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How Coca-Cola and PepsiCo

Will Thrive In The 21st Century


The market has left Coke and Pepsi for dead, but wise investors know
that both companies are in position to dominate for another century.
Read enough headlines and you'll think that Coca-Cola (NYSE:KO) won't survive, let
alone thrive, in a world that has become increasingly hostile toward its key
product. PepsiCo (NYSE:PEP), too, is under pressure to relinquish its beverage unit and
focus on its thriving snacks business.
As usual, the market has focused on the latest data point at the expense of seeing the
bigger picture. Carbonated soft drink volume has been declining for years, but both stocks
have kept pace with the broader market. It was not until an especially slow year in 2013
that the market decided that the soft drink business was doomed. However, last year's
stumble will only reinvigorate the soft drink giants and return their focus to long-term
prosperity.
Complacency kills even great businesses
At Coca-Cola's 2013 annual meeting, the company's biggest cheerleader, Warren Buffett,
warned its employees and shareholders about the devastating consequences of
complacency:
The biggest thing that kills [great businesses] is complacency. You want a restlessness, a
feeling that you know that somebody's always after you but you're going to stay ahead of
them. You always want to be on the move. When you've got a great business like CocaCola...the danger [is] that you rest on your laurels.
Buffett says that not even great businesses can afford to be complacent. The market, it
seems, is judging Coca-Cola and PepsiCo to be just that: complacent.
This is not a completely unfair assessment, either. Coca-Cola has traditionally relied on
just a few brands to drive a majority of its revenue. Coke and Diet Coke alone account for
more than a quarter of all U.S. carbonated soft drink sales. In 2012, the company passed
on an opportunity to buy energy drink giant Monster Beverage in what would have been
a roughly $15 billion acquisition. For 128 years, Coca-Cola's addictive sugar-and-

caffeine-infused beverages have carried the company through good times and bad -- so
management may be wondering why the company needs to change now.
The same can be said for PepsiCo, for which CEO Indra Nooyi vigorously defended the
status quo on the company's quarterly conference call with analysts and shareholders.
Instead of laying out a radical transformation plan, Nooyi declared that the company
would ride out the storm by emphasizing synergies between the snack and beverage
businesses. The market did not take the news well; the stock is down about 2% since the
conference call.
Coca-Cola and PepsiCo can still thrive in a changing world
Despite the setback of continued declines in U.S. soft drink sales, Coca-Cola and
PepsiCo are positioned to dominate the non-alcoholic beverage market for another
century. Both companies sport global distribution networks and enormous marketing
budgets. Even large brands like Monster and Red Bull would become instantly more
valuable under the wings of Coca-Cola or PepsiCo by way of economies of scale in
distribution and marketing.
However, both companies must adapt to changing consumer desires. PepsiCo jumped in
front of the health trend by investing in its Good-For-You and Better-For-You beverage
categories. However, the company has paid the price for neglecting its soft drink
business. With the inclusion of energy drink sales, PepsiCo's share of the carbonated soft
drink market declined three percentage points to 28.1% from 2007 to 2012. Over the
same period, Coca-Cola's share fell just eight basis points, or 0.08 percentage points, to
42%.
While PepsiCo overplayed the health trend by essentially ditching its U.S. soft drink
business, Coca-Cola has been slow to invest outside of its soft drink business. Instead of
restlessly pulling away from the competition, Coca-Cola sat on its laurels -- exactly what
Buffett warned the company not to do.
Even though both companies have long and storied histories, both of them need to adapt
to the consumer environment. In an interview with the New York Times, marketing
consultant Martin Lindstrom said that having your first Coke was once a rite of passage,
but now parents are concerned about the health effects of introducing their children to soft
drinks so the generational hand-off has broken down.
Moreover, Lindstrom says young people are more interested in energy drinks than they
are in carbonated soft drinks. Adults drink Coke to feel young, but young people prefer

