WFMI) and Starbucks ( SBUX) 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, Warren Buffett, 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.