The Cola Wars (Drip Port) April 19, 1999

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The Cola Wars
Coca-Cola vs. PepsiCo.

by George Runkle (TMFRunkle)

Atlanta, GA (April 19, 1999) -- The very first cola was Coca-Cola, and over the years many imitators appeared. The first real competitor, however, was Pepsi. As many years have gone by, the two have competed mercilessly for market share. Sometimes PepsiCo (NYSE: PEP) is ahead, sometimes it's Coca-Cola (NYSE: KO). There is a little strange twist to this war, though. Unlike the horrible scenes we are seeing on television, both sides are probably winning in the Cola Conflict.

When I worked for a major oil company, we knew that if a competitor opened on an opposite corner, both gas stations would do more business. This is probably why you see fast food outlets congregating in the same place. The Pepsi/Coke competition helps each company through the advertising and publicity generated by both companies.

Let's look at the two companies and see how they appear financially. Now, we really are not comparing apples to apples yet. Pepsi spun-off its restaurants and other non-cola assets in 1997, which throws off the numbers a bit. In 1998, it divested its bottling operations into the Pepsi Bottling Group. It also acquired Tropicana in 1998 to compete with Coke's Minute Maid. This makes PepsiCo more like the Coca-Cola Co. in that Coke concentrates on soft drinks and some fruit drinks. Coke also has significant holdings in Coca-Cola Enterprises, which does the bottling for the company. So, in the next few years the two companies will be operating on much the same model. (Pepsi still has a large and highly profitable snack food division, of course.)

One area that jumps out immediately is Gross Margin. Coke has a Gross Margin for 1998 of 70%, Pepsi's is only 58%. Return on Equity (ROE) is 42% for Coke, for Pepsi it is 31%. Now, Coke has recently dropped in its Return on Equity. In 1997, it had a ROE of 57%. Over time, Pepsi has stayed the same. Both have suffered a declining Return on Assets (ROA). Pepsi went from 11% ROA in 1997 to 9% in 1998. Coke went from 24% to 18%. Still, Coke is winning here. Pepsi's Current and Quick Ratios dropped, but then again, it has spun off assets, so that is expected. Coke beats them here, too: it has a Current Ratio of 0.81 vs. 0.55 for Pepsi, and a Quick Ratio of 0.63 vs. Pepsi's 0.42. Current and Quick Ratios are a measure of assets vs. liabilities, and higher is better. See my column of April 5, 1999, which explains the different ratios.

Inventory Turnover (days to sell all inventory) and Day Sales Outstanding (days to collect on accounts receivable) are not significantly different at the two companies. However, I did notice that Operating Revenues are increasing for Pepsi. In 1997, it brought in 7% more, while Coke lost its fizz and stayed flat. (Sorry about the puns, I couldn't resist.) This is probably due to its concentration in its core business, and Coke has had trouble in many overseas markets. The economy in many areas of the world is not as good as it is here.

Let's look at a couple of other items. Pepsi has a P/E of 28 vs. Coke's P/E of 45. If you look for lower P/Es, Pepsi wins here. I prefer to ignore the P/E here, though. Often a poorer performer will carry a low P/E, since the market does not feel it is worth the money. In the past three years, Coke's stock price has increased 52%. Pepsi has returned 23.4%. You can look at that as Coke having a stronger relative strength, and that it should be able to continue providing good returns. OR, you could say that Coke's price has gotten away from itself, and Pepsi may be a better deal. Am I making the waters muddy (or caramel colored) or what?

In the end, I personally go with Coke. Since arguments can be made for each company, the winning reasons for me are:

1. I like Coke better than Pepsi.
2. I live in Atlanta, and buying Pepsi stock would be High Treason.
3. I already own stock in Coke, and its Drip has automatic investments (Pepsi's doesn't).

For further information on Coke and it's Drip, check out www.coca-cola.com. For Pepsi, check out www.pepsico.com. I did not cover why people buy Pepsi and Coke when there are zillions of supermarket brands that sell much cheaper. In next week's column we'll look at branding and how it adds value to a company.

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