) -- Ask for a Coke in a restaurant, and half the time you get a familiar question from the waiter: "Is Pepsi OK?"
As if the two sweet, caffeinated, caramel-colored and carbonated products from
were so dissimilar that the difference could cause customers to change their orders or storm out in disgust.
The answer invariably will come back to the waiter in the affirmative, since both beverages fulfill Americans' insatiable desire for the sweet stuff. The interchangeability of the two, while both rack up billions in sales, is an illuminating window to the demand for these cheap and calorie-rich products.
Pepsi and Coca-Cola don't make healthy food, yet their balance sheets have remained strong during the economic downturn. While other companies may produce food that's better for you, their stocks have been on a roller coaster. Junk-food brands have parlayed their cheap and addictive foods into success.
As families pare expenses during the recession, certain day-to-day luxuries are the first to go. People who may have shopped at
or some other equally expensive organic retailer in search of food that's free from the dreaded high-fructose corn syrup menace plaguing America may be venturing back into the traditional grocery store looking to stretch their food budget.
Companies like Pepsi, Coke and
Dr Pepper Snapple
have higher marking costs than beverages featured in Whole Foods. However, their ingredients are so much cheaper, a satisfactory margin can be earned at a fraction of the price. Ingredients like the aforementioned high-fructose corn syrup enable those companies to sweeten their products without the costly use of real sugar or other similar ingredients.
In addition to the lower cost of their drinks and food products, Coca-Cola, Pepsi and Dr Pepper control distribution networks that are second to none. While it may be difficult to find health-food brands, every convenience store and supermarket in the country will pack their shelves with Coke and Pepsi products, including Pepsi's snack foods such as Frito-Lay, the maker of Doritos.
The proof is in recent filings for Coke and Pepsi. Both boast returns on equity above 25% with dividend yields of about 3%. Coke's shares are up 30% over the past year. While Pepsi's have risen only 4%, they fell less during the stock-market meltdown. As the
S&P 500 Index
has lost 43% of its value in the past two years, Pepsi dropped 13%.
Coke and Pepsi products aren't luxuries. They are easy to find and afford, and few can resist the sweet, caffeinated fare. Coca-Cola and Pepsi are well-suited to survive and thrive regardless of the economy's condition.
-- Reported by David MacDougall in Boston.
Prior to joining TheStreet.com 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.