Coca-Cola vs. Pepsi: Internal Asset Productivity Analysis

Overall Firm-Wide Asset Productivity

One area of internal analysis that is essential for any investor or competitor to investigate — arguably the most essential area of analysis — is basic productivity, or asset productivity: measures of how well a company uses its assets to generate returns (Palepu, 2007). No company can remain in business over the long term unless it is capable of converting current assets into revenue streams, producing the cash flow needed to expand the business and to pay shareholders — to make a profit, in other words. Except in cases of accounting manipulation and outright fraud, such as in the Enron debacle of a decade ago and certain issues noted in the recent collapse of the financial sector, determining firm-wide asset productivity and creating comparisons of such data is actually relatively straightforward. Annual reports of publicly traded companies and even certain freely accessible summary websites present at least a broad overview of general productivity.

There are several figures and ratios that can help both an investor and a competitor determine whether a company has appropriate levels of asset productivity, and whether problems with asset productivity weaken it as a competitor or make it a poor investment. Ratios are especially important in all areas of analysis because they tend to remove at least the direct effects of company size on performance and efficiency. Comparing the raw earnings of a local corner store with a national supermarket chain would not be meaningful; however, comparing productivity ratios that involve earnings can yield a reasonable comparison of how efficiently each company turns its assets into profits.

One good measure of asset productivity for both investors and competitors is the profit margin, which simply measures how much of what the company takes in is left after all costs, taxes, and other expenses are accounted for. A profit margin of 100% would mean that for every dollar spent producing and selling a good, the company receives two dollars in revenue; a margin of 0% would mean it costs just as much to make a sale as was received in revenue from that sale. The Coca-Cola Company (Coca-Cola hereafter) has a current profit margin of 18.42%, while PepsiCo (Pepsi hereafter) has a profit margin of 9.69% — a little more than half that of Coca-Cola's (Yahoo Finance, 2012; Yahoo Finance, 2012a). This indicates that Coca-Cola is clearly the more efficient of the two companies in terms of turning assets into profits, spending less to generate each dollar of profit than Pepsi does.

The return on assets (ROA) ratio is a similar measure that directly evaluates a company's actual assets — not just its cost of sales — in terms of how much profit is generated. Interestingly, Coca-Cola has a slightly lower ROA at 8.91% compared to Pepsi's 9.2%, which carries different implications for investors and competitors (Yahoo Finance, 2012; Yahoo Finance, 2012a). These figures, considered alongside the profit margins, suggest that Coca-Cola is likely reinvesting a large portion of its profits back into the company rather than distributing them to shareholders as dividends. This means Coca-Cola will likely grow larger and become a more formidable competitor to Pepsi over time, but is actually less attractive to investors in the short term, as its asset productivity is not translating directly into value creation for shareholders (Palepu, 2007).

Productivity of Human Assets

Determining the productivity of human assets within a given organization can be a much more arduous task than determining overall firm-wide asset productivity, for two primary reasons — each with its own set of complicating factors. First, establishing an accurate, reliable, and consistent measure of human productivity can be difficult, especially as companies grow larger and more complex. Not all labor hours are directly related to sales, nor are all jobs equal in compensation or labor demands; thus, comparisons even within companies — let alone between companies that do not have exactly similar operations — are crude at best (Fitz-enz & Davison, 2002). While it is possible to establish a single figure for the amount of human resources at an organization — either in terms of labor hours or expenditure, with the latter providing a more meaningful comparison — and to divide this by the company's output (revenue or profit) to determine an efficiency ratio, this gives an incomplete picture of total human resource productivity. Second, information regarding human assets and their productivity is simply not published as widely as overall firm performance data. These two obstacles do not prevent such assessments from being made, however.

