke is in the space, too. You're spot on with your analogy there.

There's a fabulous case study that I learned about a long time ago, and it's called a creosote bush. Really quickly, what a creosote bush is, it's essentially, think of like a tumbleweed. It's not exactly the same, but it's a bush that lives in the desert, and it survives by gobbling up all the resources.

If you think about it, what gets the resources at a company like PepsiCo from a development standpoint? It's Pepsi, it's Diet Pepsi, it's the big brands. It's hard internally for a company like Pepsi or Coke to develop new things. They actually have to take this approach.

Let the market decide, hey, this looks like an emerging winner, and come in a little later. Instead of an angel investor or a Series A investor, this is like Series C, Series D. This is before the IPO. We're going to come in, and there's a business there. They have structure, they have management, they have all the things that we need as a business that we're going to get via the acquisition. I think you're thinking about it exactly right there.

For investors in this space, you look at the returns for Pepsi and for Coke over the last three, five, 10 years, they've underperformed the market, even if you start factoring in dividends.

We've been waiting for both of these brands to find that thing that gets them outside of soda in a meaningful way. Don't get me wrong, I have a soft spot for it, but I don't have a soft spot for it in my portfolio. I like it on the table next to my sandwich. Do you feel like these businesses are investable or that there's something that would make them more investable for you?

It's difficult to say that they're investable. They're extremely mature. They're GDP + 1% to 2% growth.

The way that investors need to think about them is not, hey, I'm looking for this company to grow. It's completely on a total return basis. I'll get a little bit of capital appreciation. Let's call it that GDP growth plus one or two. I'll get some dividend yield. I'll get some repurchase of shares. I can probably expect maybe 6% to 8% per year, which is never a bad thing, especially since these companies are mature. They're not going out of business, etc., etc.,

But let's take the Pepsi and poppy acquisition. This is actually a soda, right? The things that you mentioned before, they were during the water phase, they were during the tea phase, they were during the energy drink phase, which there's been many ways that Pepsi has made that one successful.

But this is actually a part of their core brand. It'll be interesting to see if they can actually do a little more with this or longer than they have with some of the other ones. But again, getting back to the real thing, as an investor, any stock can be investable, especially at the right price, but you have to have the right expectations. Total return is the way to think about it, not growth. David, I'll raise a can to you. Thanks for joining me today. Thanks for having me. This was awesome.

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Coming up on the show, it's no secret that a lot of investors have high hopes about the future of artificial intelligence, but how do genuine experts, people who have been studying AI and machine learning long before it entered the mainstream, feel about the future of the field? Up next, Motley Fool analysts Andy Cross and Asit Sharma talk with Oren Etzioni, an AI expert and professor emeritus at the University of Washington, about the current and future states of artificial intelligence.

Dr. Ezioni, maybe to start, I'll just reflect on a 2024 New York Times article from last year where you said you're an optimist about artificial intelligence. That was just last year. So if 10 is totally optimistic and one is completely pessimistic, where are you these days and why?

Well, I'm ambivalent, to be honest. So on the optimistic side, I am absolutely at a 9 or even a 10, simply because we're seeing self-driving cars. We've been promised them for a long time. They're coming to the fore. You can actually get in one in San Francisco and Phoenix and in more cities every day. And these save lives.

Their accident rates are much lower than the 40,000 highway deaths we have each year. So I could go on and on, but the bottom line is there's just these huge benefits of AI saving lives.

At the same time, I would say on the negative side, I'm at a five because we do have some very real concerns, the use of AI by totalitarian regimes, the impact of AI on jobs and disinformation. So we have plenty of problems that AI causes as well. And Dr. Edzioni, when you reflect on where we are today and you think about the technologies

And then going forward, is there one particular, whether it's in the application of chatbots versus you're so involved in there because you've looked at so many businesses and you've invested in different businesses and run different businesses. I'm curious when you think about the application of AI, you mentioned driverless cars, which I agree. Are there other things that stand out that really catch your attention these days?

Absolutely. My colleague Andrew Ng of Stanford said AI is the new electricity. The first thing to understand before we get into some specifics, and I will in a sec, is just how transformative it is. Take a dart,

Throw it anywhere, on any word in the dictionary, any field, education, healthcare, cars, robots, you name it. Yes, AI is right now transforming that. There are startups. Now, it takes a while. So some of these, particularly in heavily regulated industries like healthcare, it's going to take a while to reach its peak.

But right now in finance, for example, in investing, in regulatory compliance and things where there's like reams and reams of text that somebody has to read and make sense of quickly, AI is up to that task because it can now really understand language and it doesn't run out of patience or time.

Investing. Investing is a great, I mean, like just the amount of things that we are using the different tools for to go through financial statement analysis. I was just doing it this morning, doing some research and it's pretty, I mean, it's just, it's just a game changer, really. It's a, it's a complete time saver. I don't know if the regular consumer on the street is, I still think we haven't seen the adoption of that quite yet. Do you agree with that?