energy drinks. Lindstrom's surveys indicate that the younger generation does not like
highly carbonated beverages. This poses a problem for Coke, which is about twice as
carbonated as energy drinks.
The solution, of course, is simple. Coca-Cola and PepsiCo need to continue promoting
their soft drink brands, but invest in trending categories that may also be durable. CocaCola's deal with Green Mountain Coffee Roasters is a step in the right direction, as this
gives the company a new channel for distributing its soft drinks. However, the company
needs to get in front of bigger trends, like energy drinks, and invest heavily.
Foolish takeaway
Coca-Cola and PepsiCo have the resources to dominate the beverage market for another
century; they simply need to execute. PepsiCo is off to a good start with its healthy
products portfolio, but it cannot give up on its soft drink business just yet. Coca-Cola, on
the other hand, needs to rid itself of complacency and make significant investments in
non-soft drink categories. If both companies shed their complacency and face reality, their
shareholders have a lot to gain.
Ted Cooper owns shares of Coca-Cola. The Motley Fool recommends Coca-Cola, Green
Mountain Coffee Roasters, Monster Beverage, and PepsiCo. The Motley Fool owns shares of
Coca-Cola, Monster Beverage, and PepsiCo. Try any of our Foolish newsletter services free for
30 days. We Fools may not all hold the same opinions, but we all believe that considering a
diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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50 years of fighting: The


competition between Coke and
Pepsi

It's a marketing slam dunk for PepsiCo.


The multinational food and beverage behemoth made waves recently, announcing that it
will become the National Basketball Association's exclusive food and beverage partner in
North America, according to Fortune magazine.
What makes this victory even sweeter for the soda conglomerate? They nabbed the title
from Coca-Cola, which has had a relationship with the NBA since 1986.
Competition between PepsiCo and Coca-Cola has been fierce almost all the way back to
PepsiCo's founding in the 1960s. Today, the better beverage debate is still alive and well.
An Opinion Outpost poll showed that, although Pepsi made some gains on the court,
respondents still prefer Coke. Out of over 3,000 respondents, some 62 percent noted that
Coke was their go-to cola while just 38 percent preferred Pepsi.
That controversy has spawned some of the most interesting and heated marketing
campaigns between the two drink giants. Here are just a few of the TV spots and ads
they've used over the years.
An out-of-this-world dispute
The fight between Coke and Pepsi knows no bounds. The two drink titans made the cold
vacuum of space their arena for deciding soda supremacy in 1985 when both companies
built special space cans for NASA's "Challenger" shuttle, according to Smithsonian
magazine. Coke spent an estimated $250,000 developing a can that could work in zerogravity. Pepsi claimed they spent $14 million researching and developing their own can.
The battle reached a high point when senators and the White House entered the debate,
lobbying for the cola they liked. Jimmy Carter preferred Coke. Ronald Reagan was a Pepsi
man.
At the end of the day, four cans from each brand went into space, and the astronauts
weren't partial to either beverage.

Fighting with Hollywood's heavy-hitters


Celebrities started endorsing Coke or Pepsi by the dozen in the 1980s, according to New
York Magazine.
Joe Montana challenged celebrity endorsers to a Pepsi taste test during the Super
Bowl. Vanna White spelled out her reasons for switching to Coke on an illuminated board.
Michael J. Fox appeared for Pepsi bottlers live looking for his "favorite" beverage, and
"Sugar Free" Sugar Ray Leonard explained to Super Bowl viewers why Pepsi was too
heavy for the former boxing superstar while opting for Coke.
Both companies have used the most popular names in the world like gladiators to fight
the soda battle, and not much has changed today. According to the Center for Science in
the Public Interest, these are the celebrities that have endorsed each brand within the
past nine or so years.
Coke
Michelle Kwan, Ted Ligety, Jessica Long, Evan Lysacek, Gretchen Bleiler, Maroon 5, Dacid
Boudia, Rockne Brubaker, Keauna McLaughlin, Alex Morgan, Henry Cejudo,
Common, Apolo Ohno, David Oliver, Danica Patrick, Amy Purdy, Marlen Esparza, Angela
Ruggiero, Ryan Seacrest, John Isner, Ken Jeong, Magic Johnson, Shawn Johnson
Pepsi
Sergio Aguero, Frank Lampard, Christina Aguilera, Akon, Melanie Amaro, Andrei
Arshavin, Michael Ballack, David Beckham, Jennifer Lopez, Eva Longoria, Mary
J. Blige, Drew Brees, Lionel Messi, Robinson Cano, Nicki Minaj, Mariah Carey, One
Direction, Paula Patton, Katy Perry, Didier Drogba, Bob Dylan, Tony Romo, Flava
Flave, Barry Sanders, Calvin Harris, Hunter Hayes, Thierry Henry, Shakira, Britney
Spears, Gwen Stefani, Justin Timberlake, Fernando Torres, Elton John, Kanye
West, Will.i.Am, Ricardo Kaka, Jack Wilshere, Beyonc
Whether those celebrities regularly sip either soft drink regularly is up for debate, but
they've all spoken on behalf of the companies within recent memory.