Coke Falls Short in New Pepsi Challenge
ATLANTA (TheStreet) -- Coca-Cola (KO) - Get Report, following Pepsi's (PEP) - Get Report lead, said recently it will buy the North American operations of its biggest bottler, Coca-Cola Enterprises (CCE) .
The move may produce as much as $350 million in savings and enable the world's biggest seller of soft drinks to respond more nimbly to changing tastes. Pepsi and Coke have felt weaker demand for carbonated beverages. Expanding beyond sugary offerings will be key to both in coming years.
Coke is the reigning champion in the carbonated-beverage battle, but the war is shifting. As in snack foods, consumers are hungry for healthier fare. While Coke and Pepsi sell alternatives to carbonated beverages, the advantage goes to Pepsi, which has enlarged its product line through innovation and acquisitions. Pepsi offers Gatorade, a favorite of professional sports players and weekend warriors; SoBe teas, marketed toward the
Whole Foods
(WFMI)
and
Starbucks
(SBUX) - Get Report
set; and Aquafina water, which sponsors film festivals.
Coke has similar products, ranging from Vitamin Water to Minute Maid juices, but the breadth is less impressive. In addition to Pepsi's beverages, the company also owns the Quaker and Frito-Lay brands, adding diversification to food items as well.
Besides Pepsi's food operations, the companies are similar in most respects. Each offers a good deal of international diversification, with nearly half of revenue coming from foreign countries, tapping into faster economic growth in emerging markets. Coke and Pepsi hedge against currency risks.
Both companies also employ similar levels of borrowing, with debt-to-equity ratios of about 0.47. As Coke and Pepsi buy their main bottlers, debt levels will rise, though they have more than enough capacity as they remained profitable through the recession.
The purchase of the bottling plants is a way to "vertically" integrate operations, or own companies along the supply chain, including suppliers and buyers. As consumers shun soft drinks, a company can alter supply more quickly and exploit savings to reduce prices, thus stimulating demand. All that can be done with a negligible effect on profit margins.
The response to changing market conditions signals that both companies are forward-looking, but because Coke is following Pepsi, the once-mighty Coke appears to be at a disadvantage.
Both companies are rated "buy" from
TheStreet.com Ratings
, with a solid grade of B. Because the equity model is quantitative in nature, the differences in strategy and product offerings need to be analyzed by individual investors.
Coke's biggest investor,
, seems to be on board with the move to integrate the company, though he's pointed out the difficulties. While the Oracle of Omaha may still be sucking down Cherry Cokes, he's among a dwindling number. As the shift occurs, Pepsi's product lineup seems better suited to excel. Coke should enjoy dominance for another few years, but to stay there, innovation will be key. As it stands now, Pepsi is a better long-term bet.
-- Reported by David MacDougall in Boston.
Prior to joining TheStreet Ratings, David MacDougall was an analyst at Cambridge Associates, an investment consulting firm, where he worked with private equity and venture capital funds. He graduated cum laude from Northeastern University with a bachelor's degree in finance and is a Level III CFA candidate.
