- PepsiCo wins on the product diversity front.
- Coca-Cola wins in terms of global market dominance in the beverage market.
- Dr Pepper Snapple wins in terms of profitability and shareholder return.
Coca Cola (NYSE:KO), Pepsico (NYSE:PEP) and Dr Pepper Snapple (NYSE:DPS) represent “The Big Three” on the carbonated soda scene. Essentially, these companies operate as an oligopoly that is largely unchallenged by competition. However, they do face challenges in the form of flat lining demand for their soda offerings. Some are meeting this challenge through diversification, innovation, cost cutting and efficiency. As an investor with limited capital you may wonder which company represents the best investment. Let’s take a look at each of the three companies below.
All three companies sell carbonated and non-carbonated beverages such as sodas, juices and bottled water. However, carbonated sodas face headwinds due to the healthy lifestyles movement. According to Beverage-Digest, carbonated soda drinks peaked in 2004 and declined for 10 years straight ending in 2014.
Last year, Coca-Cola and Dr Pepper Snapple gave indication that still beverage growth exceeded growth in carbonated sodas. Coca-Cola expanded its still unit case volume 5% last year versus 1% for its carbonated soda. Dr Pepper Snapple saw its non-carbonated bottler case volume increase 4% as compared to 1% for its carbonated soda volume.
PepsiCo holds the added advantage of selling both beverages and snacks. This gives the company something to fall back on in the event that consumers no longer want carbonated soda at all. PepsiCo’s Frito Lay division represents the company’s only subsidiary that grew its reported operating income consistently over the past three years.
PepsiCo exhibits a strong innovation culture especially with snacks. For example, recently Frito Lay North America released the first “All-Doritos Chip Mix” in two different flavors; “Cheese Explosion” and “Taco Explosion”. Moreover, the company released a “Spicy Jalapeno Ranch” flavor of its bagged popcorn line. I always emphasize how PepsiCo could sell a snack alongside one of its beverages in retail establishment.
Coca-Cola and PepsiCo exude market dominance in the global beverage market. Coca-Cola and PepsiCo command 9% and 4%, respectively, of the global beverage market, according to the Bloomberg Leaderboard. This gives each company a rank of No. 1 and No. 5, respectively. Nestle SA (OTC:NSRGY) actually ranks No. 3 with a 5% market share in beverages overall. This gives Coca-Cola and PepsiCo the ubiquity of presence and economies of scale, which enables heightened global awareness and the ability to sell products at a low price.
By contrast, Dr Pepper Snapple doesn’t even rank among the top 10 on the Bloomberg Leaderboard. PepsiCo ranks at the top in terms of sales among the big three soda companies due to its snack business, with $63 billion in reported revenue in 2015. Coca-Cola and Dr Pepper Snapple reported $44 billion and $6 billion in revenue, respectively, last year.
As shown in the chart below, Dr Pepper Snapple gave its shareholders the highest return on their investments among the “Big three” soda companies. Dr Pepper Snapple, PepsiCo and Coca-Cola gave shareholders a 155%, 58% and 38% return, respectively, over the past five years. Coca-Cola actually underperformed the S&P 500, which returned 48%, during that time frame (chart below).
Why is this? Dr Pepper Snapple actually has the best reported fundamentals over the past five years in terms of margins and consistency in YoY revenue growth (see tables below). Dr. Pepper Snapple’s superior revenue growth is due, at least in part, to the lack of exposure to adverse currency translations.
In FY 2015, 83% of Dr Pepper Snapple’s volume came from the North American geographic region, shielding it from the strong dollar headwinds that have affected Coca-Cola and PepsiCo. Moreover, Dr Pepper Snapple represents the only company of the three with higher reported operating and profit margins than five years ago. Dr Pepper Snapple really focuses on cost cutting via its “Rapid Continuous Improvement” program. Its smaller size would make it easier to respond to rising costs.
|YoY Reported Revenue Growth (in %)|
|Dr Pepper Snapple Group||4.7||1.6||0.0||2.1||2.6|
|Reported Operating Margins (in %)|
|Dr Pepper Snapple Group||17.3||18.2||17.4||19.3||20.7|
|Reported Profit Margins (in %)|
|Dr Pepper Snapple Group||10.3||10.5||10.4||11.5||12.2|
Source: Morningstar and Sec Filings and author’s calculations
Looking forward, PepsiCo represents the best chance over the long-term due to product diversity. It has other products to fall back on. Dr Pepper Snapple would actually be second best due to low exposure to political risk and its smaller nimble size, making reported profitability expansion easier. Coca-Cola lies at the bottom of this list. However, its recent move to shed bottling assets, produce merely the syrup and sell finished products on the still beverage side could potentially boost margins to the point where it’s competitive with Dr Pepper Snapple.