Coke and Pepsi have been rivals for decades, with Coke usually coming out on top.
- IMPORTANT NOTES
- Coke and Pepsi both outperformed Wall Street expectations for their third-quarter earnings, but only Coke reported volume gain.
- The stocks of both companies have struggled this year as investors worry about rising interest rates and the potential negative impact of weight-loss medicines.
- However, Coke’s business appears to be improving, thanks to rising demand for its beverages.
Coke and Pepsi: The stocks of the beverage leaders have struggled this year, harmed by increasing interest rates and market fears about the potential detrimental impact of weight reduction medications such as Wegovy. (Coke’s market valuation of $242 billion exceeds Pepsico’s by about $20 billion.)
Despite this, both corporations outperformed Wall Street expectations for their third-quarter earnings and upped their full-year predictions. Strong demand for Coke products prompted the Atlanta-based corporation to lift its prediction, while Pepsico’s cost-cutting efforts have boosted its full-year earnings outlook.
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Only Coke, however, reported volume growth. The indicator, which excludes the effects of pricing and currency, has grown more important to investors in recent quarters as food and beverage businesses halt price increases that propelled sales growth last year. The same price rises have turned off other buyers who are looking to save money on their food expenditures.
In the third quarter, Coke’s overall volume increased by 2%, while Pepsi reported flat beverage volume and a 1.5% fall in food volume. The disparities between the two businesses were even more pronounced in North America. Coke reported stable volume, while Pepsi’s North American beverage segment reported a 6% drop in volume. Coke also improved its full-year top- and bottom-line forecasts, although rival Pepsi merely raised its full-year earnings projection, implying that the stronger outlook may not be due to higher demand for its products.
Here are the five major variables that helped Coke beat Pepsico:
Pricing strategy of coke and pepsi
In the spring of 2021, Coke began hiking prices across its portfolio. PepsiCo followed suit, beginning its own price increases that summer. Both companies stated that increasing prices had increased sales more than two years later. Pepsi temporarily halted pricing increases earlier this year but intends a “modest” increase next year. Coke took longer to stop raising prices, but CEO James Quincey announced in July that the business is no longer raising prices in the United States and Europe. Coke’s North American drink prices rose only 5% this quarter due to the timing of their price hikes, compared to Pepsi’s 12% increase.
“The greater the price increase, the greater the drag on volume,” Edward Jones analyst Brittany Quatrochi said.
Better brands
However, Coke is also gaining over customers with its beverages, while Pepsico is focusing on rejuvenating some of its non-soda brands, such as Gatorade.
“Coke has been taking share from Pepsico for many, many quarters,” said Nik Modi of RBC Capital Markets.
When Pepsico’s beverage business fails, it is usually saved by its Frito-Lay division, which includes Cheetos, Doritos, and other snacks. Snacking, however, has slowed as buyers switch to cheaper 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,” he added.
As the cost of a bag of chips has risen, some buyers have turned to private-label products — or even leftovers from the fridge. Pepsico is also discontinuing less profitable promotions. The plan boosts earnings but reduces North American drink volume by 2.5%, according to officials on the company’s conference call.
Away-from-home business
During the early days of the pandemic, executives stated that roughly half of Coke’s sales originate from out-of-home activities such as movie theater visits or dining out. Quincey noted on Tuesday’s conference call that away-from-home purchases rose faster than the company’s at-home business in the third quarter.
“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 investors in a telephone interview.
Coca-Cola may potentially gain from customers trading down outside of the grocery store.
“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,” he said.
McDonald’s, for example, has recently reported that diners trading down to its restaurants had increased its U.S. sales. Since Ray Kroc’s first franchised store, McDonald’s has served Coke products and is the beverage company’s largest restaurant customer.
Pepsi, on the other hand, lags behind Coke in its out-of-home business, despite having several significant restaurant corporations as customers, such as Taco Bell owner Yum Brands. The scale of this business has not been disclosed by Pepsi.
International strength
In addition, coca-cola has a wider international presence than Pepsi. According to FactSet, over 40% of Pepsi’s sales originate from outside the United States, whereas more than 60% of Coke’s revenue comes from international markets.
“There’s stronger growth in those international markets,” Quatrochi of Edward Jones remarked.
International success can compensate for slower domestic demand, such as Pepsi’s North American beverage’s 6% volume loss. But this comes at a cost. Some international markets, like Argentina and Turkey, have experienced hyperinflation, prompting coca-cola to raise prices even after suspending hikes in the United States and Europe. Furthermore, due to the high dollar, coca-cola believes that currency exchange rates will reduce its sales and profitability more than previously anticipated this year.
Franchising its bottling
The most significant distinction between coca-cola and Pepsi is not found in their portfolios. It’s how they package soda. Coca-Cola collaborates with independent bottlers who make, package, and ship their beverages to customers. These bottlers are well-versed in their markets and can make sound business judgments on their own.
Pepsi, on the other hand, owns nearly three-quarters of its North American bottling operations. The plan is intended to help the corporation gain more control and save costs, but it also necessitates investing resources and capital in bottling soda, a sector that has seen declining demand for over two decades.
“Right now, I think the whole bottling of owned versus not owned is showing up in the results,” he said.
Frequently asked questions
Are Coca-Cola and Pepsi the same company?
No, Pepsi and Coca-Cola do not belong to the same firm. In the beverage sector, they are two distinct and competing companies.
What is the relationship between Coca-Cola and Pepsi?
The cola wars are a long-running rivalry between soft drink companies The Coca-Cola Company and PepsiCo, which have engaged in mutually-targeted marketing campaigns for direct competition between their respective product lines, particularly their flagship colas, Coca-Cola and Pepsi.
Which is better Pepsi or Coca-Cola?
While coca-cola won on flavor and perceived caffeine levels, PepsiCo fared significantly better than its rival throughout the pandemic.
Click here to learn more about Coca-Cola and Pepsi.
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