Soft drinks rivals: The brands they are a changin’

Christopher Shanahan, a research analyst at Frost & Sullivan, said that despite the long-standing global rivalry between these prominent cola makers, both groups’ operations were increasingly becoming harder to compare directly, as they pursue growth.

Shanahan said that both companies understood that in key Western markets like the US or the EU, carbonated beverages that were their mainstay, were now at a mature stage and potentially on the verge of decline.

A change, the analyst claimed, was being spurred by growing interest in beverages purporting to offer health and wellness benefits, such as juices and waters.

Profit push​

With this week’s release of the drinks groups’ respective year-to-date results, the contrast of PepsiCo’s fall in operating profit to Coca-Cola’s earnings boost, were reflective of how they are individually adapting to a changing beverage market, said Shanahan.

“You have PepsiCo, which is very diversified in terms of snack manufacture and now one of the leading food companies in the world, and Coca-Cola, which has pursued massive global expansion in various beverage segments,”​ he stated.

“We may therefore one day see a market when the two groups are no longer in direct competition with each other.”​

Results​

For the three-month period ending 28 September, Coca-Cola said that its operating sales rose by 9 per cent to $8.3bn on the back of volume growth across its international markets.

The company, as a result, posted operating profit of $2.1bn over the twelve-weeks, a 20 per cent improvement over the same time last year, which it claimed was aided by strong sales growth in emerging markets that had helped offset concerns in North America.

Over the same time, rival PepsiCo said flooding at one of its US-based baked goods operations and a continued ‘weakness’ in its liquid refreshment category had negatively impacted it performance during the third quarter.

While net sales for the group were up by 10.5 per cent to $11.24bn for the three months ending 6 September, operating profit was marginally down by 4 per cent to $1.98bn over the period.

Overall, year-to-date operating profit was nonetheless up by 5.1 per cent for the three quarters, which amounted to $5.7bn.

Pepsi rethink​

Shanahan reiterated PepsiCo’s concerns that flooding during July at a major Quaker Foods plant in Cedar Rapids, Iowa, led to a nine per cent reduction in production volumes over the quarter.

In reacting to these difficulties, the analyst said that PepsiCo already appeared to be taking hard decisions in attempts to turnaround declines in its US beverage business, by attempting to cut operating costs.

The group said it was therefore considering cutting 3,300 positions from its workforce as part of plans to become more cost efficient in its manufacturing.

International push​

Despite differences in their respective performances, Shanahan said that both companies had still shown strong growth in segments like functional beverages and other alternatives to carbonated beverages in both established and emerging markets.

Pepsi, like Coca-Cola, said that it too was benefiting from sales volume gains in its non-US operations. Markets such as China, the Middle East and Africa had all helped to push an 11 per cent increase in global beverage sales.

According to the analyst, Pepsi remains a little behind Coca-Cola in its ability to offset regional difficulties by exploiting demand in emerging and other international markets.

“In looking away from saturated beverage markets like ​North America​, Coca-Cola seems more adept at being globally local, or locally global,”​ said Shanahan.

The analyst said he was referring to the beverage company’s strong branded presence in markets like Latin America, where products were successfully being sold as if they were a product unique to consumers in the region.

This strategy was paying off for Coca-Cola, particularly in the Eurasia region, according to Shanahan.

Beverage resilience​

While the long-term direction of the soft drink market remains unsure, like the food industry as a whole, Shanahan claimed that drink makers were expected to be relatively resilient to current financial upheavals.

“All companies will obviously be impacted by ​North America​,”​ said the analyst, referring to recent difficulties in the stock markets that had served to undermine confidence in global banking.

“Pepsi’s recent downward trend is not reflective of industry troubles, for even with declining spending by consumers in the food service sector, traffic in grocery stores is expected to be boosted.” ​

Shanahan said one trend that was undeniable though was that major changes were afoot for the soft drinks market, particularly in shifting demand from traditional carbonated beverages.

“It will be interesting to see how companies adapt to these changes,”​ he stated.