A Key Test Is Coming for Coke and Pepsi. Here's What You Need to Know

Here's why 2015 could be a make-or-break year for Coca-Cola and PepsiCo.

Jul 16, 2014 at 6:00PM

Coca-Cola (NYSE:KO) and PepsiCo (NYSE:PEP) are known to have strong beverage franchises that carry significant pricing power. In theory, pricing power should shield them from competitive threats -- and even mitigate losses from industrywide declines in demand. Both companies have taken advantage of their pricing power, but neither has been able to completely offset beverage volume declines.

The next year will be a crucial test for both companies' beverage businesses. Keurig Green Mountain (NASDAQ:GMCR) could play a key role in it. If the channel innovations and new product introductions of Coca-Cola and PepsiCo do not lead to higher growth in 2015, investors may rightly doubt the beverage giants' durability. Here's what needs to happen for the two companies to pull it off.

New channels to reignite consumer interest
Coca-Cola and PepsiCo are branching into new distribution channels to reignite consumer interest in their beverages -- particularly soft drinks. Coca-Cola has already partnered with Keurig on the coffee company's newest innovation, Keurig Cold. Keurig Cold is due out in Keurig's fiscal 2015, which starts in October. The at-home carbonation system could claw back ex-soda drinkers who previously left the category for alternative beverages. If that happens, both Coca-Cola and Keurig would benefit tremendously.


Pepsi Spire is PepsiCo's answer to Coca-Cola's Freestyle.

PepsiCo may also benefit from Keurig Cold's success. The No. 2 soft drink company already serves the at-home carbonation market through its partnership with Bevyz, but CEO Indra Nooyi is open to the possibility of a partnership with Keurig. Nooyi says that PepsiCo is working with multiple platforms, telling investors that she's "making sure that we don't lock and load with any technology until the technology has proven out." My bet is that Nooyi waits until Keurig Cold's final design has been tested and manufactured before hitching PepsiCo to the platform.

In addition, PepsiCo recently announced Pepsi Spire, a new soda fountain that can be placed in restaurant chains and can compete with Coca-Cola's Freestyle. This could further boost buzz in the beverage world -- something that benefits both Coca-Cola and PepsiCo.

However, if Keurig Cold and other channel innovations do not lift soft drink sales in 2015, perhaps nothing ever will. That would warn investors that a long-term secular decline in soft drinks is under way.

New products are generating buzz
Although delivering beverages in new and interesting ways could reignite consumer interest in soft drinks, bringing new products to the market that suit consumers' preferences will produce larger long-term benefits.

Ko Life

Coke Life could put some life back into soft drink sales.

Later this year, Coca-Cola will begin US distribution of Coke Life, a stevia-and-sugar-sweetened mid-calorie version of its iconic Coca-Cola beverage. The launch comes after successful tests in Argentina. PepsiCo already distributes two similar drinks, Pepsi Next and Sierra Mist. However, those brands have been tarnished by accusations of false advertising and unnatural ingredients. If Coke Life's natural sweetener claim withstands health skeptics' scrutiny, it could be the answer to declining diet soft drink sales. This revelation would give Coca-Cola and PepsiCo a blueprint for the rest of their diet soft drink lines.

Coca-Cola and PepsiCo are also diversifying into non-soda categories. Bottled water, ready-to-drink tea, juice, and sports drinks are important parts of both companies' beverage portfolios. Coca-Cola derives about one-quarter of its total revenue from non-soft-drink beverages and PepsiCo derives more than one-third of its beverage revenue from non-soft drink beverages. These proportions will likely climb in future years, making them important contributors to overall growth. If soft drink innovations do not boost sales in 2015, investors should require strong sales of non-soda beverages if they want to hold onto their positions in these stocks.

Foolish takeaway
It's one thing to have a durable competitive advantage, and another to exploit it. Coca-Cola and PepsiCo own the best-selling brands in the soda universe, but have struggled to grow sales in the last couple of years. Although Foolish investors are long-term thinkers, sooner or later these companies need to perform. If Keurig Cold, Pepsi Spire, Coke Life, and other innovations cannot spark mid-single-digit volume growth in 2015, investors should reevaluate the soda giants' durability in the beverage industry.

Top dividend stocks for the next decade
Has your Coca-Cola investment disappointed? Don't worry. The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Ted Cooper is a member of an investment club that owns shares of Coca-Cola. The Motley Fool recommends Coca-Cola, Keurig Green Mountain, and PepsiCo. The Motley Fool owns shares of PepsiCo and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers