The Week That Was: Coca-Cola And PepsiCo

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The Coca-Cola Company

This week we will discuss new developments at The Coca-Cola Company (NYSE:KO) and PepsiCo (NYSE:PEP). Coca-Cola has been in the news lately due to the controversy surrounding its FIFA sponsorship. Considering that the FIFA sponsorship is pivotal for Coca-Cola, the new development might have an impact on the company’s soft drink sales. On the other hand, amid continually declining sales of carbonated soft drinks (CSD), PepsiCo is launching a new product, targeted specifically at the Hispanic population, in a bid to derive growth in the ailing soda segment.

Coca-Cola

Seven FIFA officials were arrested in Switzerland this week over claims that they were part of a racket involving bribes that added up to more than $150 million. As one of the major sponsors of the Football World Cup, Coca-Cola, along with McDonald’s, Adidas, Budweiser, and Hyundai, has issued statements after the dramatic events on Wednesday. Some of these companies are also reassessing their sponsorship of the event. Coca-Cola has said that the lengthy controversy has tarnished the mission and ideals of the FIFA World Cup and that the company remains concerned about these serious allegations.

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We estimate a $44 stock price for Coca-Cola, which is above the current market price. The stock has declined 1.15% in the last week.

See our full analysis for Coca-Cola

Despite Coca-Cola’s stronghold in the soft drink industry and vast global reach, the company spends a considerable 7.6% of its net revenues on advertising, compared to only 3.4% of the net sales worth of advertising spend for PepsiCo. Coca-Cola believes in expanding its consumer base through experiential marketing, which aims at creating an emotional connect with customers, especially as soft drinks are mostly impulse buys. This makes positive customer perception very crucial for beverage markers, including Coca-Cola, as they face headwinds in the CSD category due to the unhealthy tag associated with these drinks. Last year, despite the sluggish economic activity in Brazil, volume sales in the country rose for Coca-Cola due to large-scale investment and marketing activities centered on the FIFA World Cup, which is an important event for Coca-Cola. The beverage giant might feel pressured by consumers to distance itself from any corruption, which could jeopardize Coca-Cola’s sponsorship of the World Cup.

PepsiCo

The U.S. carbonated soft drinks (CSD) market declined for the tenth consecutive year in 2014. As customers continue to shift away from sugary, calorie-filled sodas to alternatives such as sports drinks, carbonated water, and ready-to-drink teas and coffees, at no time soon is the CSD market expected to rebound strongly. Around 25% of PepsiCo’s last year revenues were from CSDs, and the U.S. alone formed 51% of the net revenues. Especially now, when most foreign currencies are depreciating against the U.S. dollar, and with increased volatility in some of the key emerging markets such Russia, China, Ukraine, Venezuela, and Brazil, growth in the home country has become more crucial for these players.

We estimate a $98 price for PepsiCo, which is above the current market price. The stock has declined 1.3% in the last week.

See Our Complete Analysis For PepsiCo

In this scenario, PepsiCo is introducing a new product called Pepsi Limon, a new cola-based drink containing real lime juice, in 20-ounce and 2-liter bottles. The product is targeted directly at the Hispanic population, and will be available in select markets such as California, Arizona, New Mexico, Texas, and Chicago, where a considerable Latino population resides. The Hispanic population in the U.S. is expected to grow by 12% between 2015-2020 to form nearly 20% of the country’s net population, which is estimated to grow by only 4% during this period. [1] Hispanics are major consumers of CSDs, and Pepsi Limon will aim to penetrate this segment, going forward, in a bid to recover some of the lost CSD sales for PepsiCo.

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Notes:
  1. U.S. demographic projections []