The enduring rivalry between beverage giants Coca-Cola and PepsiCo has spanned decades, with Coca-Cola traditionally emerging as the frontrunner. In the most recent quarter, this trend continued, as both companies struggled due to higher interest rates and concerns surrounding the potential negative impact of weight loss drugs like Wegovy. Despite these challenges, both Coca-Cola and PepsiCo exceeded Wall Street’s expectations for their third-quarter results and raised their full-year forecasts. However, only Coca-Cola managed to report volume growth, a metric that has become increasingly crucial for investors as price hikes wane and consumer focus shifts towards saving money. In this article, we will delve into the five key factors that have contributed to Coca-Cola’s edge over PepsiCo.
Coca-Cola took the initiative to raise prices across its product portfolio in the spring of 2021, with PepsiCo following suit later that summer. The impact of these price increases was evident in their sales performance, with both companies reporting a boost in revenue. However, the timing of these increases played a significant role in the volume differences between the two rivals. While Coca-Cola’s North American drink prices increased by only 5% this quarter, PepsiCo’s prices saw a staggering 12% hike. This discrepancy resulted in a smaller volume drag for Coca-Cola, which managed to win over shoppers with its beverages, while PepsiCo diverted its focus towards revitalizing non-soda brands like Gatorade. As a result, Coca-Cola has consistently gained market share over PepsiCo in recent quarters.
PepsiCo has typically relied on its Frito-Lay unit, which includes popular snack brands like Cheetos and Doritos, to compensate for any shortcomings in its beverage division. However, the snacking industry faced challenges as consumers sought cheaper alternatives amidst Frito-Lay’s double-digit price increases. The rising cost of a bag of chips led some shoppers to turn to private-label brands or forgo snacking altogether. While PepsiCo’s earnings benefited from its strategy to eliminate less-profitable promotions, it resulted in a 2.5% decline in North American drink volume. In contrast, Coca-Cola managed to navigate these challenges more effectively, as its focus on beverages allowed it to capitalize on changing consumer preferences.
The COVID-19 pandemic drastically altered consumer behavior, causing a significant shift from away-from-home purchases to at-home consumption. Coca-Cola, which relies on away-from-home occasions like movie theater visits and dining out for roughly half of its sales, experienced a rebound in this segment during the third quarter. The growth in away-from-home channels, including restaurants, amusements, travel, and hospitality, contributed to Coca-Cola’s overall volume growth. Moreover, consumers trading down from mid-tier restaurants to quick-service fast-food establishments benefited Coca-Cola, as it has a stronger presence in these venues. In contrast, PepsiCo struggled to capitalize on away-from-home opportunities as it lagged behind Coca-Cola in this aspect.
Coca-Cola holds a distinct advantage over PepsiCo in terms of international presence. Approximately 60% of Coca-Cola’s revenue is derived from international markets, while only 40% of PepsiCo’s sales originate outside of the United States. The stronger growth in international markets has allowed Coca-Cola to offset sluggish domestic demand, such as the 6% decline in PepsiCo’s North American beverage volume. However, the international success comes with its own set of challenges. Some markets, like Argentina and Turkey, have been grappling with hyperinflation, forcing Coca-Cola to implement price increases even after pausing them in the U.S. and Europe. Additionally, the impact of the strong dollar on currency exchange rates has dampened Coca-Cola’s sales and earnings, more than initially anticipated.
One noteworthy disparity between Coca-Cola and PepsiCo lies in their approach to bottling their beverages. Coca-Cola collaborates with independent bottlers who have profound knowledge of their respective markets, enabling them to make informed decisions for their businesses. In contrast, PepsiCo owns over three-quarters of its North American bottling operations, a strategy aimed at exerting greater control and reducing costs. However, this ownership necessitates the allocation of resources and capital to bottling soda—an industry facing declining demand for almost two decades. This aspect of their business models seems to be reflected in their respective results.
While Coca-Cola and PepsiCo continue to vie for dominance in the beverage industry, Coca-Cola’s recent performance demonstrates its distinct advantages over its rival. Strategic price increases, a stronger focus on beverages, success in away-from-home channels, greater international presence, and a more flexible bottling strategy have contributed to Coca-Cola’s edge. As these two giants navigate the ever-changing landscape of the food and beverage market, their ability to adapt and leverage their unique strengths will determine their future success.
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