According to the non-financial portion of Coca-Cola's most recent annual report, the company had approximately 146,200 "associates" (the company's preferred term for its employees), while PepsiCo's corporate website states that it has "over 285,000" employees — information that it does not publish in a more precise form in its more heavily scrutinized annual report (Coca-Cola, 2012; Pepsi, 2012a). While Coca-Cola's higher profit margin might initially suggest that the company is more efficient in its human resource use than Pepsi, given that the former has roughly half the employees of the latter, a more accurate comparison comes from examining the actual operating revenue generated by each company, which is directly dependent on human resource activity and productivity (Fitz-enz & Davison, 2002; Palepu, 2007). Pepsi had $66.5 billion in net revenue in 2011, while Coca-Cola recorded revenues of $46.5 billion — a smaller gap than what exists between the two companies' employment numbers (Pepsi, 2012; Coca-Cola, 2012). The employee-to-revenue ratio for Pepsi is 285,000 / $66.5 billion, or approximately 0.0000043, while for Coca-Cola it is 146,200 / $46.5 billion, or approximately 0.0000031. The lower ratio suggests greater efficiency; however, the divide is clearly not as significant as an initial cursory analysis of employee numbers and profit margins might suggest.

As noted above, this quantitative analysis provides only a crude understanding of true human asset productivity at these companies. Given the differences in the scope and structure of their operations, one might conclude that Coca-Cola is actually less productive with its human assets — much of the actual manufacturing and distribution is not handled directly by Coca-Cola but by independent bottlers and distributors, meaning its human assets are more heavily concentrated in white-collar office roles (Coca-Cola, 2012). Investors would still benefit from the increased quantitative efficiency this arrangement produces, but competitors might be able to find an edge in terms of human resource management and operational efficiency.

Plant and Equipment Productivity

This is another area of analysis that is difficult to carry out based on readily available information. To determine the true productivity of specific factories, plants, and equipment, audits of such facilities need to be carried out through direct observation (Palepu, 2007). Nevertheless, information provided in the annual reports of most major companies can be used to estimate plant and equipment productivity — and thus how fully the real assets of a company are utilized. This enables both competitors and investors to gain an understanding of a business's real operations and provides a rough way of estimating what growth — in terms of actual production rates or new facility construction — would look like in terms of both cost and revenue increases, which again carries varying implications depending on one's perspective (Palepu, 2007).

A standard line item on any publicly traded company's consolidated balance sheet, included as part of the annual report, is property, plant, and equipment. While this figure includes property such as office buildings not directly used in production, it represents the best available estimate of plant and equipment value commonly accessible to those outside the company — i.e., investors and competitors (Palepu, 2007). Comparing this number to operating revenue, as was done with human asset estimations, should allow for a rough estimate of plant and equipment productivity. In a scenario like the present one — comparing two fairly similar companies — the numbers are actually more reliable despite including non-production property, because both companies are likely to hold comparable proportions of such property, which would essentially cancel out in the comparison. For Coca-Cola, the property, plant, and equipment value in 2011 was $14.94 billion; for Pepsi, this value was $19.7 billion (Coca-Cola, 2012; Pepsi, 2012). While Coca-Cola's higher profit margin initially suggests that the company uses its plants and equipment more efficiently, the calculated ratio (property, plant, and equipment divided by revenue) tells a more nuanced story: Coca-Cola's ratio is 0.32 and Pepsi's is 0.29 — close figures, but suggesting that Pepsi is able to generate more revenue for every dollar of property and equipment it owns.

This makes sense given the operational differences between the companies. As noted above, Coca-Cola does not own or operate all of the production elements for its products, so it is logical that it carries much lower property values than Pepsi, which is more fully vertically integrated (Coca-Cola, 2012; Pepsi, 2012). This also suggests, however, that Pepsi's revenue generation and overall value are more tightly tied to its physical properties, plants, and equipment, meaning expansion could be more costly for the company (Palepu, 2007). In this way, higher asset productivity may not translate into long-term efficiency and profitability — a consideration that both investors and competitors should weigh carefully.