Business Essentials for Professionals


While Both Coke And Pepsi Stocks Are Underperforming, One Beverage Giant Is More Concerned Than The Other

While Both Coke And Pepsi Stocks Are Underperforming, One Beverage Giant Is More Concerned Than The Other
The decades-long competition between Coca-Cola and PepsiCo is usually won by Coca-Cola.
The same was true this quarter.
Due to increased interest rates and investor worries about the potential side effects of weight loss medications like Wegovy, the stocks of the leading beverage companies have performed poorly this year. (Coke's market capitalization of $242 billion exceeds Pepsi's by almost $20 billion.)
Nevertheless, both businesses exceeded Wall Street's projections for their third-quarter earnings and upped their estimations for the entire year. The Atlanta-based corporation, Coke, raised its projection due to strong demand for its goods, while Pepsi's full-year earnings outlook was strengthened by improvements in cost-management.
But only Coke was able to record an increase in volume. Investors have become more sceptical of this statistic in recent quarters as food and beverage businesses have paused the price hikes that drove growth in sales last year. The metric removes the effects of currency and pricing.
Some consumers who are attempting to reduce their grocery expenses have also become enraged by these same hikes.
In the third quarter, Coke's total volume increased by 2%, while Pepsi's beverage volume remained unchanged and its food volume decreased by 1.5%. The distinctions between the two companies were considerably more pronounced in North America. While Pepsi's North American beverage sector suffered a 6% decline in volume, Coke reported unchanged volume.
While rival Pepsi just increased its projection for full-year profitability, Coke also lifted both its top and bottom-line outlooks for the year, suggesting that the improved outlook may not be the result of increased demand for its products.
Below is a summary of the five main elements that gave Coke the advantage over Pepsi:
Pricing tactics
In spring 2021, Coke began boosting prices across the board. That summer, PepsiCo began raising its own prices, following suit.
Both companies stated that higher prices have increased sales more than two years later. Though it stopped raising prices earlier this year, Pepsi intends to raise prices "modestly" the next year. Although Coke took longer to halt its price increases, CEO James Quincey announced in July that the business had finished raising prices for the time being in both the US and Europe.
Coke's North American drink prices increased by just 5% this quarter due to the timing of their price increases, whereas Pepsi's increased by 12%.
“The higher the price increase, you would expect a bigger drag on volume,” Edward Jones analyst Brittany Quatrochi said.
Superior brands
However, Pepsi is concentrating on bringing back some of its non-soda brands, like Gatorade, while Coke is also gaining customers over with other beverages.
“Coke has been taking share from Pepsi for many, many quarters,” RBC Capital Markets analyst Nik Modi said.
Pepsi's Frito-Lay division, which produces Doritos, Cheetos, and other snacks, typically bails the company out when its beverages division struggles. However, snacking has decreased as consumers switch to less expensive options in response to Frito-Lay's double-digit price increases.
“The reason why snacks have done so well relative to other categories is because it was really a trade down option on a meal,” Modi said.
With the rising cost of a bag of chips, some consumers are turning to private-label products or even merely storing leftovers in the refrigerator.
Pepsi is also discontinuing its less successful marketing campaigns. Executives stated on the company's conference call that while the technique boosts profits, it causes a 2.5% decline in drink volume in North America.
Away-from-home business
In the early days of the pandemic, executives stated that events like going to the movies or dining out accounted for about half of Coke's sales. Quincey stated during the company's Tuesday conference call that those transactions made while travelling increased more quickly in the third quarter than the at-home business.
“There’s still a rebound and strong growth in away-from-home channels, not just some of the restaurants, but the amusements, travel, leisure, hospitality, those things,” Quincey told analysts.
Customers who trade down outside of the grocery shop may also be helping Coke.
“If you were going to a mid-tier restaurant, maybe now you’re going to quick-serve fast food, which is where Coke has a lot of its business,” Modi said.
For instance, McDonald's has reported higher U.S. revenue in recent quarters due to customers switching to its locations. Since Ray Kroc established his first franchised store, McDonald's has served Coke products, making it the beverage company's biggest restaurant client.
In contrast, Pepsi's business outside of the home is not as strong as Coke's, despite having some major restaurant chains as clients, such as Yum Brands, the owner of Taco Bell. The size of this company has not been disclosed by Pepsi.
International power 
In terms of global reach, Coke is more widespread than Pepsi. Pepsi's foreign sales account for about 40% of total sales, whereas Coke's foreign sales account for over 60% of total income, as reported by FactSet.
“There’s stronger growth in those international markets,” Edward Jones’ Quatrochi said.
More sluggish local demand, such as the 6% volume loss for Pepsi's North American beverage, can be counteracted by success elsewhere. It has a cost, though.
Due to hyperinflation in some foreign markets, such as Argentina and Turkey, Coke had to boost prices even after stopping price hikes in the US and Europe. Furthermore, Coke expects currency exchange rates to hurt its sales and earnings this year more than previously anticipated due to the high dollar.
Franchise its bottle business
The primary distinction between Pepsi and Coke cannot be found in their portfolios. That's how their soda is bottled.
Coca-Cola collaborates with independent bottlers who produce, package, and distribute its beverages to consumers. These bottlers have a thorough understanding of their markets and are capable of making wise judgements for their companies.
On the other hand, Pepsi owns over 75% of its bottling operations in North America. Although the plan aims to give the corporation greater control and reduce expenses, it also necessitates investing time and money in the bottling of soda, a market that has seen declining sales for almost 20 years.
“Right now, I think the whole bottling owned versus not owned is showing up in the results,” Modi said.

Christopher J. Mitchell

Markets | Companies | M&A | Innovation | People | Management | Lifestyle | World | Misc