New Pepsi Max Commercial Could Help PepsiCo and Coca-Cola

+6.13%
Upside
175
Market
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Trefis
PEP: PepsiCo logo
PEP
PepsiCo

PepsiCo (NYSE:PEP) recently launched a new salvo in the cola wars by airing a witty commercial that pits Pepsi Max, its zero-calorie carbonated soft drink, against The Coca-Cola Company’s (NYSE:KO) popular Coke Zero.

Because PepsiCo and Coca-Cola sell similar products, they differentiate themselves mainly at the level of marketing and promotion. History has shown that soft drink consumers respond well to marketing campaigns that highlight the ancient rivalry between Coke and Pepsi.

We expect PepsiCo’s aggressive marketing campaign to boost Pepsi Max sales during our forecast period. However, the perception of rivalry between Pepsi Max and Coke Zero is likely to strengthen both brands going forward. Our analysis follows below.

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Coke Zero vs. Pepsi Max

Pepsi Max was introduced in 2007, about two years after the launch of Coke Zero. Pepsi Max has not kept pace with Coke Zero, which has seen double digit growth in each of the past four years.

We expect PepsiCo’s aggressive marketing to boost Pepsi Max sales going forward. This should yield higher revenue growth in PepsiCo’s Mug Root Beer, Slice & Other Smaller Brands segment, which includes Pepsi Max.

We currently expect annual sales in this segment to rise by about 20% during the Trefis forecast period, from $1 billion this year to $1.2 billion in 2016. You can drag the trend-line in the chart below to create your own smaller brands sales forecast for PepsiCo and see how it impacts the company’s estimated share value.

We see a modest 1% to 2% upside to our current $67.28 stock price estimate for PepsiCo in the event that Pepsi Max sales rise as a result of the recent marketing campaign. The stock could see a bigger upside if PepsiCo launches a series of successful campaigns to promote Pepsi Max.

Interestingly, Coke Zero also stands to benefit from marketing that highlights the Coke/Pepsi rivalry. Such commercials tend to stimulate demand by improving consumer perceptions of both brands.

The industry could use a boost

The U.S. carbonated soft drink industry has been struggling in recent years as consumers have shifted to energy drinks and juices that are perceived as healthy alternatives. Pepsi Max and Coke Zero are both efforts to reposition carbonated soft drinks for health-conscious consumers.

You can modify the chart above to see how PepsiCo’s stock would be impacted by changing U.S. demand for carbonated soft drinks.

And you can see the complete $67.28 Trefis price estimate for PepsiCo’s stock here.

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