Coke Vs Pepsi

To: Douglas Daft, CFO of Coca-Cola

From: Carolyn Keene, Consumer Analyst with Siegel, Parker, and Lauck (SPL)

Date: December 5th, 2000

Subject: Assessment of past and analysis of expected future performance

Mr. Daft,

Coca Cola (KO) and PepsiCo (PEP) have created one of the strongest rivalries in business history, both trying to serve customers' needs as "total beverage companies" offering numerous kinds and variations of beverages, ranging from the traditional carbonated soft drinks to coffee, tea, bottled water and else. This memo gives an overview on the causes and direction of the companies' past performances, their business strategies over time and their anticipated future development.

Historically Coca-Cola has been the dominating company, not only in terms of EVA but also in terms of profitability and operating margin. As can easily be seen in Exhibits 1 and 2, KO has been able to add stable amounts of economic value (EVA) each year while keeping its business profitable, consecutively outdoing the numbers of PepsiCo until 1999. The main driver of this performance had been the major spin-off of the companies bottling operations and the resulting ability to focus on the higher-margin business of selling concentrate to bottling companies rather than sticking with the capital-intensive division. Yet from 1998 on, KO lost some ground to PEP, due to economic reasons as well as business mistakes, e.g. raising prices to unsustainable levels, and more aggressive competition. As a result, KOs returns on their assets and equity (ROA, ROE) plummeted (Exhibit 2).

PepsiCo on the other hand had shown poor performance prior to 1997, with negative EVA as well as a negative ROIC-WACC spread and low returns on invested capital, due to highly unprofitable units in the company's fast food segment and low margins in their bottling operations (Exhibit 1). In 1997, with the formation and spin-off of Yum!Brands, and with the separation from their bottling operations in 1999, the company was able to focus on their snack-and-beverage business, earning a first mover advantage in the non-carbonated drinks segment. As a result, PEP was able to reverse the negative trend in EVA and ROIC-WACC spread and accomplished a major turnaround

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