In the Spotlight - PepsiCo, The Coca-Cola Co battle into H2
PepsiCo's share slid 3.39% on Thursday compared to Coca-Cola's 3.4% lift on Monday
On the face of it, the winner may have appeared clear, as PepsiCo's share slid 3.39% on Thursday compared to Coca-Cola's 3.4% lift on Monday. Yet, while the two firms continue their neverending battle for brand dominance, the pair are now facing a further battle against pressures beyond their control - that of rising commodity costs.
Coca-Cola was the first to release its figures this week, revealing an 18% increase in first-half profits, driven by strong worldwide volume growth of 6%. The results pushed shares up by 3.4% in afternoon trading.
Pepsico on the other hand, revealed flat first-half profits, resulting in a 3.39% fall in its share price on Thursday.
For Coca-Cola, its results came in ahead of analyst expectations on the group's strength in emerging markets. Morningstar analyst, Philip Gorham, told Reuters that the surprise was not that international markets grew, but the rate at which they grew.
"Coke is investing in distribution in emerging markets and gaining points of sale," he said.
But, while Coca-Cola's results may be pleasing to investors, the world's largest soft-drink maker, like PepsiCo, is continuing to face struggles in its home market, where a still shaky economy has dulled sales of soft drinks and global commodity pressures continue to bite.
Indeed, alongside flat first-half profits, PepsiCo conceded that the operating performance of its North America beverage division was "well below expectations" in the second quarter of 2011. CFO Hugh Johnston, blamed "exceptionally high" levels of commodity inflation, poor consumer category demand, and a tough pricing environment.
Indeed, both firms have confirmed price increases in North America in a bid to offset commodity pressures. Coca-Cola raised prices by 1% to 2% in the first half of the year, and has already started work on additional increases that should total 2% to 3% for the year. PepsiCo is raising its drinks prices by an average of 3% to 5% between mid-July and Labor Day on 5 September. The increase will put PepsiCo's prices 5% to 7% higher than they were a year ago by the end of the summer.
Consumer Edge Research analyst Bill Pecoriello said Coca-Cola's reiterated plan to raise prices in the rest of the year means that its net increases could be below Pepsi's. "PepsiCo will have to decide whether to settle for less pricing or meaningful share losses," Pecoriello wrote in a note to Reuters.
Morningstar analyst Philip Gorham believes that raising prices again could be difficult, given the delicate state of consumer spending following weak US jobs growth in June.
"Pricing should be led by the consumer, but the trouble is the consumer, particularly at the low end, is driven by unemployment, which is back up," Gorham told Reuters. "I just don't think the environment is right to raise prices."
Wells Fargo analyst, Bonnie Herzog was particularly unimpressed by PepsiCo's first-half performance and told the Financial Times that the "tenuous predicament" facing the beverage business could make it harder for the company to make its planned price increases.
PepsiCo's chief executive, Indra Nooyi, blamed consumer and competitive conditions that had become more difficult than the company expected. In an earnings call on Thursday, she said the pick-up in consumer spending this year had reversed in the past few months.
The question posed by Bernstein Research analysts however, is, when does North American profitability recover for PepsiCo (PEP) and Coca-Cola (KO)?
"Will KO continue its aggressive tactics after lapping CCE in Q4?," Bernstein wrote in an analyst note. "Across most investors with whom we speak, the perception (rightly or wrongly) is that PEP would like there to be more pricing increases in the marketplace, but that KO is holding prices back."
Nonetheless, the analysts added: "For PEP, we continue to believe that challenges in the company's beverages business will improve, aided additionally by strengths and yet-to-be-proven pricing power in snacks/food. We also believe that ... integration costs, input inflation, and other reinvestment needs can be largely overcome by significant cost savings opportunities."
The co-founder of Vitaminwater has made a "significant" investment in US drinks firm Bodyarmor....
PepsiCo has formed an alliance with Ocean Spray Cranberries for the manufacture and distribution of fruit-based drinks in Latin America....
- Interview - Beam Suntory's EMEA president
- Beckham, Diageo and the Allure of the VIP Pop-Up
- Interview - William Grant & Sons
- What do A-B InBev results mean for SABMiller deal?
- Interview - Beam Suntory's EMEA head - part II
- Diageo, Beckham launch VIP pop-up for Haig Club
- Diageo reveals US$400m Tequila investment
- Pinnacle Vodka, Skinnygirl roll out on ice
- Diageo completes Don Julio, Bushmills swap deal
- Beam Suntory strikes new Baltics tie-up
- Global non-Scotch whiskies insights - market forecasts, product innovation and consumer trends research
- Wine, 2014 and the future
- Beam Suntory Inc. - Strategy and SWOT Report
- Global RTD/RTS insights - market forecasts, product innovation and consumer trends research
- Spirits and RTDs, 2014 and the future