Well, what I'd like to point out, and again, we can spend a little bit of time to unpack this because just AI and investing is complicated. But the thing I want to highlight is I think people may not be aware, the person on the street, the extent that they're already using AI every day.

So when they're using Alexa speech recognition, that's AI. When they're using a search engine, the ranking is done using AI. When you get a recommendation from Amazon or even your Facebook feed, that's all done using AI. So we're using it everywhere. Now in investing, you do need to be more sophisticated. Maybe you need to be a fool to be using AI. Why do you say you need to be a little bit more sophisticated on the investing side? Just curious.

The thing to remember, my current favorite definition of AI, it's called artificial intelligence, but I like to refer to it as augmented intelligence.

Because if you just blindly rely on AI, then you really are a fool. You're the lawyer who submitted a brief to the court to find out that it invented some precedents and he got in trouble and so on and so on. So the smart play is to use the information it gives you to make you a lot more efficient, but to still remain in the driver's seat, if you will, make your own decisions. So

AI is really being used to augment us, to supercharge our abilities, not to take over.

Dario Amodei, who's, as you know, the CEO of Anthropic, has a lot of vision about the future and how AGI can benefit society. One of the visions he puts forward is that a reasonably intelligent artificial intelligence could be put in control of the means of production. So an AGI could control a factory and produce things at scale, or it could use tools to actually do science. So right now we think

think of having a transformer mechanism, look through data sets, and maybe come up with some innovative molecule. But he posits that the actual machine itself could have control over those tools. Do you think that is something that's viable or going to come anywhere near into the future? You're bringing up a really important point that a lot of people misunderstand. I feel like this is the most important thing I'm going to say today. Let me just take a few extra seconds to say this.

We often conflate, confuse, mix up intelligence and autonomy. Basically, autonomy is power.

And people, right, who are very powerful, often very intelligent, very intelligent, often gain a lot of power. And so we naturally see these things as going hand in hand because that's how it works with people. With machines, it's very different. If you take Chad GPT, in some ways, one of the most intelligent programs ever built, and you ask it, hey, Chad GPT, what do you do between queries?

The answer is nothing. I just sit there, wait for the next query. So is ChatGPT powerful? No. Does it have autonomy? No, it just sits there, right? Likewise with these more sophisticated systems. The reason that's important is we can build over time AI systems that can do very, very sophisticated things.

But people will and should remain in charge. And so some of these visions, like the ones you're describing, assume that once we have these intelligent machines, we're not using them as tools, they're using us. And I think that's a misconception. And the example I love to give to just drive this home is we're on the verge of having self-driving cars in many, many places. As I mentioned, we already have them in several cities.

it's the case that the car decides when to hit the brake, when to hit the gas, and all that to keep you safe. But it's not like the car decides where to go. It's not like I get into the car and I say, hey, I want to go to Dunkin' Donuts. And it says, oh, no, Oren, it's the second time this week. I'm taking you to the gym. That's not how it works. You still decide where the car goes. And that's the way it needs to be with AI.

What I'm really curious about, and you're an expert in machine learning, among so many other things, if we look forward to this future where we do have artificial general intelligence, will it really be able to solve problems? It seems to me that so much of AI is based on optimization functions, so making things that are really probabilistically correct. And the human brain is so good at seeing things that

come out of left field or just happening to have something that's in your consciousness that gets related to something else, and then we have breakthroughs. Why haven't we seen as yet in not just the three years where most of us have been using things like ChatGPT, but in the years before, why have we not seen a major scientific breakthrough from the machines?

I love that question because my colleagues at the Allen Institute for AI are actually working on machines for scientific discovery, as per the paper that I wrote a while back that you mentioned, which is there. So, you're right that it's important and valuable, and you're right that we haven't quite seen it yet. It has to do, actually, with taste.

It has to do with the fact that you can generate actually an enormous number of scientific advances. Most of them are completely uninteresting. Think of it, you can generate all these new molecules, right? But most of them are like, you know, they're hard to produce. They don't help anybody. So what's the point? It turns out that we still have a very strong, I don't want to call it monopoly, but a very strong advantage in

in taste, in knowing what's important, what really makes a difference. And so science requires a lot of taste, as by the way does art. So if you tell it to copy Picasso, it can do that very quickly. If you tell it to mix Picasso and Van Gogh, it'll do that very easily. If you tell it to produce art, it'll produce 10,000 paintings in a few seconds. But if you tell it to produce beautiful art,

that's new and exciting, all of a sudden it's like a colleague of mine said that the music that AI produces sounds like wet cardboard, right? It doesn't have taste.

Listeners, that interview originally aired on our new live stream offering Fool 24. You can catch Fool 24 every day on our member site and also on The Motley Fool's YouTube channel. Drop a link to the channel and to the full version of the conversation in our show notes for today's episode. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers.

But if you only picked products I'd personally recommend to friends like you. For the TMF team, I'm Dylan Lewis. Thanks for listening. We'll be back tomorrow.