Both sell sugary drinks, but why is Coca-Cola suffering more than Pepsi? Recently, Coca-Cola, one of the "sugary drink twins," announced 4,000 layoffs, with estimated severance costs up to $550 million, about RMB 3.8 billion. In Q2, Coca-Cola's net profit fell 33% to $1.8 billion, meaning about one-third of earnings will be used to pay severance. In H1 financial reports, Coca-Cola's revenue declined 15.73%, while Pepsi's revenue grew 1.68%. Both sell sugary drinks, but why is Coca-Cola suffering more than Pepsi?

-01-

Root Cause:

Single Category vs. Diversified Categories

Under the pandemic's impact, cinemas closed, supermarkets shut, and sports events were postponed, nearly halting out-of-home consumption. This was bad news for both Pepsi and Coca-Cola. But compared to Coca-Cola, Pepsi was less affected. The main reason lies in their product structures—Pepsi also has a snacks business besides beverages, and both contribute equally; Coca-Cola, despite many brands, focuses solely on beverages, which dragged performance during the pandemic. Pepsi (left) has a clearly more diverse product range than Coca-Cola. Pandemic-induced stress and boredom boosted snack (especially salty snack) consumption; staying home increased home cooking, aiding sales of cereals and syrups. This gave Pepsi's snacks business a chance to shine. Although Pepsi also suffered from offline downturn, its snacks, cereals, and other categories saw notable growth due to home isolation, offsetting losses from closed venues and helping Pepsi weather the crisis. The strong performance of the snacks business directly drove Pepsi's organic growth of 7.9% in Q1 (excluding M&A, divestitures, and currency effects), reaching $13.88 billion, up 7.7% year-over-year. Pepsi's food business performed well in North America. Source: WSJ In contrast, Coca-Cola, which only sells beverages, was not so lucky. Coca-Cola generates half of its revenue from cinemas, restaurants, and stadiums. The consequence of a single category is that the company can hardly offset the revenue decline in the pandemic environment. Coca-Cola experienced perhaps its worst H1 in company history—in Q1, operating cash flow fell 29% to $556 million, and free cash flow dropped 43% to $229 million. Q2 was even worse—revenue fell 25% year-over-year, the largest quarterly drop in 25 years, with net profit of $1.8 billion, down 32%. This more clearly shows that facing the same blow, Pepsi's diversified categories are the foundation for growth. Previously, P&G maintained stable growth because pandemic-driven surges in paper and cleaning products offset declines in beauty, allowing P&G to continue brand investment.

-02-

Offline vs. Online

Consumers are indeed more accustomed to buying beverages in supermarkets or convenience stores; e-commerce has always been a challenge for both Coca-Cola and Pepsi. During the pandemic, the two companies delivered different answers. Pepsi has clearly made more efforts in digitalization. First, of course, is "buy, buy, buy." Acquisitions are a key strategy for Pepsi to enhance its e-commerce DNA. In recent years, Pepsi has acquired DTC brands to increase online business, aiding brand digitalization. The recent "double acquisition" is a typical example. In February this year, Pepsi acquired Baicaowei, an e-commerce brand under Haoxiangni Health Food Co., Ltd., for $705 million. Besides Pepsi's pursuit of "healthy food," Baicaowei's e-commerce DNA was key. Data shows Baicaowei's e-commerce revenue accounted for 95.22% and 95.64% of total revenue in 2018 and 2019, respectively, meaning Baicaowei can well compensate for Pepsi's lack of e-commerce expertise. Pepsi established a 200-person online channel service team as early as 2015, tasked with designing packaging and marketing strategies suitable for online sales. In May this year, Pepsi launched two e-commerce websites, snacks.com and PantryShop.com, offering two-day home delivery of its products to expand e-commerce. It is reported that the websites took only 30 days from planning to launch, which is swift decision-making for a company of this size, reflecting Pepsi's internal emphasis on e-commerce. In contrast, Coca-Cola still regards offline distribution channels as its core competitiveness. As early as 2011, Coca-Cola tested a subscription model in Australia for personalized bottled Coke, but this was more of a marketing gimmick than a channel innovation. In recent years, to better adapt to offline consumption, Coca-Cola has continuously reduced packaging sizes for portability. (Smaller packaging also brought higher profits, contributing to Coca-Cola's better-than-expected financial performance over the past five years.) In February this year, Coca-Cola Japan reduced its core 500ml packaging to 350ml and introduced a new 700ml size for two people. Clearly, the "small packaging" that revived Coca-Cola is not suitable for online sales. Coca-Cola CEO James Quincey stated in the Q1 2020 earnings call that to cater to consumers' online shopping habits, Coca-Cola is focusing on larger packaging and increasing online promotions.

-03-

Coca-Cola Misses the Olympics

Pepsi Catches the Super Bowl

Sports events with massive exposure have always been battlegrounds for brands, and Pepsi and Coca-Cola are no exception. In 2019, Coca-Cola spent $3 billion to sign a 12-year partnership with the Olympic Committee, solidifying its exclusive brand sponsorship. Besides boosting brand awareness, the "Olympic year" is also an opportunity to educate the host city's consumer market. The postponement of the Tokyo Olympics is an incalculable loss for Coca-Cola, a long-time Olympic sponsor. Olympic sponsorship also has a stimulating effect on sponsor brands' stock performance. Source: CNBC Other events canceled/postponed in H1 included football leagues across continents, another area Coca-Cola has long sponsored. However, football league sponsorship has diminishing returns for Coca-Cola's sales; CMSCMEDIA analysis suggests football audiences skew toward those over 30, whose tastes are largely fixed, making marketing less effective. Pepsi won a round in February before the pandemic fully erupted, thanks to its Super Bowl sponsorship. Benefiting from massive advertising during the event, Pepsi's net profit grew 7.7% in the quarter ending March 21. Industry analysts noted that the Super Bowl sponsorship positively influenced Pepsi's appeal among young people. However, Pepsi's CFO also recently stated that the company will reduce unnecessary advertising and marketing expenses but maintain essential marketing efforts, such as strengthening advertising for snacks and Quaker oatmeal products, and focusing on marketing methods that directly drive sales. In many brands' Q1 earnings calls, "The worst is yet to come" was a common phrase from CEOs. The pandemic may change more than we imagine. Source: CBNData Consumer Station (ID: cbndatayxs) Author: He Zhexin Tips will be paid 400-2000 yuan upon adoption.