Coke vs. Pepsi... Are the Cola Wars Finally Over?

by Tony D'Altorio

Coke vs. Pepsi... Are the Cola Wars Finally Over?

by Tony D'Altorio, Investment U Research

PepsiCo (NYSE: PEP) is one of the world's most familiar consumer food and beverage companies, offering brands like Frito-Lay, Gatorade, Tropicana and Quaker.

It's best known, of course, for is its flagship soft drink brand... and its rivalry with Coca-Cola (NYSE: KO).

The Coke vs. Pepsi conflict raged on for decades across the country on supermarket shelves, fast food restaurants and the like.

Coke always held the bigger market share in this area. But at times, Pepsi - fueled by smarter and more aggressive advertising campaigns - moved ahead.

Many investors believe the cola war is still going strong. But that's where they're wrong.

Sure, the TV commercial designed to show that PepsiMax tastes better than Coke Zero rather smacked of the blatant competition in the 1980s and 1990s. But in reality, Pepsi surrendered; the war was lost.

Yet in comes Indra Nooyi, PepsiCo's CEO as of 2006, and the game completely changes.

A former management consultant, she decided not to duke it out directly with Coke. Instead, she's trying to redefine the playing field...

Pepsi's New Strategy: Better-For-You Products

U.S. Consumption of carbonated soft drinks has steadily declined in the past decade.

Part of that comes down to the array of alternative beverages the market now offers. Part of it comes down to health concerns in a nation with an obesity problem.

But rather than buck the trend, Ms. Nooyi seeks to refocus Pepsi. "Lifestyles have changed," she notes, "And we have to modify our products."

In that spirit, she's focusing the company more on water, juices, teas and sports drinks.

Pepsi's top brands in those areas include Aquafina and Gatorade. And while it trails in soft drink sales, it leads the world in ready-to-drink teas through Lipton, while its Tropicana wins out in juices/nectars.

The company is betting big on creating healthy foods through its Quaker Oats, Gatorade and Tropicana divisions. And it just began the Global Nutrition Group to deliver breakthrough products.

Nooyi says the new Group "is part of our long-term strategy to grow our nutrition business from about $10 billion in revenues today to $30 billion by 2020.

To further that goal, Pepsi hired several well-known nutritionists to direct its efforts at reducing fat, sodium and sugar in its products. Already, Lay's potato chips have 25% less sodium... and by 2011, they'll be made from 100% natural ingredients.

As Caroline Levy, a CLSA analyst, noted, "PepsiCo is currently focused on better-for-you" products.

Coke's Consistent Strategy Wins the Cola War

Meanwhile, Coca-Cola doesn't seem to care about what Pepsi has accepted. CEO Muhtar Kent not only continues to focus on selling soft drinks globally, but even vows to rebuild Coke sales in the U.S. market.

  • And admittedly, Coke's beverage volume in North America dropped only 2% last year. 2009 was extremely difficult economically on top of a relatively cool summer.

  • In comparison, Pepsi's beverage volume in the same region plunged 8%.

According to Beverage Digest, this makes Coca-Cola brand the uncontested U.S. heavyweight.

Indeed, looking at all carbonated soft drinks, Coke brands commanded 41.9% of the total market last year compared to PepsiCo's 29.9%.

The same goes for the companies' flagship brands. Through 2009, Coca-Cola commanded 17% of the U.S. soft drink market; Pepsi held only 9.9%.

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And while both brands have been declining, Pepsi is doing so at a slightly faster rate.

Pepsi Admits Defeat... Goes On New Health Kick

As far as Pepsi is concerned, the cola wars are over. It now needs to focus on convincing investors that it has the right focus in this new health kick.

Currently, the Global Nutrition Group is little but a nice marketing tool. Whether Pepsi can really develop healthier foods and drinks while still coming up with new types of chips and soda flavors... well, that's the question.

It recently reduced the top end of its guidance for earnings growth this year from 13% to 11%. This may be due to increased investment in nutrition... or because of a difficult, competitive global environment.

Coke, among others, continues to steal market share away from Pepsi.

Ms. Nooyi should not neglect the company's core business. Carbonated beverages still produce much of the company's sales and for now, they're still key to Pepsi's future health.

Good Investing,

Tony D'Altorio

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