Cola Wars Heat Up as PepsiCo Makes Beverages Push

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The cola wars are heating up again. It is not just the $600 million of additional marketing spend but also a combination of new product offerings and a strategic review of existing products that PepsiCo (NYSE:PEP) plans in 2012 leading to this push. PepsiCo competes with leading food & beverage companies around the world including Kraft Foods (NYSE:KFT), Coca-Cola Co (NYSE:KO) and Dr Pepper Snapple (NYSE:DPS). We maintain a price estimate of $71, which is about 10% above the current market price.

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Pepsi Next is Here

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PepsiCo is launching its version of a mid-calorie soda named Pepsi Next, a can of which contains 60 calories. The idea is to appeal to consumers who refrain from buying the unhealthy colas but don’t like the taste of the diet versions. It remains to be seen if Pepsi Next cannibalizes or boosts the sales of Pepsi and Diet Pepsi cola. [1] Either way, if the company is successfully able to market the product, it will do the company a world of good as PepsiCo’s soft drink sales have been falling for quite some time now.

PepsiCo, which announced its Q4 and full year earnings earlier this month, saw carbonated soft drink (CSD) volumes decline by mid-single digits for the year 2011. Dr Pepper Snapple launched  Dr Pepper TEN which contains only 10 calories in October 2011. The product has so far received a positive feedback with Dr Pepper Snapple reporting that the product helped boost its Q4 sales.

Adding Water To Juice Up the Margins

PepsiCo plans to offer consumers another option of Tropicana juice with higher water content. The company feels that the consumers add water to Tropicana to thin down the juice, so why not give them the option of a juice that’s already thin. Moreover, higher water content will ensure lower calories, something which the company can leverage to boost sales. [2] Since the cost of raw materials, as a percentage of sales, is usually lower for beverages, we could see an increase in PepsiCo’s gross margins if the company is indeed able to increase the beverage volumes considerably.

It will be interesting to see how things pan out and how Coca-Cola and Dr Pepper Snapple react to PepsiCo’s renewed push in the beverages space. Coca-Cola denies any increase in its marketing budget for the time being. [3]

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Notes:
  1. The cola wars: Pepsi launches mid-calorie Pepsi Next as it takes on Coke in battle to lure the ‘health-conscious, Daily Mail, 24 February, 2012 []
  2. PepsiCo Adds Water to Tropicana Products to Juice Margin: Retail, Business Week, February 16, 2012 []
  3. UPDATE 1-Coke, Dr Pepper react to Pepsi ad increase, Reuters, February 22, 2012 []