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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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