You Are an Investment Analyst: Pepsi versus Coca-Cola
The rivalry of two non-alcoholic giants PepsiCo and Coca-Cola has been going on for decades. The main index, which is taken into account by all stakeholders in this case, is a measure of the correlation of forces named market share. On an international scale, Pepsi won the competition in 1939. The basic idea was to use a bottle of displacement, two times the displacement of the Coke bottles with the advertising company with the logo ‘Twice as much for the same money’. The bottle was 12.5 ounces instead of 6.5 ounces for the same 5 cents. It was a brilliant strategy, which had a spectacular incarnation. The brand became popular, especially among children. In regard to the sweets and lemonade, children always prefer quantity to quality. Moreover, all happened with a minimal advertising budget. In 1939, Coca-Cola spent $15 million on advertising costs, while PepsiCo spent only $600,000.
Older people preferred Cola, while the young ones were more willing to consume Pepsi. Additionally, the larger bottles were intended primarily for young people. In 1961, the concept was first expressed in the motto ‘Pepsi – for those who feel young’. By 1964, the idea had gained the form that became a classic ‘You – generation of Pepsi’. Thus, the strategy of Pepsi was aimed at changing the position of competitors who were out of time and out of fashion. Pepsi managed to achieve not only this goal, but the other, no less valuable psychological advantage. The company used the age rivalry that existed among the target audience. The motto ‘new generation chooses Pepsi’ has become another expression of the youth strategy, on which the attack on the ‘old’ Coca-Cola product is based.
The paper will provide an analysis of the financial statements of PepsiCo and the Coca-Cola Company in order to present comparative results to the potential investors and creditors as well as provide recommendations for the company that requires the upgrade for the annual sale and revenue increase.
The Company Overview: PepsiCo
PepsiCo’s history began in the 20th century. In August 1898, Caleb Bradham, the owner of a small pharmacy in New Bern, North Carolina, invented the recipe for a refreshing drink of cola nut and vanilla, which was named Pepsi-Cola. In 1902, the Pepsi-Cola Company was founded.
Today, the company’s revenue is about 65 billion dollars. Retails sales of each of the 22 PepsiCo brands are more than a billion dollars a year. The company is represented in 200 countries and employs about 300,000 people. PepsiCo, whose history began with the production of soft drinks, is constantly expanding its product portfolio at the expense of healthy foods and beverages. PepsiCo’s mission is to be the best company in the world-food producer, focused on finished products and beverages. The company’s vision focuses on the judicious use of the environmental resources, on activities that benefit society as well as the commitment to increase shareholder income that will make PepsiCo a truly stable and sustainable company.
Finding weaknesses in the leader’s strength is the PepsiCo’s basic principle of offensive marketing war. The Coca-Cola’s strength was in releasing the first drink of a different sort. It appeared on the market much earlier than Pepsi’s drink. That was an obvious force of Cola but it led to another less obvious result. Older people preferred the Cola, while the youth were more willing to consume Pepsi. Moreover, the larger bottles were intended primarily for the youth. Another strategic move undertaken by PepsiCo in the mid 70’s was called the Pepsi challenge. It included a blind test evaluation of two drinks. The participants chose Pepsi over Coca-Cola by a margin of 3:2 and this fact was made public in the television commercials.
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PepsiCo uses an innovative approach that is associated with the conclusion of new and unique products that attract new buyers who are the leading market share. These were the launch of drinks with such tastes as Cherry, Twist launched earlier than Coca-Cola did, as well as Pepsi Blue Christmas. Additionally, the production and distribution of Irn-Brew was launched in Scotland, which had no analogues among the competitors drinks. In spring 2003, Pepsi produced a unique, unprecedented in the competition, drink Pepsi X, to which Coca-Cola could not answer in any way, but enhanced the sale of its sport drink Powerade. Containing guarana and taurin, the new Pepsi X has created a semi-market energy drinks on which it has the leading position at the moment (Bhat, 2008).
The Coca-Cola Company
The Coca-Cola Company was established by Asa Candler having an initial capital of $100,000 in the state of Georgia in 1892. The trademark Coca-Cola, which has been used since 1886, was registered in the US Patent Office on January 31, 1893. Currently, Coca-Cola has more than 3,300 drinks. The Coca-Cola Company owns four of the five most popular brands of soft drinks. The brand Coca-Cola is the most expensive brand in the world that is familiar to 94% of the population. More than 90,000 highly qualified employees work for the company worldwide.
Along with the Coca-Cola brand, which is considered to be the most expensive brand in the world, the company’s product line contains 12 other brands that cost more than a billion dollars. These drinks are Diet Coke, Coca-Cola Zero, Sprite, Fanta, Vitaminwater, Minute Maid, Powerade, and Georgia Coffee. Throughout the world, Coca-Cola is a number one supplier among drinking water, carbonated soft drinks, juices, nectars and ready-to-drink beverages. With the largest distribution system in the world, there are a number of eventual consumers in more than 200 countries who are pleased to drink Coca-Cola.
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To manage the business, the company is divided into two sectors, the Business Sector in North America and the International Business Sector. The Business Sector of North America consists of Coca-Cola USA, Coca-Cola Ltd. in Canada and Coca-Cola Foods located in Houston, which produces juices and juice drinks. The International Business Sector is divided into groups; each one is responsible for a specific geographic region of the world. The partners are all those people, groups and businesses that contribute to the promotion of products on the chain and enhance the value, including the bottlers. The company’s consumers are people all over the world who like the Coca-Cola (Heisinger, 2008).
Financial Health of the Companies
In order to analyze the companies’ profitability ratios that creditors may be interested in and present recommendations to management that can be used for the improvement of the companies’ financial health, it is relevant to discuss such ratios as net profit margin, return-on-assets (ROA), return-on-equity (ROE) that have the next formulas:
Net profit margin = (Net profit after tax) / Sales * 100,
ROA = Net profit after tax / Total assets * 100,
ROE = Net profit after tax / Stockholders’ equity * 100 (Harrison & John, 2012).
Table 1. PepsiCo Profitability Ratios, 2013 – 2012
The Table 1 represents the company’s financial changes during last 2 years. Thus, profitability ratios show the company’s growth and stability. Thus, PepsiCo’s revenue increased in 2013 compared with 2012 year, when net profit margin increased from 9.49% in 2012 to 10% in 2013 fiscal years (PepsiCo, 2014). The increase in annual profit resulted better ROA ratio in 2013 when it became 8.76% compared to 8.33% in 2012. However, it still remains under 100% and, therefore, did not bring any harm to the company’s capability to pay its debts. The same situation was with ROE ratio, but it was increased from 27.74% to 27.81% in 2013 year compared to 2012 (PepsiCo, 2014). It proofs that PepsiCo earned more money, and less investments were involved into the company’s operational activity.
Table 2. The Coca-Cola Company Profitability Ratios, 2013 – 2012
The given table represents the company’s financial changes during last 2 years. Although, the Coca-Cola Company’s revenue increased in 2013 compared with 2012 year, net profit margin decreased from 18.92% in 2012 to 18.41% in 2013 fiscal years (The Coca-Cola Company, 2014). The decrease of net profit margin resulted in the fall of ROA ratio, which decreased from 10.54% to 9.58% in 2012 and 2013 years respectively. However, it still remains under 100% and, therefore, did not bring any harm to the company’s capability to pay its debts. The same situation was with ROE ratio, but it was decreased from 27.4% to 25.8% in 2013 year compared to 2012 reported year (The Coca-Cola Company, 2014). It proofs that the Coca-Cola Company earned more money, but it had to attract extra investments into the company’s operational activity.
The results of profitability ratios of both companies allow representing the following recommendations. First, net profit margin can be increased with the help of improvement of the production of marketable products, the quality of products and selling price as well as the reduction of the production cost. Second, ROE and ROA can be improved with the help of acceleration of goods circulation, weight reduction of costs and increase in the rate of return by increasing prices.
The Impact of News Events to the Companies’ Finances
In 2012, two food industry giants PepsiCo and Tingyi-Asahi Beverages agreed about a strategic alliance formed in China in which both companies would have significant benefits. PepsiCo would own 5% of Tingyi-Asahi Beverages shares. By 2015, the company plans to increase its shares to 20%. At the same time, PepsiCo’s shares of 24 bottling operations would be transferred to the division of Tingyi. Thus, the production of world-famous beverages would be established in China and the Chinese equipment would be used in the manufacturing process. Tingyi would represent PepsiCo as a franchise bottler in China, which would greatly develop China’s beverage market. As a result, this deal is a great opportunity for PepsiCo to increase its market share, as well as annual sales and revenue (“PepsiCo finalizes,” 2012).
In accordance with the $2.15 billion deal, Coca-Cola announced that it would transfer its worldwide business in Monster Beverage in 2014. In exchange, the Monster, which includes Peace Tea and Hansen’s Natural Sodas, partially gives its business to the Coca-Cola Company. This transaction provided a right of access to the Monster of Coca-Cola’s world sales system. For Coca-Cola, the partnership would provide the opportunity to increase its share in the fast growing market of energy drinks. The head of Coca-Cola said that the company continued to find the innovative approaches of partnership that contributed to the fact that the company remained at the forefront of consumer trends in the beverage industry. The Monster shares jumped up to 22% on the news, while the shares of Coca-Cola rose to 1.2%. The deal was concluded as a result of the modern trends of consumers in developed countries in regards to health care matter, which are currently seeking to abandon the use of soft drinks that can cause the development of obesity. Currently, Coca-Cola is struggling with falling sales from products that have previously been the main source of its revenue (“Coca-Cola in acquisition,” 2014).
