History has shown us that America was built on the back of
#-ad_banner-#Like the long-standing feud between the New York
Yankees and the Boston Red Sox... or the U.S. vs. Russia in the
Olympics. That's to say nothing of more serious rivalries like
the political feud between Democrats and Republicans.
Nothing can drive competitors to perform their best like a
well-matched rivalry. This is particularly true in the world of
business. Think of
General Motors (NYSE:
All of these (and dozens of others) have resulted in increased
innovation, industry growth and -- most critically for investors
-- shareholder value. One rivalry in particular stands out to me
in terms of longevity, pure competitive zeal and using nearly
every trick in the book for the upper hand: the epic cola war
Both of these companies have made great investments over the
years, both offer solid growing dividend yields, and both excel
in a particular niche. However, going forward, I think one of
these companies has the edge on the other as an investment.
Coca-Cola was launched in 1886 by an Atlanta chemist. Seven
years later, Pepsi was created as a direct competitor. The cola
war waged on for decades with the edge moving back and forth
between the two competing firms.
But truth be told, Coca-Cola has won the cola war. Coke
controls 42% of the total carbonated soft drink market, compared
with Pepsi's 30%, according to Beverage Digest.
Coke Has Won -- But Does It Matter For
Despite Coke's clear victory, I expect this will have little
relevance going forward for investors.
Due to changing tastes and a healthier consumer, both cola
brands have been in decline. Research firm IbisWorld has forecast
that per-capita soda consumption's downward trend will continue
with no end in sight. No matter how much money is spent on clever
marketing, the overwhelming secular trend against sugary,
calorie-filled carbonated beverages cannot be reversed.
Why Pepsi Has The Edge
While Coca-Cola has vowed to rebuild sales in the United States
and focus on international sales, Pepsi has taken a different and
smarter track. The change within Pepsi started back in 2006 with
the hiring of Indra Nooyi as CEO.
A former management consultant, Nooyi understood the changing
consumer with the shift from sugary soft drinks to healthy drinks
and snacks. This fact is quite obvious due to the vast numbers of
alternative and often health oriented drinks found at nearly
every retail outlet. The new CEO refocused Pepsi on water, teas,
juices and sport drinks. The company plans on expanding its
nutritional business from $10 billion to $30 billion by 2020. It
is relying on using its Gatorade, Quaker Oats, and Tropicana
divisions, plus the newly formed Global Nutrition Group to follow
the trend away from sugary sodas to healthier snacks and
On the other hand, Coke has vowed to ramp up marketing with an
extra $3 billion over the next three years. In addition, a
Keurig Green Mountain (NYSE:
is expected to ride the future wave of "home-brewed" sodas. (
As I wrote recently
, Coke must know something I don't, because I don't see what
long-term value Coca Cola expects from this partnership.)
To be sure, Coca-Cola has been on a buying frenzy to ramp up
its healthy offerings with brands, such as VitaminWater and
Odwalla. While this shift is a huge positive, soda remains 75% of
Coca-Cola's global sales.
On the other hand, Pepsi's snack division makes up about 50%
of the company's sales volume. Soda is just 25% of the company's
U.S. sales compared to 60% of Coca Cola's. What this all means
for investors is that Pepsi is better prepared to handle the
unstoppable trend away from its flagship product than
Finally, Coca-Cola is one of Buffett's "big four" stocks, and
he's said he's very unlikely to sell his position within the next
five years. He may be missing the big picture with this
Risks to Consider:
Sugar prices recently plunged to a near three-year low. While
this may help lower costs for Coca-Cola and Pepsi products alike,
I'm not expecting much of an effect since these companies
generally lock in commodity prices through futures.
Action to Take -->
I am certainly not saying that Coca-Cola is a bad investment,
just that the edge right now is with Pepsi due to its product
mix, healthy focus, and having less exposure to the declining
market of sugary sodas. I think Coca-Cola is nearing the end of
its glory days, and the share price may drop soon. Buying
Pepsico's shares on a breakout of $83 with initial stops at $80
and a one-year target of $87 makes solid risk/reward sense.
If you are a risk-embracing investor, shorting KO at or below
$39 with a $36 profit target makes sense. Remember to keep tight
stops at $40 should you wish to take a short position.