Still Sweet on Coke and Pepsi?
The soda-pop business is, in its purest form, at once ridiculous and sublime. It’s ridiculous because it involves selling people sugar water (or corn syrup water or Aspartame water). It’s sublime because, if you’re Coca-Cola Co. or PepsiCo Inc., your main responsibilities are 1) branding and 2) producing a secret syrup that somebody else mixes with carbonated water and serves at a restaurant or pours into bottles or cans and hauls to the supermarket. Capital expenditures are low, profit margins are high. At Coca-Cola the operating margin topped 25 percent for years and years, remarkable for a company selling something other than drugs or iPhones. Pepsi’s overall margins are lower because it also sells snacks; activist investor Nelson Peltz recently tried to get the company to spin off that business, but his campaign just ended in an apparent truce.
Lately things have gotten more complicated, as both Coca-Cola and Pepsi, fretting that they were losing control of their distribution networks, acquired their biggest North American bottlers in 2009 and 2010. This drove operating margins down to the low 20s for Coca-Cola and the mid-teens for Pepsi. Given the companies' histories, though, don't be shocked if they spin off the bottlers again in the future, then reacquire them after that, and so on.
Their more existential concern is that people might stop drinking soda-pop. In Coca-Cola and Pepsi’s home market of North America, the sector sometimes known as “carbonates” is shrinking, and is projected by the research firm Euromonitor to keep shrinking at 0.7 percent a year through 2018. As Clair Suddath and Duane Stanford wrote in a BloombergBusinessweek cover story last July, consumers are heeding warnings that sugar will make them fat and artificial sweeteners may kill them, and even Coca-Cola North America President Sandy Douglas has cut his intake down to an 8-ounce glass bottle of the real stuff and one Coke Zero a day.
As a result Coca-Cola and Pepsi have struggled. Both companies have become focused on reducing costs, and Coca-Cola is now cutting as many as 1,800 jobs, or about 1 percent of its workforce.
Still, there’s a whole world of soda-pop drinkers and potential soda-pop drinkers out there, not to mention an ever-growing universe of cold, non-alcoholic things to drink beyond soda-pop. In the 1990s I remember Coca-Cola emphasizing that it accounted for almost 2 percent of global fluid intake, with the implication that the other 98 percent -- or at least some of it -- was ripe for conquest. Global soft-drink sales are growing at a 2.7 percent annual rate (that’s the five-year forecast from Euromonitor). Can’t Coca-Cola and Pepsi take advantage of that?
Well yes, they can, but it won’t be as simple as soda-pop. Here, via Bloomberg Intelligence and Euromonitor, are the five biggest global soft-drink categories (yes, it’s weird to call bottled water a “soft drink,” but it’s sold in the same places and can be a direct substitute for the others):
As you can see, carbonated beverages constitute the biggest sector worldwide. This giant market is dominated, no surprise, by Coca-Cola and Pepsi products.
It's also the slowest-growing sector, with Euromonitor projecting a compound annual growth rate through 2018 of 1.3 percent. Other sectors are doing much better. The fastest-growing soft drink sector of all is “Asian specialty drinks,” at 12.3 percent. It’s relatively small, though, with total sales of $8.2 billion in 2014, so I left it (along with ready-to-drink coffee and concentrates) off the charts.
In the faster-growing sectors, Coca-Cola and Pepsi aren't as dominant. Bottled water and fruit/vegetable juice are extremely fragmented categories, with local and regional brands accounting for most sales.
The iced tea and sports/energy drinks categories are more concentrated, and Pepsi (Gatorade) and Coca-Cola (Powerade) have pretty strong positions in the latter.
Still, it's nothing like their shared reign over soda-pop. For example, Coca-Cola is acquiring 16.7 percent of energy-drink maker Monster Beverage Corp. as part of a deal in which it will become Monster's main distributor and hand its energy brands (a Full Throttle, anyone?) over to Monster. That's an interesting move. It's also indicative that the company faces a more winding, obstacle-filled path in energy drinks than in carbonates -- and the same is true in every other soft-drink category.
Not that I would count either company out. Coca-Cola and Pepsi are full of resourceful people, and their long rivalry keeps them sharp. Coca-Cola led the way in the 1990s, Pepsi in the 2000s. Over the long run, I would guess, they have driven each other forward. When I ran the 25-year total return numbers, that is indeed how it looked:
Pepsi's performance was a bit better (1,457 percent to 1,349 percent through the end of December), but the two companies have basically ended up in the same place, way ahead of the stock market as a whole. I like to think that someone in Purchase, New York, or Atlanta (or both) is celebrating this with an 8-ounce bottle of soda-pop -- and then getting right back to work.
Disclosure: I remember this in part because Coca-Cola has been mailing annual reports to my family for two decades. I bought my wife a few shares before we were married, because at the time she drank lots of Coke, and over the years thanks to stock splits and reinvested dividends our holding has grown to a prodigious 60.2907 shares, which were worth $2,602.15 at yesterday's closing price. She doesn't drink any Coke (or other soda-pop) anymore, and neither do I. But we hold onto the shares as sort of a memento. OK?
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