Investment Analysis of Pepsi vs. Coca Cola
For decades, Pepsi and Coke have always been the leading rival- global brands when it comes to soft drinks. Over time, their operations and products have evolved to cope with the changing consumer demands and business environment, but their leadership and competitive position in the global market remain strong. The following are some insights about the companies behind these products and what makes them a worldwide success.
PepsiCo’s history dates back in the 1890s with the formulation of Pepsi-Cola by Caleb Bradham. However, it was only in 1919 when Pepsi Cola Company was incorporated in Delaware by founder Donald M. Kendall who became the company’s president and chief executive officer. Subsequently, it was reincorporated in 1986 in North Carolina. Up until 1940s, Pepsi has been the company’s banner product. Then, Mountain Dew was introduced by Tip Corporation in 1948, followed by launched of Diet Pepsi in 1964 (PepsiCo Inc., 2013).
-Excerpts of Pepsi’s Changing Logos
Nowadays, PepsiCo manufactures and markets a variety of foods and beverages through authorized bottlers and third party manufacturers and distributors. It operates under four business units that manage the company’s businesses in the regions where it exists (PepsiCo Inc., 2013).
- PepsiCo Americas Foods handles the Frito-Lay North America (FLNA), Quaker Foods North America (QFNA) and Latin American food and snack businesses.
- PepsiCo Americas Beverages (PAB) oversees the North and Latin American beverage businesses.
- PepsiCo Europe (Europe) manages the European and South African business operation.
- PepsiCo Asia, Middle East and Africa (AMEA) has oversight for the region’s beverage, food and snack businesses.
Among the foods and snacks PepsiCo offers are Frito-Lay snack foods, Doritos tortilla chips, Cheetos, Ruffles, Quaker’s cereals and snacks. For drinks, the company manufactures/co-partners in producing and distributing diet and regular Pepsi, Gatorade, diet and regular Mountain Dew, Aquafina, 7UP, Tropicana, Dr. Pepper, Snapple, and Ocean Spray. Its customers are mainly wholesalers, distributors and large-scale restaurants, stores and supermarkets. In terms of competition, Coca-Cola Company is still its main rival in the beverage area. For snacks and other food products, it battles with local and multinational branded companies such as Nestle, ConAgra Foods, and Kellogg (PepsiCo Inc., 2013).
Spearheaded by its Research and Development Team, the company promotes innovation in terms of improving its existing products or finding new ones. PepsiCo highlights this pursuit for innovation and entry into emerging markets as their key strategic initiatives that will continue propel its sustainable growth in the coming years (PepsiCo Inc., 2013).
Around the same time Pepsi Cola was being formulated, Coca-Cola was likewise being developed in 1886 by another pharmacist in Atlanta called Dr. John S. Pemberton. His syrup made it to the market and his partner, Frank M. Robinson, named the beverage Coca-Cola as well as, registered its trademark which is still currently being used. The company was later on incorporated in the State of Delaware in September 1919 which carried on the same name that it was recognized for since 1892 (Coca-Cola Company, n.d.).
Since then, like PepsiCo, the company’s ownership and management have changed several times. However, unlike PepsiCo, Coca-Cola has kept its core business in the beverage manufacturing and marketing sector. It has blossomed to be the world’s largest beverage company with over 500 nonalcoholic beverage brands, including, sparkling beverages, waters, juices, sport drinks, and ready –to-drink teas and coffees. It is proud to own four of the top five nonalcoholic sparkling beverage brands, which are Coca-Cola, Diet Coke, Fanta and Sprite. Other branded beverages include Minute Maid, Powerade, and Dasani (Coca-Cola Company, 2013).
-Excerpts of Coca-Cola’s Changing Logos
Currently, Coca-Cola Company manufactures and markets its products through company-owned or licensed third party bottling plants, distributors, and wholesalers. Its operating segments are Eurasia and Africa, Europe, Latin America, North America, Pacific, Bottling Investments and Corporate. Like PepsiCo, Coca-Cola recognizes the seasonality of its products that is mainly affected by weather condition. More consumption is observed during the summer time when the weather is warm. It competes in the sparkling beverages line mainly with PepsiCo. Similar to PepsiCo, the company also encounters brand battles with the likes of Nestle, Kraft Group, Unilever, as well as local brands in the countries where it operates (Coca-Cola Company, 2013).
Coca-Cola credits its strong brand awareness, financial strength, global distribution and marketing system and people for its success. These are the company’s core strengths that it hopes to continue to deliver value to shareholders (PepsiCo and Coca-Cola Company, 2013).
Issues Faced by Coca-Cola and PepsiCo
Lately, consumers are becoming more and more conscious about global companies’ social responsibility in operating sustainably. Both Coca-Cola and PepsiCo’s beverage manufacturing are intensive users of water, which is considered a limited resource in many countries where it produces its branded beverages. There is a pressure to conserve this resource or utilize it sustainably. At the same time, as demand for good quality of water increases given the increasing population in those countries, production cost is being threatened (PepsiCo and Coca-Cola Company, 2013).
Another area that is receiving scrutiny for both companies is in the public health issue. Consumers are now more aware of the consequences of obesity or diabetes which are mainly caused by consumption of sugar-sweetened beverages or other nutritive sweeteners. This has put pressure in their operations to innovate towards healthier products (thus, the “lite or zero” products), and responsible labeling and advertising (PepsiCo and Coca-Cola Company, 2013).
