On a micro level, the events of the past two weeks illustrate how Pepsi (NYSE:PEP) and Coca-Cola (NYSE:KO) have taken divergent paths. First, Coke released a surprisingly grim outlook, cautioning that flat worldwide unit case volume growth would leave second-half results below expectations. Management cited a number of reasons for the adverse operating conditions, running the gamut from "environmental legislation" to "retail de-stocking" to "unseasonably cool and rainy weather in the highly-profitable Northern European markets."
The dour news sank Coke's stock to 19-month lows, and as Rick Aristotle Munarriz recently noted, to within shouting distance of levels not seen since 1995. Meanwhile, while Coke has been mired in profit warnings, management shake-ups, and analyst downgrades, Pepsi has quietly put together another solid quarter. This morning, the company posted a 35% rise in net income to $1.36 billion, on revenues that climbed 6.3% to $7.26 billion. Excluding a tax gain, earnings jumped 14% to $0.66, a penny ahead of estimates.
While a 4% drop in carbonated soft-drink volume drove overall North American beverage volume 1% lower, the noncarbonated beverage volume rose 5%. Sales of Gatorade X-Factor, Propel Fitness Water, and a new line of Tropicana juice drinks were particularly brisk. Segment operating margins expanded 100 basis points, resulting in an 8% increase in operating profits to $542 million.
International operations were even stronger, as both carbonated and noncarbonated beverage volumes improved by double digits. Year to date, overseas snack volumes and beverage volumes have risen 9% and 12%, respectively. Quarterly operating profits in the international segment soared 29% to $370 million (with currency fluctuations taking a fractional bite out of the bottom line) on an 11% rise in revenues.
Frito Lay's revenues grew 5% to $2.3 billion, but a waning public appetite for salty snacks has forced Pepsi to consolidate by shuttering four facilities, scaling back the workforce by a few hundred positions. The company expects to record a pre-tax $160 million fourth-quarter charge related to the closings. Despite the charge, Pepsi raised its 2004 forecast by $0.06 to $2.35.
While Coke's fortunes are largely tied to a carbonated beverage market that is stuck in the doldrums, Pepsi has a far more diversified revenue stream. With 200 new products launched last year alone, Pepsi is clearly the leader in product innovation. Furthermore, only 37% of the firm's sales are derived from beverages, with the rest coming from Quaker Foods and Frito Lay, which has a stranglehold on the salty snack market.
Consumers are increasingly washing down those snacks with noncarbonated drinks, where Pepsi maintains a decided advantage. It has done a better job of keeping its finger on the collective pulse of the consumer, and was much quicker to jump into the faster-growing noncarbonated market. This subcategory now represents 30% of Pepsi's overall beverage sales, a number that continues to rise steadily.
We may never see an end to the cola wars, but for now at least, Pepsi's tactics appear to be paying off.
Would you like a soda-industry refill? Try one of these:
- Coke Is Currently Not It, by Steven Mallas
- Diet Sprite Means Zero to Coke, by Steven Mallas
- Does Soda Kill?, by Rich Smith
- Is Pepsi Losing Fizz?, by Alyce Lomax
- Coke's New "New Coke," by Rich Duprey
Fool contributor Nathan Slaughter owns none of the companies mentioned.
