"My FYs bigger than your FY"

"My FY's bigger than your FY"

The bitterest rivalry in the soft drinks market and arguably in the entire consumer goods arena is that between Coca-Cola and PepsiCo. Conveniently for those wishing to see how that battle is progressing, the two companies publish their annual results within a few days of one another. Ben Cooper takes a look at their performances and assesses who currently has the bragging rights.

As Coca-Cola and PepsiCo published their full-year results this week, one common strand could immediately be discerned. Emerging markets remain key growth areas for both companies, and have made important contributions for both over the last year.

Coca-Cola, which posted an 18% rise in net income for the year to US$6.82bn on revenues down 3% at $30.99bn, pointed to strong growth in both India and China.

PepsiCo also said growth in India had made an important contribution to a 16% increase in full-year profits to $5.95bn on flat sales at $43.23bn. Its beverage volumes grew by 8% for the year, with growth of some 32% in India. It also recorded high single-digit growth in Thailand and Egypt. The company said international sales as a whole were buoyant, with PepsiCo International delivering double-digit net revenue and core operating profit growth, but China was not as positive a story for PepsiCo as for its rival.

While Coke reported a 29% volume increase in China in the fourth quarter, PepsiCo said volumes had declined, attributing the fall to a shift in the timing of the Chinese New Year and promotions by rivals. This is borne out by Coke's progress. The company posted volume growth in India and China in the fourth quarter of 20% and 29% respectively.

This appears to be indicative of a differing approach towards promotions taken by the two companies. PepsiCo CEO Indra Nooyi said the company had made a conscious decision "not to hit the volume accelerator for one period or one quarter". However, some analysts believe this policy may have cost the company in North America, where PepsiCo's fourth-quarter volumes fell by 5% compared with Coke's decline of 1%.

It should always be borne in mind that while on the soft drinks side the two companies are directly comparable and are locked in a number of head-to-head brand battles, most notably that between Coke and Pepsi, PepsiCo is a more diversified company with substantial food interests. Indeed, PepsiCo's snacks business has undoubtedly bolstered its overall performance, with snack volume sales up 13% in the fourth quarter, interestingly also on the back of progress in emerging markets.

What clearly unites the two companies is the continuing woeful state of their common domestic market. But while both will be anticipating some degree of recovery in the US this coming year, the stakes are clearly a little higher for PepsiCo, given its bold move to acquire its two largest bottlers and integrate its network. It is set to complete the $7.8bn buyout of PepsiAmericas and Pepsi Bottling Group by the end of this month.

PepsiCo sees the move as giving it greater flexibility and increasing speed to market for new products, and will be hoping that it puts it in good stead to capitalise on any faint recovery in the US.

Credit Suisse analyst Carlos Laboy believes the North American beverage business is rebounding, but says this will not be the critical factor for PepsiCo in the first quarter, as it takes on the formidable challenge of setting up a radically altered operating structure. "On the eve of a major surgery it's futile to point out that the patient cosmetically looks a little better," Laboy wrote in a research note.

But given that for years the two companies have operated parallel bottler strategies PepsiCo's move creates a key point of difference between the two. PepsiCo's new approach will be keenly watched, and if it proves successful over the coming few years the company could be seen to have stolen a march on its competitor, particularly as Coke chief executive Muhtar Kent has repeatedly ruled out a similar move for the Atlanta-based soft drinks giant.

Another area where PepsiCo may have recently taken the initiative is in healthier products. At the end of January, Indra Nooyi said the company planned to triple PepsiCo's $10bn revenues from the better-for-you food and drink market with the introduction of several products. Nooyi reiterated this point at the analysts'  briefing this week when she said that the success of its Quaker and Tropicana brands had created an "unbelievable" brand platform, coupled with enhanced R&D capabilities, to grow the healthier products business  range from its $10bn base.

"I feel we have a great platform to expand the nutrition business and I feel very good about our prospects here," Nooyi said.

The rationale behind the strategic shift was to a degree underlined by PepsiCo's performance in the US. In spite of the overall drop in beverage volumes, PepsiCo said it had been "encouraged" by the performance of its SoBe Lifewater and Gatorade beverages, which had gained market share during the fourth quarter.

Moreover, Morningstar analyst Philip Gorham believes the change in bottling structure will assist the move to healthier drinks. "This will be an important part of their shift to healthier drinks because as non-sparkling drinks become more popular, meeting consumer demands will require a more broad product portfolio," Gorham tells just-drinks.

Coca-Cola has plenty of brands to compete in this area too. In fact, the company pointed to a 9% increase in volumes of teas, juices and waters in the fourth quarter, albeit driven by a 14% increase internationally with sales at home flat. But Coke has not gone so far as to make it a strategic focus in the way that PepsiCo has done, while Gorham suggests PepsiCo's new structure may tip the balance between the two in this area. "Being more nimble in the route-to-market may just give Pepsi an edge," he says.

As for who is currently in the ascendency overall and can anticipate the best year ahead, it appears that PepsiCo has staked more this year than its rival, with the integration of its bottler network and its significant commitment to healthier products. If both those strategies prove successful, 2010 could be a good year for the company.

Philip Gorham adds: "Coke vs. Pepsi is going to hot up in 2010, especially in drinks. From the fourth quarter results, you would have to say that Coke are by far the happier because they have survived the economic storm better. But they should be looking over their shoulders. Pepsi's bottler acquisitions in North America should give them more flexibility to interpret and react to consumer tastes and preferences and to better manage their relationships with retailers."

Given that the major growth is still expected to come from international markets, much is made of Coca-Cola deriving a larger part of its business overseas, and therefore being less exposed to the frailties of the home market.

PepsiCo's international sales represent around half of its turnover, compared with 75% at Coca-Cola. But PepsiCo points out that it therefore has further to grow internationally than its rival. Indeed, international sales only represented 25% of PepsiCo's revenues around ten years ago.

Both brands will expect a global dividend from this year's soccer World Cup, but history has shown that Coca-Cola tends to gain the greater benefit from major sports tournaments.