Global business environment is also changing. Intensifying competition in the market for nonalcoholic beverages is squeezing profits. In the mean time, big retailers are demanding lower costs of doing business which is adding pressure on the bottom line. There are also the macro-economic factors that influence the operations of both companies globally. Foremost of this is the fluctuation of foreign currency exchange rates. Moreover, aside from uncertainty in socio-political conditions in countries where bottling and distribution partners operate, there is the overall economic condition to contend with. These includes interest rates, raw material, fuel and labor cost, and changing laws and regulations, which all pose as risk and threats to operations and profitability (PepsiCo and Coca-Cola Company, 2013).
In analyzing the both companies’ profitability, the following ratios are used Demonstrating Value (n.d.):
- Net Profit Margin= Net Profit/ Sales. This is to show how efficient each company is in generating earnings for every dollar spent.
- Return on Assets = Net Profit Average/ Total Assets. This is to provide measure on the companies’ ability to convert existing assets into profits.
- Return on Equity= Net Profit/ Average Shareholder Equity. This is considered as one of the most important ratios to investors to indicate if they are making enough earnings for the risk they are taking for investing into the business.
Below is a table summarizing the results of the calculated profitability ratios.
In terms of net profit margin, Coca-Cola is at 18%, which better off compared to PepsiCo at 10%. This indicates that Coca-Cola is managing its operation more efficiently than PepsiCo. PepsiCo’s lower ratio may be attributed to its more diverse products and presence in emerging countries to which it may have lesser control of as it partners with local businesses. This is impacting its bottom line significantly.
Similarly, base on return on assets (ROA), Coca-Cola by far shows better result at 53% compared to PepsiCo at 8%. Due to PepsiCo’s diverse operation, the overall margins and investments required in snack foods and beverages could be eating up on its profitability and impacting efficient returns on its assets. Meanwhile, return on equity (ROE) is slightly higher in PepsiCo at 29% vs. Coca-Cola at 26%, which indicates more favorable condition for investors. However, if debt-to-equity ratio is considered, one of the reasons PepsiCo has better ROE because it is leveraged higher than Coca-Cola. PepsiCo’s debt-to-equity ratio in 2013 is 2.17 compared to Coca-Cola’s 1.69. This only means higher risk for investors in PepsiCo than for Coca-cola, which is consistent with its ventures into non-beverage business such as foods and into emerging markets.
Income Statement: Pepsi vs. Coca Cola
While the profitability ratios of Coca-cola seem more attractive than PepsiCo, the trend analysis of their income statement is telling a different story. From 2012 to 2013, PepsiCo grew by 1.4% in terms of revenues and 9.1% in terms of net income. On the other hand, Coca-Cola’s revenues declined by 2.4%, and its profits by 4.8%. This indicates that although Coca-Cola’s operation is more efficient than PepsiCo, it has failed to capture growth in the maturing and globally challenging business environment (please refer to PepsiCo and Coca-Cola’s financial statements).
On the vertical analysis of their income statements, their operating expense ratios are close: Coca-Cola is at 39%, while PepsiCo is 38%. This just means that both companies are able to manage their overall operating expenses competitively. Where they depart is in gross profit ratio, where Coca-Cola is at 61% while PepsiCo is at 53% due to higher cost of revenues for its non-beverage products.
Balance Sheet: Pepsi vs. Coca Cola
In terms balance sheet analysis, PepsiCo reflects 3.8% growth in total assets from 2012 to 2013, while Coca-Cola showed 4.5%. On the other hand, total liabilities of PepsiCo only grew by 1.6% compared to Coca-Cola which grew by 6.8% (please refer to PepsiCo and Coca-Cola’s financial statements).. These results imply that both companies continue to invest in growth or maintaining market leadership financed by internally generated funds, and debt--but more so by Coca-Cola than PepsiCo.
Looking at the ratio of total debt to equity of both companies Pepsi remains higher leveraged with a 2.17 ratio vs. Coca-Cola at 1.69, which entail more risk for investors. However, in terms of liquidity ratios, PepsiCo at 1.24 is slightly better than Coca-Cola with it 1.13 ratio.
No doubt both Pepsi and Coke will continue to be strong global brands in years to come. As an investor however, one needs to consider not only the returns, but also the risks involved in the business being invested into. Financial reports indicate that basic earnings per share in PepsiCo is higher at than Coca-Cola: $4.37 vs. $1.94, making Pepsi more attractive if one is only considering returns on investment. Digging deeper into its operations however, shows that it is no longer just Pepsi a beverage company, but also now, a snack and food company venturing in several emerging markets. This diversification may be two pronged—creating growth opportunities but also increasing risk factors. The decision where to invest would therefore depend on the risk appetite that an investor is willing to carry given an almost equally profitable investment.
The Coca-Cola Company (2013). 2013 Annual Report (Form 10-K). Retrieved
PepsiCo Inc. (2013). 2013 Annual Report (Form 10-K). Retrieved from
The Coca-Cola Company (n.d). About Us Coca-Cola History. Retrieved from
Demonstrating Value (n.d.), Financial Ratio Analysis. Retrieved from
Google Finance(2014). The Coca-Cola Co. (NYSE: KO). Retrieved from
Google Finance (2014). PepsiCo, Inc. (NYSE: PEP). Retrieved from