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Financial Analysis: Pepsi versus Coca-Cola
According to PepsiCo (2014), the company’s net revenue was $66,415 million and $65,492 million in 2013 and 2012 years respectively. It included $31,243 million and $31,291 million of cost of sales, $25,357 million and $24,970 million of selling, general and administrative expenses, as well as $110 million and $119 million of amortization of intangible assets in 2013 and 2012 years respectively. This brought the company $9,705 million and $9,112 million of operating profit in 2013 and 2012 reported years accordingly. At the same time, PepsiCo’s net income before taxes was $6,787 million and $6,214 million, while net income attributable to PepsiCo less net income attributable to non-controlling interests became $6,740 million and $6,178 million in 2013 and 2012 reported years respectively. Basic shares of the company were leveled at $4.37 and $3.96, while diluted shares were leveled at $4.32 and $3.92 per share in 2013 and 2012 fiscal years accordingly.
According to The Coca-Cola Company (2014), the company’s net operating revenue was $46,854 million and $48,017 million in 2013 and 2012 years respectively, which included $18,421 million and $19,053 million of cost of goods sold, $17,310 million and $17,738 million of selling, general and administrative expenses, as well as $895 million and $447 million of amortization of intangible assets in 2013 and 2012 years respectively. This brought the company $10,228 million and $10,779 million of operating profit in 2013 and 2012 reported years accordingly. At the same time, the Coca-Cola Company’s income before taxes was $11,477 million and $11,809 million, while net income attributable to shareowners of the Coca-Cola Company less net income attributable to non-controlling interests became $8,584 million and $9,086 million in 2013 and 2012 reported years respectively. Basic net income per share of the company was leveled at $1.94 and $2.00, while diluted net income per share was leveled at $1.90 and $1.97 per share in 2013 and 2012 fiscal years accordingly.
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The analysis of the both companies’ financial health allows one to state that PepsiCo outperformed the Coca-Cola Company. Thus, it is relevant to recommend for the Coca-Cola Company management the following steps. First, the management should consider the implementation of an innovative process for the production and distribution of its products, which should possess novelty, satisfy market demand and make profit. Second, the Coca-Cola Company should be in a constant process of improvement of planning measures in order to increase profits. It can contain an increase in output, improvement of product quality, sale of surplus equipment and other property or renting it out, as well as reduction of production costs due to more rational use of material resources, capacities and areas of labor and working hours. Additionally, the management can reconsider the policy of diversification of products and expansion of the market sales by conducting a deeper analysis of the market share and consumer demand.
In order to analyze both companies’ balance sheets, it is required to consider a vertical analysis for each company given below in the Table 3 and 4.
Table 3. PepsiCo Comparative Balance Sheet, December 31, 2013 – 2012
According to the Table 3 (PepsiCo, 2014), PepsiCo holds 23% and 22.9% of debt in proportion of short-term assets in 2013 and 2012 years respectively. At the same time, the stockholders’ share was 31.5% and 30.0% in proportion to total liabilities and equity.
In the Table 4 (The Coca-Cola Company, 2014), the Coca-Cola Company holds 30.9% and 32.3% of debt in proportion of short-term assets, while the stockholders’ share was 37.1% and 38.5% in 2013 and 2012 fiscal years accordingly.
Table 4. The Coca-Cola Company Comparative Balance Sheet, December 31, 2013 – 2012
The prepared vertical analysis of both companies allows one to state that the Coca-Cola Company strategy was not as much productive as PepsiCo’s and this is why its balance sheets can be improved in the following way. First, it is recommended to enter the combined form of registers that provide information about the flow of funds in the synthetic accounts in the context of individual debts, as well as in respect of payments to creditors for the materials for accounts receivable for the sale of products. Second, it can be relevant to create such resources of information for the balance sheet, which processing the property of visibility could be the least cumbersome. Perhaps, this would require the introduction of inclusive differentiation of registers on the basic and intermediate.
The given research paper allows one to analyze both companies’ financial health like PepsiCo and the Coca-Cola Company in order to see their strengths and weaknesses in regards to gaining profit. The rivalry of two non-alcoholic giants PepsiCo and Coca-Cola has been going on for decades. PepsiCo’s strategies have helped to overcome the Coca-Cola Company in many cases, but mainly due to the expansion of the interest to its product of the youth. In some aspects, the Coca-Cola Company is losing positions, in which PepsiCo wins. Although, both companies require improvement in terms of profitability ratios as it will help them to attract more revenue and increase the target groups. The Coca-Cola Company has been recommended to improve the future strategies in terms of obtaining income. It is believed that the given recommendations will be helpful in building a successful campaign in not only its competitive strength but in trying to overcome PepsiCo in many positions.
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