Pepsi Is in Bigger Trouble Thank You Think

Quick Read

• Pepsi’s stock dropped 7% while Coke surged 38%, as Pepsi’s soft drink market share nearly halved since 2000 to just 8%.

• Coke’s operating margin of $0.29 per sales dollar crushes Pepsi’s $0.12, explaining why Coke’s $401B market cap more than doubles Pepsi’s.

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Coca-Cola’s (NYSE: KO) stock is up 38% this year. The S&P is up 12%. Pepsi’s (NYSE: PEP) stock is down 7%. The apparent reason is that KFC replaced Pepsi with Coke. It is more than that. Coke is the premier soft drink at McDonald’s (NYSE: MCD), Burger King, and Wendy’s.

Another sign of Pepsi’s problem is that, according to research firm Beverage Digest, Pepsi’s soft drink market share is 8.1%. In 2000, that was 13.6%. By that yardstick, Dr Pepper has passed it. Coke’s share is flat over the period at just above 18%.

Pepsi has also hurt investors. In the most recent quarter, revenue rose 6% to $25.7 billion. “Core EPS” was up 2% to $2.34. It has diversified into brands that include Lay’s, Quaker, and Lipton.

Coke’s third-quarter revenue was $13.4 billion, much smaller than Pepsi’s. EPS rose 16% to $1.03. It has also diversified, mostly into beverages. It claims to have 32 brands worth more than $1 billion each.

The odd thing is that Pepsi has a market cap of $182 billion. Coke’s is $401 billion. That means Coke is valued at more than 2x Pepsi, which seems strange. Most experts believe this is because Coke’s margins on sales to bottlers are better than Pepsi’s margins on snack sales. This means Coke’s operating margin is $0.29 per dollar of sales. Pepsi’s are $0.12 based on a comparable model.

KFC is not Pepsi’s problem. Margins are

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