Coca-Cola vs. PepsiCo: Business Strategy Compared

Resources and Capabilities: Coca-Cola vs. PepsiCo

Coca-Cola's most important resource enabling international expansion is its operational structure, which is strongly dedicated to emerging markets outside the U.S. where soda sales are still growing — especially in Brazil, China, and Russia. By this measure, Coca-Cola is very well positioned, with operating segments encompassing (1) Africa, (2) East and Southeast Asia and the Pacific Rim, (3) the European Union, (4) Latin America, (5) North America, (6) North Asia, Eurasia, and the Middle East, and (7) bottling investments (Badal, 2007, p. 33). The structure of strong geographic orientation manages franchise relationships, while headquarters in Atlanta maintains global responsibility for sales, finances, marketing, and specific product lines such as water and juices (Holstein, 7 November 2011). This arrangement allows Coca-Cola to respond quickly to consumer demands across different countries.

PepsiCo's biggest resource and capability is its broad product diversification, encompassing both a beverage line and a snack line (Frito-Lay, etc.). The international market served PepsiCo's snack division well, with operating profit rising 26% and snack volume up 9% in 2006; Mexico and Russia were two contributing markets (Badal, 2007, p. 38). PepsiCo also performed well in addressing growing consumer concerns about the potentially negative health effects of highly sweetened sodas and salty or fried snack foods (Sivy, 23 April 2007, p. 1) by introducing reduced-calorie, sugar, fat, and salt snack options.

Shareholder Value Creation

PepsiCo has created greater value for its shareholders over these years. On 9 February 2010, Coca-Cola reported a large surge in fourth-quarter profits. The 55% year-over-year gain in net income was due largely to increased sales volume in international markets. Coca-Cola earned $1.54 billion, or 66 cents a share, in the final quarter of the year — substantially better than the $995 million, or 43 cents a share, earned in the final quarter of 2008. Coca-Cola also posted strong revenue figures, with sales of $7.51 billion in the fourth quarter of 2009, compared with $7.13 billion a year earlier (Dlugosch, 14 April 2010, p. 1).

In the race for pure beverage sales, the edge still goes to Coca-Cola. The company's unit case volume — a measure of all drinks sold worldwide — climbed 5%, with gains of 8% in Brazil, 20% in India, and a remarkable 29% in China. By contrast, PepsiCo's international sales account for only about half of its revenue, up from a mere 25% of overall revenue a decade earlier, but still lagging behind Coca-Cola's international reach (Dlugosch, 14 April 2010, p. 4). That gap is actually an advantage for PepsiCo, however, because it indicates greater room for overseas growth.

On 11 February 2010, PepsiCo reported a near-doubling of its fourth-quarter profit, also on strong overseas sales. PepsiCo's revenue grew as well, with sales for the final three months of the year rising approximately 4.5%, to $13.3 billion, from $12.74 billion the previous year. Coca-Cola shares were trading at a price-earnings ratio of 18.35 at that time, while PepsiCo shares traded at a P/E of 17.50, meaning Pepsi shares were slightly cheaper. Coca-Cola shares carried a dividend yield of 3.2%, while Pepsi's dividend yield was slightly lower at 2.7%.

From an investment perspective, buying PepsiCo shares appeared to be the stronger decision, because the company had diversified into snack items (Frito-Lay and others) while Coca-Cola had not. The ability to leverage sales across a wider variety of products is a powerful driver for PepsiCo both in the U.S. and abroad (Dlugosch, 14 April 2010, p. 4). The brand value was roughly equal for both companies, as each possesses a powerful brand name and numerous popular products (Dlugosch, 14 April 2010, p. 1).

Organizational Structure as a Strategic Driver

Coca-Cola's organizational structure was the true driver of its business performance in the period under review. Following its strategy of "think global, act local," the company maintains strong regional managers while headquarters in Atlanta retains global responsibility for sales, finances, and marketing — factors that contribute substantially to overseas expansion (Holstein, 7 November 2011, p. 1). Coca-Cola also benefited from being the largest soda beverage company in the world, producing over 400 brands (Badal, 2007, p. 32).

By contrast, PepsiCo benefited from its wide product diversification. Its product line includes popular snack brands, while Coca-Cola has remained focused on beverages. This gave PepsiCo the lead in overall sales — $43 billion compared to Coca-Cola's $31 billion in 2009 (Dlugosch, 14 April 2010, p. 1).

References

Ali, T. (26 February 2010). The Coca-Cola Company to buy Coca-Cola Enterprises: Vertical integration continues (pp. 1–4). Accessed 6 December 2011.

Badal, A. (2007). Coca-Cola Company (pp. 33–40). [Publication data incomplete.]

Coke near deal for bottler. (2009) (pp. 1–3).

Dlugosch, J. (14 April 2010). [Coke or Pepsi — which stock to buy?] (pp. 1–4). Accessed 4 December 2011.

Holstein, W. J. (7 November 2011). How Coca-Cola manages 90 emerging markets. Accessed 4 December 2011.

Pepsi gets a makeover: Taking the challenge. (25 March 2010) (pp. 1–4). Accessed 6 December 2011.

Ross, J., and Ross, S. (2009). PepsiCo (pp. 41–51). [Publication data incomplete.]

Sivy, M. (23 April 2007). In cola wars, Coke now has the edge (pp. 1–2). Accessed 4 December 2011.