The Week That Was: Coca-Cola And PepsiCo

As we move closer to the announcement of full year results for the beverage giants The Coca-Cola Company (NYSE:KO) and PepsiCo (NYSE:PEP) in February, we take a look at the recent developments at the companies this week.

Carbonated soft drink (CSD) sales have declined for ten consecutive years in the U.S. as consumers continue to shift away from sugary sodas and choose healthier alternatives such as sports drinks, ready-to-drink teas, and organic juices. Both Coca-Cola and PepsiCo are heavily dependent on CSDs for organic growth, with this segment constituting 64% and 17% of their net valuations respectively, according to our estimates.  Beverage companies have looked to reverse the trend of declining soft drink sales by introducing low/no calorie drinks, but the diet alternatives have in fact been more severely hit in terms of volume sales, due to safety concerns regarding artificial sweeteners, such as aspartame, and the bitter aftertastes of natural sweeteners.

Coca-Cola and PepsiCo are looking to solve their low-sugar problem, and with this aim, the companies launched Coke Life and Pepsi True respectively, both of which are Stevia-sweetened, in the U.S. last year. Another effort to reduce calories has been the reduction in sizes of cans and bottles, which gives customers the comfort of consuming lower cumulative calories in one go. Both Coca-Cola and PepsiCo, along with Dr Pepper, pledged to reduce calorie consumption through their offerings by 20% by 2025 in the U.S., and so we discuss the latest initiatives by the two biggest beverage companies in the country as part of this plan.

Both the Coca-Cola and PepsiCo stocks fell this week, but the declines were lower than that in the overall S&P 500 Index.

Coca-Cola

This week Coca-Cola announced that it will reduce the sugar content in the Coke sold in Canada, which used to be much sweeter than the Coke sold elsewhere. The company is reducing the size of its widely-bought 591 milliliters (~20 ounce) bottles by 15% to 500 ml (~17 ounce). In addition, Coca-Cola is introducing smaller 310 ml cans and increasing the availability of 222 ml mini-cans and 237 ml small glass bottles in the country. As Coca-Cola reduces calories by 8% in Canada, the company will look to win-back customers in a market where CSD sales are declining by roughly 4% each year, and appease health activists that have for long criticized sugary-soft drink makers for contributing to obesity. In fact, 66% of Canada’s adult population is either overweight or obese. ^[1]

We estimate a $42 stock price for Coca-Cola, which is roughly in line with the current market price. The stock has declined 1% this week.

See our full analysis for Coca-Cola

Canada volumes form only approximately 1.3% of Coca-Cola’s volumes, and large volume changes in sales in the country might not significantly impact Coca-Cola’s net results. However, the beverage giant’s strategy when it comes to its CSD lineup remains clear — to increase emphasis on smaller packs that carry lower cumulative calories. This move will also help Coca-Cola gather higher profits as smaller-sized bottles and cans have higher unit pricing, and thus positively impact the price mix.

PepsiCo

PepsiCo is also taking steps to battle declining diet soda volumes in the domestic market, and is rolling out its Stevia-sweetened Pepsi True in Denver this week. Denver is only one of three test markets for Pepsi True, which was initially only available on Amazon.com last year. Pepsi True is a naturally sweetened drink containing 60 calories in a 7.5 ounce can, as opposed to 150 calories in a 12 ounce can. The company aims to leverage the positive customer perception of natural sweeteners to spur its diet soda sales, which fell by high mid-single percentages in 2013 and in the first nine months of last year. However, during its initial launch on Amazon, Pepsi True received many negative customer responses, reflecting how PepsiCo’s attempt to launch a Stevia-sweetened low-calorie drink might have gone awry. Although the initial response to Pepsi True was disappointing, the company is now testing the product in different test markets in the U.S., and will look to launch new products and provide more options in the future in order to gather customer attention.

We estimate a $91 price for PepsiCo, which is roughly 5% below the current market price. The stock has declined 1.3% this week.

See Our Complete Analysis For PepsiCo

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1. Coca-Cola is changing Canadian recipe to save calories [↩]