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Evaluation and comparison of PepsiCo and the Coca-cola company

Today Pepsi is a huge international and multibillion dollar soft-drink and snack food company second only to Coca Cola. It is hardly what Caleb Bradley had in mind when he created a soft drink formula in his North Carolina pharmacy store in 1898. In its early days Bradley sold only the syrup needed to make the Pepsi drink. Today we have countless choices of drinks and snacks all under the Pepsi name.

Caleb Bradley patented his formula in 1902 and started making and selling it out of his pharmacy. He had great success with it, and production increased almost exponentially. During World War I sugar began to be rationed and prices rose over 500%. Caleb had no choice but to declare bankruptcy and sell his business to Roy C. Megargel, and investment banker, in 1928. But Megargel had very little luck with the company as well and in 1931, just three years later declares bankruptcy himself.

A company by the name of Loft Inc. purchases most of the Pepsi shares and becomes a major shareholder of the corporation. After reorganizing, Pepsi begins to advertise on a massive scale. With the depression in full swing at the time Pepsi begins to sell 12 oz bottles of its product for just 5 cents compared to its competitor selling 6 oz bottle at the same price. It becomes known as the “poor man’s drink”.

It began to aggressively look to the international market, especially in Canada and Mexico. In 1934 Pepsi was finally able to open its first distribution center in an international market, Canada. From that point on the drink and the name had nowhere to go but up. New products were added to its list such as Diet Pepsi, Pepsi Free, etc.

In 1965 Pepsi joined forces with a large snake food industry know as Frito Lay. Thanks to this merger the company was able to make for the first time $1 billion in sales, its first but certainly not its last. Pepsi also become purchasing fast food restaurants such as Taco Bell, Kentucky Fried Chicken and Pizza Hut. But in 1997 it spun off these fast food chains into another company.

Today Pepsi make over $40 billion a year and this number is increasing every year. The brand name alone is worth over $12 billion which puts it in the top 20 most valuable names in the world. There seems to be no stopping this giant in the soft drink industry, but every company has a rival and Pepsi has some very powerful ones.

PepsiCo and The Coca Cola Company Performance

Ratio Comparisons: PepsiCo Inc

Fiscal Year 2009

Profitability

Growth

Cash Flow

Financial Health

Efficiency Ratios

Ratio Comparisons: The Coca Cola Company

Ratio Comparisons

Profitability

Growth

Cash Flow

Financial Health

Efficiency Ratios

Stock Charts: PepsiCo Inc

3 month stock chart

6 month stock chart

1 year stock chart

Stock Charts: The Coca Cola Company

3 month stock chart

6 month stock chart

1 year stock chart

Stock Prices: PepsiCo Inc

Stock Prices: The Coca Cola Company

Development: PepsiCo Inc

Product

Add more than 200 product variations a year to keep up with changes in consumer taste

“New Age” beverages

SoBe No Fear (energy drink)

SoBe Synergy (targeted to school-aged children)

SoBe Fuerte (Hispanic market)

Propel Fitness Water

Obesity concerns

Low-carb Doritos, Cheetos, and Tostitos

Health concerns

Natural and organic chips

Hispanic markets

Popular brands from a Mexican subsidiary (Sabritones Chile and Lime puffed wheat snacks)

Culture

Pepsi Refresh Project – Pepsi is awarding grants from $5,000 to $250,000 to consumer-generated ideas that will make a positive impact in the world. The program launched on January 13, 2010 and will award more than $20 million in 2010 to move communities forward.

Aug 27, 2010 - CVS Pharmacy and Boundless Playgrounds Join the Refresh Challenge to Support Children of All Abilities

Current Developments

Aug. 4, 2010 – PepsiCo announces company is investing USD $3 million over next three years to create Agricultural Development Center of Peru (CEDAP), which will develop new varieties of potatoes and other tubers and roots.

This is meant to develop new and healthier products and to encourage commercial cultivation of these species in ways that preserve biodiversity

Aug 16, 2010 – PepsiCo announces plan to invest USD $250 million in Vietnam over next three years.

