PepsiCo (NYSE:PEP) has been steadily losing market share to Coca-Cola (NYSE:KO) in the carbonated soft drinks market, but PepsiCo’s true strength lies in its diversified portfolio which partially shields it from the woes of the CSD category. PepsiCo’s leadership in some of the fast growing beverage categories such as bottled water, juices and sports drinks further enhances its chances to outperform its rival in the long run. This could play out to its advantage as CSD’s in developed markets continue to decline and as health concerns around CSD consumption spread to growth markets. While PepsiCo will still want to expand its CSD volumes in emerging markets given the growth potential, its diversification could be the winning formula.
The first difference to keep in mind is that Coca-Cola is a beverage focused company and derives more than 70% of its revenues from the sale of sparkling beverages or CSDs. On the other hand, PepsiCo deals in both snacks as well as beverage segments and generates more than half its revenues (~51%) from its snacks business, which according to our estimates contributes more than 60% to the company’s value.
The biggest challenge facing the beverage industry today is the declining consumption of CSDs in developed markets. CSD consumption is known to bear a high correlation with the prevalence of obesity, diabetes and other health related issues. This is the primary reason behind the consistent decline in CSD volumes seen over the last decade in developed markets. Consumers in the developed markets are not only well-informed, but are also becoming increasingly health conscious which is keeping them away from CSDs. Annual per capita consumption of CSDs has fallen from over 50 gallons in 2005 to just over 42 gallons in 2012.  Given Coca-Cola’s higher dependence on CSDs, this could be a relative advantage for PepsiCo.
‘Better For You’ Products
PepsiCo outsells Coca-Cola brands in most of the important fast growing beverage categories such as bottled water, juices and sports drinks. Aquafina, Tropicana and Gatorade brands hold leading market shares in all of the three categories, outperforming Coca-Cola’s Dasani, Minute-Maid and Powerade brands respectively. Demand for products in these categories has been growing rapidly over the past few years, primarily driven by increasing demand for “better for you” products amid growing health consciousness. PepsiCo’s stronger hold in these beverage categories is another advantage the company holds over Coca-Cola.
While PepsiCo continues to focus on a more diversified portfolio with leading brands in some of the fast growing beverage categories, Coca-Cola has enhanced its global leadership in the CSD category over the years. Across its brands Coca-Cola holds leading shares in both developed as well as the emerging markets of the world. Just two of its brands, Coke and Diet Coke, together command almost 27% of the U.S. CSD market. All its brands together control 42% of the CSD volumes in the U.S. while PepsiCo holds 28% share in the U.S.  Moreover, Coca-Cola has also strengthened its grip on emerging markets such as China and India. The company holds more than 15% and 54% of the CSD market in China and India respectively, outperforming PepsiCo in these fast growing markets as well. This should worry PepsiCo since it cannot afford to lose out on the huge growth potential that emerging markets hold for the CSD category by their shear size of consumer base and rising income levels.
However, it should also be noted that the world today is far more connected than ever and information takes much less time to reach people globally than just a decade ago so health related CSD woes in developed markets could lead to slower volume growth in the “high-growth” emerging markets well before per capita consumption in these markets reaches anywhere close to its peak in the developed markets. Given PepsiCo’s more diversified business, we believe it has an edge over Coca-Cola in terms of future cash potential primarily because its diverse snacks segment can still take advantage of consumption growth in emerging markets while carrying less exposure to the vulnerable CSD category.Notes: