Will Coca-Cola or Pepsi Win The Soda War?

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Among the major soda purveyors, it's understandable to consider Coca-Cola  (NYSE: KO  ) and PepsiCo (NYSE: PEP  ) as one-and-the-same. After all, their namesake sparkling beverages have competed against each other for decades, and together they've dominated the soda business.

As it happens, though, the present day represents a vastly different place in terms of consumer preferences. Consumers, particularly in the United States, are more health-conscious than ever. The demand for lower-calorie, less-sugary beverages is rippling through the soda industry, and the end result is stagnating case volume shipments for the twin industry heavyweights.

One of the two titans of soda has acknowledged this trend and charted a different course, while the other has no plans to be anything but a sparkling beverage company. That's why, as it appears to me, there's a clear winner of the soda wars.

One company takes a strategic turn
Pepsi appears to be the one accepting the fact that consumers want to live healthier lifestyles. In response, several years ago Pepsi slowly built a portfolio of brands outside its previous core competency. Well-known brands that are now under the Pepsi umbrella include Gatorade, Quaker, and Frito-Lay. Right now, Pepsi's revenue is almost evenly split between food and beverages. Meanwhile, Coca-Cola still derives the vast majority of its sales from sparkling beverages.

As far as Pepsi's strategy is concerned, the results speak for themselves. Pepsi grew revenue and earnings per share by 2% and 12%, respectively, over the first nine months of 2013. Compare this to Coca-Cola, whose revenue and EPS both fell 2% through the first three quarters of the year. While Coca-Cola remains a blue-chip company that registers hefty profits year in and year out, there's no denying the company's underlying results have hit a snag.

To be fair, both Coca-Cola and Pepsi have richly rewarded shareholders over many decades. Both companies have paid and increased their dividends for many years in a row. Coca-Cola and PepsiCo have increased their dividends for 51 and 41 consecutive years, respectively. And, each stock yields roughly 2.7%, which is better than the 2% payout of the broader market.

If dividends are your primary concern, Dr Pepper Snapple  (NYSE: DPS  ) might be for you. That's because Dr. Pepper Snapple yields 3.2%, significantly above both Coca-Cola and Pepsi, as well as the overall market. Moreover, Dr. Pepper Snapple is a much smaller competitor than the two industry giants, with a market capitalization of just $9 billion. As a result, Dr. Pepper Snapple might have more room for stock appreciation, since it's got more room to grow due to its much smaller size.

At the same time, Dr. Pepper Snapple is seeing its fair share of troubles to start the year. The company's sales are flat over the first nine months, and operating income has actually declined during the first three quarters of 2013.

While Coca-Cola and Pepsi have delivered strong results for their shareholders for many years, what matters for investors is what the future holds. And when it comes to Coca-Cola and Pepsi, the vastly different strategies laid out by each company's management teams mean there may be a clear choice going forward.

Which soda giant has the brighter future?
Coca-Cola and Pepsi are both immensely profitable, well-run businesses, that are deeply committed to providing generous cash returns to shareholders. That being said, there is a clear divergence forming between the two consumer goods giants. Pepsi is now a pure soda company in name only. It has broken away from sparkling beverages in a meaningful way, because it has seen the writing on the wall. Consumers have spoken, and soda companies are feeling the heat.

Pepsi has proven to be a more visionary company than Coca-Cola, in my estimation, since Coca-Cola has remained steadfast in its position as a pure-play soda company. As a result, because of its more diversified portfolio of products, I don't consider Pepsi to have the same level of risk as Coca-Cola. There appears to be a winner of the soda wars, at least for the time being: Pepsi.

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Read/Post Comments (2) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 18, 2013, at 9:52 AM, MatteoFronz wrote:

    Bob, I think your article is a bit one-sided.

    Despite what concerned readers might think, the flagship Coca-Cola brand is not fading away. Coca-Cola’s sales are increasing.

    In the last quarter, North American sales of Coca-Cola’s flagship brand “Coca-Cola” grew 2% (a strong number for a company as huge as Coca-Cola).

    And what about Coca-Cola's is strong overseas growth?

    Sparkling beverages (think “soda”) volume, led by the Coca-Cola brand, increased in Thailand (+27%), India (+22%), Russia (+11%), the Philippines (+9%), and Germany (+8%).

    Non-sparkling beverage volume grew too. Ready-to-drink tea grew 5% in the quarter. Energy drinks grew 4%. And packaged water grew 5%.

    You say "Coca-Cola has remained steadfast in its position as a pure-play soda company."

    Coca-Cola isn’t just a “soda” company. Coca-Cola is well aware of the “health” challenges it faces. That’s why the company has been expanding its beverage portfolio for years.

    glacéau vitaminwater, SmartWater, Dasani, Hi-C, Honest Tea, Powerade and NOS Energy Drink are are all Coke products.

    According to Coca-Cola’s 2012 annual report, sports drink sales increased by 6%, waters by 12%, and energy drinks by 20%.

    Ten years ago, Coca-Cola’s total sales were $21 billion.

    Last year, sales came in at more than $48 billion. That’s a 130% increase in 10 years!

    Bottom line, with due respect: Coca-Cola isn’t going anywhere.

  • Report this Comment On November 18, 2013, at 2:48 PM, knpstr wrote:

    "Coca-Cola isn't going anywhere" is essentially the thesis of this article, meaning not that it isn't going out of business but that it's long term outlook may not be as strong as it once was.

    Certainly the brand isn't going out of business anytime soon, or losing its position as the #1 cola. The thesis is that over the long term people may consume less cola for health reasons and it will make its flagship less valuable. I don't necessarily buy this thesis, however it is a valid concern.

    It's something to ponder as none of us can predict the future.

    Your response seems a little too personal, or maybe should contain a disclaimer that you own KO ;)

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