Here’s How Favorable Price Mix Is Helping Coca-Cola And PepsiCo Increase Soft Drink Revenue

by Trefis Team
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Both the global leaders in carbonated soft drinks (CSD), The Coca-Cola Company (NYSE:KO) and PepsiCo (NYSE:PEP), have struggled with the falling consumption of CSDs, particularly in developed markets such as the U.S., which formed 46% and 56% of Coca-Cola and PepsiCo’s net revenue, respectively, in 2015.

ko-pep Q&A 1

While overall consumption of CSDs has fallen for eleven consecutive years in the U.S., Coca-Cola and PepsiCo’s U.S. CSD volumes have also declined sequentially. Thus, revenue growth in this category, which still forms a bulk of the net U.S. liquid refreshment beverage volume, remains under threat.

ko-pep Q&A 2-1

In order to achieve revenue growth in U.S. CSDs, beverage makers, especially both Coca-Cola and PepsiCo, have emphasized sales of smaller packages, which carry heftier margins. Why the mini cans and bottles are gaining on the traditional larger-sized bottles and cans is because they effectively address the biggest issue that consumers have with soft drinks — high and unhealthy amounts of sugar concentration.

Currently, 15% of Coca-Cola’s total U.S. CSD volume is in these newer, smaller cans and bottles. Although having the same amount of calories per unit volume, the 7.5 ounce, 8 ounce, and 8.5 ounce packages obviously have lower calories in total, than the larger size containers, which, as the numbers would suggest, is enough to appease the heath conscious customer. In fact, as customers look for low cumulative consumption of sugar, Coke’s mini can sales have risen by double-digit percentages since their introduction in 2007. On the other hand, PepsiCo has shifted approximately 6% of its CSD volume mix from traditional two-liter and 12-ounce multi-pack packages to higher margin, more profitable, single-serve and alternative multi-serve packages, over the past five years in North America.

These efforts have been driving higher net price realization for both Coca-Cola and PepsiCo. The table below includes data for Coca-Cola and PepsiCo’s North America (U.S. and Canada) beverage growth last year.

ko-pep Q&A 3

North America beverage volume for both companies also includes still beverage volume, which is why the volume growth figures are positive. While CSD volume for Coca-Cola, representing roughly 80% of the net North America volume, remained even last year, that for PepsiCo, representing roughly 63% of its net North America volume, declined 2%. Favorable price mix has helped both the companies improve their  revenue from CSDs in the region, despite falling consumption levels.

Trefis currently estimates Coca-Cola’s U.S. CSD revenue per case (including Coke, Diet Coke, Sprite, Fanta, etc.) to grow at a CAGR of 1.3% between 2015-2020. If the revenue per case in the U.S. rises at a CAGR of 3% instead through the end of the forecast period, the company’s valuation could rise by 5%. On the other hand, Trefis estimates PepsiCo’s global revenue per case for soft drinks to decline at a CAGR of 1% through 2015-2020, on account of negative currency translations in the near term. However, if foreign currencies gain momentum and effective pricing in U.S. CSDs continues to boost sales, global revenue per case could rise at a CAGR of 3% in the review period. Given this scenario, PepsiCo’s valuation could rise 4%.

Have more questions on Coca-Cola? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Coca-Cola

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