New investment includes increasing manufacturing capacity, adding marketplace equipment, further strengthening brands, and broadening company’s product portfolio via innovation

Market Differentiation Strategy

Industry-leading Nutrition Goals

Reduce the average saturated fat per serving in key global food brands in key markets by 15% by 2020

Reduce the average added sugar per serving in key global beverage brands in key markets by 25% by 2020

Reduce the average sodium serving in key global food brands in key markets by 25% by 2020

Increase whole grains, fruits and vegetables, nuts, seeds, and low-fat dairy in its product portfolio

Environmental Goals

Provide access to safe water to three million people in developing countries by the end of 2015

Reduce packaging weight by 350 million pounds by 2012

Work to eliminate all solid waste to landfills from PepsiCo’s production facilities

Commit to an absolute reduction in greenhouse gas emissions across global operations

Future

Pepsico hopes to revive Quaker with new products

Pepsi plans to cut sodium by one-fourth in key brands in five years, and cut sugar per serving in drinks by 25 percent in the next 10 years.

Development: The Coca Cola Company

Product

Calorie concerns

2006 - Enviga, “negative calorie” green tea drink

2007 – Glaceau (Vitamin Water)

2009 – 90-calorie mini can (7.5 fl oz)

Culture

Live Positively – Coke’s project to help make a positive difference in the world through sustainability with focuses on climate protection, balanced living, education, and community

Give It Back Recycling Program – Coca Cola is asking for its consumers to return the cans and plastic bottles of Coke they buy in order to make backpacks, t-shirts, rugs, etc.

Aug 24, 2010 - Coca-Cola workers strike in Bellevue

Sept 1, 2010 – Strike announced at Edmonton Coca Cola factory

Current Developments

Sept 7, 2010 – Coca Cola Enterprises plans to sell its North American business to Coca Cola Co in the fourth quarter

Aug 30, 2010 - Coca-Cola West (Japan) to buy vegetable juice maker Q’sai for $421 million

Coca Cola Freestyle

A touch screen soda fountain with over 100 different Coca-Cola beverage products and custom flavors.

Market Differentiation Strategy

????

Future

Coca Cola drinks in Japan made from Kale, a nutrition but not very tasty vegetable, may turn up in stores

Coca Cola buys major Russian juice producer Nidan

Company Comparison

In PepsiCo’s 2009 Annual Report to shareholders, it identifies a plethora of competitors. Notable competitors include Dr. Pepper Snapple Group, Inc., Nestlé, and Kellogg. However, no rivalry is longer or larger than the one between PepsiCo and Coca-Cola. Not only are these two the first and second largest food and beverage companies in the world, these two have a vested interest in keeping the competition alive. In this industry, where margins and market share determine profitability, marketing plays a vital role in bringing in creating new loyal customers and maintaining the old ones. And both of these companies have benefited from the marketing of the other.

Product Comparison

It’s easy to compare these two companies given the similarity in their products. Both have well-known brands for soda, sports drinks, juices, and water. They both also see the benefit in vertically integrating their supply chain. While PepsiCo chose to purchase its two largest bottlers, The Coca-Cola Company has continued to hold a large share in their bottling companies. These companies compete on a product by product basis as is detailed in the chart below. It is important to note that one key line is not included, popular snacks. PepsiCo has acquired a multitude of brand named snack companies including Frito-Lay while Coca-Cola while having over 3,000 different beverages sells only that, beverages. This has helped PepsiCo diversify and increase its sales and market compared to Coca-Cola.

PepsiCo

The Coca-Cola Company

Bottling

Acquired Pepsi Bottling Group and PepsiAmericas

Owns 34% share of Coca-Cola Enterprises and 32% share of Coca-Cola FEMSA

Soda

Pepsi, Mountain Dew, and Mug

Coca-Cola, Fanta, and Sprite

Sports Drink

Gatorade

Powerade

Orange Juice

Tropicana

Minute Maid

Water

Aquafina

Dasani and Evian

Size and Profitability Comparison

As much as PepsiCo tries to compete on the same grounds as The Coca-Cola Company, for the time being Coca-Cola is still the leader in many ways financially. For one, PepsiCo is significantly smaller than The Coca-Cola Company. In 2009, PepsiCo’s Market Capitalization was only 80% of Coca-Cola’s. Furthermore, the Coca-Cola Company has continued to sell more efficiently than PepsiCo. In 2009, all of Coca-Cola’s profit ratios were significantly greater than PepsiCo’s. Perhaps this is partially explained by the greater number of employees PepsiCo employees. PepsiCo is winning out on top line growth however, with more than $10B in sales last year alone.

PepsiCo

The Coca-Cola Company

Stock Ticker

PEP

KO

Headquarters

Purchase, NY

Atlanta, GA

2009 Number of Employees

203,000

92,800

2009 Market Capitalization

$103 B

$130 B

2009 Sales

$43.2 B

$31.0 B

2009 Gross Profit Margin

53.5%

64.2%

2009 Operating Margin

18.6%

26.6%

2009 Net Profit Margin

13.8%

22%

Investment Comparison

At first glance, PepsiCo and Coca-Cola may seem like they are about equal when it comes to what stockholders are looking at. Shareholders want a maximum return on their investment either through an increased stock price or dividends. Given that PepsiCo and Coca-Cola are both seen as value stocks by most investors, the amount they provide in dividends is of significant importance. Given PepsiCo’s higher Dividends per Share in this category regardless of how small is worth noting.

(2009)

PepsiCo

The Coca-Cola Company

Dividends per Share

$1.77

$1.64

EPS

$3.86

$3.18

P/E

16.61

17.66

Qualitative Comparison

But a company is more than just its numbers. A company’s qualitative features like its core values and growth plans for the future are of equal importance. Both PepsiCo and Coca-Cola are interested in expressing a commitment to health, but they do it in significantly different ways. PepsiCo’s interest in health is centered around sustainability. They highlight their three commitments to human, environmental, and talent sustainability whereas Coca-Cola takes a more human centric view on health. It is specifically trying to promote a healthy lifestyle through education, nutrition information, and exercise. Both are trying to fight the obesity epidemic and offer healthier choices, but their ways vary.

The Decision to Invest

Industry Analysis

Before deciding whether or not to invest in PepsiCo, one must investigate if now is the time to investigate in its industry. The difficulty in studying PepsiCo’s industry is that it falls into a couple of industries. The Business & Company Resource Center returned eight possible industries, but the most salient one and the one PepsiCo aligns most with is the Bottled & Canned Soft Drinks Industry.

The good news for PepsiCo is that the soft drinks industry is now and is projected to remain extremely concentrated. PepsiCo, along with Coca-Cola, are either the cause or effect of this trend and have helped lead the United States to be the number producer and consumer of soft drinks. But this market is heavily saturated, and the regions projected to be able to offer the most growth in the next decade are the Asian and South America markets. By targeting these groups and catering to their cultural expectations, significant returns can still be made.

The biggest challenge for the industry going forward is addressing the growing concern that soft drinks are causing an obesity epidemic. By offering healthier alternatives, or perceived healthier alternatives such as diet colas, juices, and bottled water, this can be overcome. The significant investment that Pepsi has made in its campaign to promote a healthier lifestyle will also not go unnoticed.

The number one ingredient in soft drinks may become more difficult to obtain. The supply of water, the largest ingredient in almost all of Pepsi’s products, could become more strained as pollution and droughts continue to plague the resource. Developing a plan to share and conserve this resource and addressing all the growing concerns over its supply will be important for Pepsi.

Management Analysis

No company can be successful long term without the right management team. PepsiCo’s committed CEO has been with the company for almost two decades in a variety of strategic and operational leadership positions. She has a firm understanding of the industry as well the growth strategy that she has been implementing for years.

Perhaps more important than what PepsiCo’s leadership is known for, is what they aren’t known for. No member has gained public attention for unethical financial decisions or misdoings.

What else should be included here?

Expert Opinions

February 20, 2008 - “While many companies saw business decline in the fourth quarter, PepsiCo met expectations even after investing heavily abroad for growth. It posted a 17% gain in revenue and an 11% increase in operating profit as core brands came through. The company had double-digit growth in snacks and drinks in emerging markets.” (article from 2008)

http://articles.moneycentral.msn.com/Investing/CompanyFocus/WhyPepsiCoStockIsABuyNow.aspx

April 14, 2010 – Coke or Pepsi: Which stock to buy?

“The ability to leverage sales across a wider variety of products will be a powerful driver for PepsiCo here and overseas.”

This is referring to PepsiCo and snack items

http://articles.moneycentral.msn.com/learn-how-to-invest/coke-or-pepsi-which-stock-to-buy.aspx

Summary


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