Can Coca-Cola Bridge Its Revenue Gap With PepsiCo?

PepsiCo (NASDAQ: PEP) and Coca-Cola (NYSE: KO) are the two largest non-alcoholic beverage manufacturers in the world with a range of sparkling soft drinks, juices, energy drinks, etc. Trefis details How Revenues For Coca-Coal and PepsiCo Have Trended Over Recent Years in an interactive dashboard, and highlights how PepsiCo’s large Food & Snacks business allows it to generate more than 2x revenues compared to Coca-Cola. Although we expect Coca-Cola to narrow the revenue gap with PepsiCo over coming years, the latter’s more diversified product offering makes it unlikely that Coca-Cola will generate more revenues than PepsiCo under its current business model.

PepsiCo’s portfolio of brands include Frito-Lay, Gatorade, Pepsi-Cola, Quaker and Tropicana. Through own operations, authorized bottlers, contract manufacturers and other third parties, PepsiCo makes, markets, distributes and sells a wide variety of convenient beverages, foods and snacks, serving catering to consumers in more than 200 countries. Peer Coca-Cola’s brands are grouped into the following category clusters: sparkling soft drinks; water, enhanced water and sports drinks; juice, dairy and plant-based beverages; tea and coffee; and energy drinks. Coca-Cola owns and markets four of the world’s top five non-alcoholic sparkling soft drink brands: Coca-Cola, Diet Coke, Fanta and Sprite.

PepsiCo and Coca-Cola Current Revenue

PepsiCo reported $64.7 billion in revenues for fiscal 2018, while Coca-Cola’s revenues were less than half of that at $31.9 billion

Revenues (and % contribution) of individual divisions to the top line of these companies were:

• Beverages & Concentrates: $30.7 billion (48%) vs $31.9 billion (100%)
• Food & Snacks: $33.9 billion (52%) vs $0.0 billion (0%)

PepsiCo v/s Coca-Cola: Recent Revenue Trend

• Between 2016 and 2018, PepsiCo’s revenue has grown from $62.8 billion to $64.7 billion, a growth of 3%.
• In comparison, Coca-Cola’s revenue has decreased from $41.9 billion to $31.9 billion, a decline of 24%.
• The vast difference in growth rates is due to Coca-Cola refranchising (converting company owned units into franchisees) its bottling plants, which has led to a steady decline in revenues, which was exacerbated by decreasing demand for carbonated drinks.
• On the contrary, PepsiCo benefited from growth in its food & snacks portfolio and its acquisition of SodaStream.
• PepsiCo’s revenue is expected to increase from $64.7 billion in 2018 to $68.6 billion in 2020 – a growth of 6%.
• With most of its refranchising already done, Coca-Cola’s revenue is expected to increase from $31.9 billion in 2018 to $38.9 billion in 2020 – a growth of 22%.
• Thus, unlike historical trend, going forward Coca-Cola’s revenue growth rate is likely to be much higher than PepsiCo’s

Below we take a look at the segment-wise comparison for the two companies

PepsiCo v/s Coca-Cola: Beverage & Concentrates Revenue

• For 2016 to 2018, both companies have seen significantly different growth in the Beverages’ segment.
• PepsiCo saw its Beverage revenues grow by 1.3% during this period, from $30.3 to $30.7 billion.
• At the same time, Coca-Cola’s Beverage revenues declined 24% due to sharp drop in bottling revenues, despite revenue seeing a rise in all other operating divisions.
• Going forward, PepsiCo’s segment revenue is likely to grow by about 12% due to acquisitions, whereas Coca-Cola could see its Beverage revenues grow by 22% till 2020, led by strong performance in the juice and energy drinks category, with bottling revenue also seeing an uptick

PepsiCo v/s Coca-Cola: Food & Snacks Revenue

• PepsiCo’s Food & Snacks division’s revenue grew from $32.5 billion in 2016 to $33.9 billion in 2018, a growth of 4.5%, which was higher than its Beverage segment.
• On the other hand, Coca-Cola has still not diversified its offerings in the food segment, with the company solely focusing on beverages.
• Going forward, food revenue growth for PepsiCo is expected to fall behind beverages (which will see faster growth due to recent acquisitions). On an absolute basis, Food & Snacks Revenue will be at par with that for its Beverages segment, at $34.3 billion by 2020.

Conclusion

• Though PepsiCo is much larger compared to Coca-Cola in terms of revenue, it has registered decent revenue growth of 3% (2016 to 2018), whereas Coca-Cola saw its revenue base shrink by 24% – making the company less than half the size of PepsiCo in terms of revenues.
• Despite consumers reducing the intake of carbonated drinks, PepsiCo’s impressive performance can be attributed to its product diversification, with the Frito-Lay brand proving to be its most important segment.
• On the contrary, with its focus on reducing cost, Coca-Cola’s strategy of refranchising low-margin bottling business took a toll on its revenue base.
• Going forward, PepsiCo’s revenues are primarily to be driven by beverages whereas food division will grow at a slower pace.
• However, Coca-Cola, with its strong portfolio of juices and energy drinks, along with tea and coffee business, is expected to narrow its gap with PepsiCo by 2020

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