Coca-Cola Co. and Pepsi Co. soda machines stand in a shopping mall car parking zone in Jasper, Indiana.
Luke Sharrett | Bloomberg | Getty Images
Coca-Cola and PepsiCo‘s rivalry spans a long time, but Coke normally comes out on top.
This quarter was no different.
The beverage leaders’ stocks have struggled this yr, hurt by higher rates of interest and investor concerns in regards to the possible negative impact of weight reduction drugs like Wegovy. (Coke’s $242 billion market cap beats Pepsi’s by roughly $20 billion.)
Even so, each corporations topped Wall Street’s estimates for his or her third-quarter results and raised their full-year forecasts. Strong demand for Coke products drove the Atlanta-based company to boost its forecast, while Pepsi’s cost-management improvements have bolstered its full-year outlook for earnings.
But only Coke managed to report volume growth. The metric, which strips out the consequences of pricing and currency, has turn out to be more critical to investors in recent quarters as food and beverage corporations pause the value hikes that drove sales growth last yr. Those self same increases have also alienated some shoppers who are attempting to get monetary savings on their grocery bills.
Coke’s overall volume rose 2% within the third quarter, while Pepsi reported flat beverage volume and a 1.5% decline in its food volume. In North America, the differences between the 2 businesses were much more stark. Coke reported flat volume, while Pepsi’s North American beverage unit saw volume fall 6%.
Coke also raised each its top- and bottom-line outlook for the complete yr, while rival Pepsi only upped its forecast for its full-year earnings, signaling the higher outlook may not be because of higher demand for its products.
Here’s a rundown of the five key aspects that helped Coke edge out Pepsi:
Pricing strategy
Greater than two years later, each corporations reported that higher prices have boosted sales. Pepsi paused price hikes earlier this yr but plans a “modest” increase next yr. Coke took longer to pause its higher prices, but CEO James Quincey said in July the corporate is completed raising them for now in the USA and Europe.
Due to the timing of their price increases, Coke’s North American drink prices were up only 5% this quarter, compared with Pepsi’s increase of 12%.
“The upper the value increase, you’ll expect an even bigger drag on volume,” Edward Jones analyst Brittany Quatrochi said.
Higher brands
But Coke can be winning over shoppers with its drinks, while Pepsi is targeted on revitalizing a few of its non-soda brands like Gatorade.
“Coke has been taking share from Pepsi for a lot of, many quarters,” RBC Capital Markets analyst Nik Modi said.
When its drinks business falters, Pepsi is frequently saved by its Frito-Lay unit, which incorporates Cheetos, Doritos and other snacks. But snacking has slowed as shoppers trade right down to cheaper options within the face of Frito-Lay’s double-digit price increases.
“The explanation why snacks have done so well relative to other categories is since it was really a trade down option on a meal,” Modi said.
As the value for a bag of chips has climbed, some shoppers have reached for private-label brands — or simply leftovers within the fridge.
Pepsi can be eliminating its less-profitable promotions. The strategy helps its earnings, but resulted in a 2.5% hit to its North American drink volume, executives said on the corporate’s conference call.
Away-from-home business
Roughly half of Coke’s sales come from away-from-home occasions, like movie show visits or dining out, executives said through the early days of the pandemic. Within the third quarter, those away-from-home purchases grew faster than the corporate’s at-home business, Quincey said on Tuesday’s conference call.
“There’s still a rebound and powerful growth in away-from-home channels, not only a few of the restaurants, however the amusements, travel, leisure, hospitality, those things,” Quincey told analysts.
Coke is also benefiting from consumers trading down outside of the food market.
“Should you were going to a mid-tier restaurant, perhaps now you are going to quick-serve fast food, which is where Coke has a whole lot of its business,” Modi said.
McDonald’s, for instance, has said in recent quarters that diners trading right down to its restaurants has boosted its U.S. sales. McDonald’s has served Coke products since Ray Kroc opened his first franchised location, and is the beverage company’s largest restaurant customer.
Pepsi, however, lags behind Coke with its away-from-home business, even though it does have some large restaurant corporations, like Taco Bell owner Yum Brands, as customers. Pepsi has not disclosed the dimensions of this business.
International strength
Coke also has a bigger international presence than Pepsi. Roughly 40% of Pepsi’s sales come from outside of the U.S., while greater than 60% of Coke’s revenue is derived from international markets, in keeping with FactSet.
“There’s stronger growth in those international markets,” Edward Jones’ Quatrochi said.
International success can offset more sluggish domestic demand, just like the 6% volume decline for Pepsi’s North American beverage. But that comes at a price.
Some international markets, like Argentina and Turkey, have been coping with hyperinflation, leading Coke to boost prices even after pausing hikes within the U.S. and Europe. And the strong dollar means Coke anticipates that currency exchange rates will dent its sales and earnings greater than previously expected this yr.
Franchising its bottling
The most important difference between Coke and Pepsi is not present in their portfolios. It’s how they bottle their soda.
Coke works with independent bottlers who manufacture, package and ship their drinks to customers. Those bottlers know their markets well and may make their very own informed decisions for his or her businesses.
In contrast, Pepsi owns greater than three-quarters of its North American bottling operations. The strategy is supposed to assist the corporate exert more control and cut costs, however it also requires devoting resources and capital to bottling soda, a category that has faced waning demand for nearly twenty years.
“Without delay, I believe the entire bottling owned versus not owned is showing up in the outcomes,” Modi said.