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The Coca-Cola Company (KO), PepsiCo, Inc. (PEP): Will a Weak Quarter Deter Investors?

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The Coca-Cola Company (NYSE:KO)The Coca-Cola Company (NYSE:KO) reported its earnings last week with profits in line with the analysts’ estimates, while revenue fell 3%. According to the company, sales declined due to poor weather conditions and floods in North America and in Europe, coupled with weak overall demand for sparkling beverages. Let’s try to look beyond bad weather to see if demand for the company’s products is waning.

In the most recent quarter, volume declined 4% for sparkling beverages in North America, which was offset by 5% volume growth in the company’s still beverage portfolio. It was the first time in 13 quarters that The Coca-Cola Company (NYSE:KO) saw a decline in its sparkling beverage business, which I believe is due to the negative publicity that soda companies are the cause for rising obesity and other health issues.

The Coca-Cola Company (NYSE:KO) has come up with counter advertisements, which state that rising health problems are due to consumption of excess calories from all the food we consume and not just soda. PepsiCo, Inc. (NYSE:PEP) CEO, Indra Nooyi, has also condemned these statements as “maniacal,” which will badly affect the entire beverage industry. Whatever both the giants do to combat the effect of sparkling soda, the damage has been done.

In the past, The Coca-Cola Company (NYSE:KO) was fast in combating the negative news that was flashing against soda companies as to how cola can cause cancer. An article in NPR reported that Coca-Cola led the way by becoming the first in the beverage industry to eliminate the chemical 4-MEI from its drinks, which has been linked to cancer. It replaced 4-MEI with another chemical that is less abrasive. The shift raised the company’s image among loyalists, and this is what it is currently trying to do with the entire soda causes obesity hush.
Further, Coca-Cola also understands the shifting trends of the market and has been concentrating on their still beverages, which have reported 24 straight quarters of volume increase. The company’s still beverage portfolio saw 10% growth last year and is expected to grow in the same way this year. It’s still beverages such as Gold Peak, Smartwater and Dasani are doing good along with volume gains in the juice category driven by concrete growth for Simply and Minute Maid. Further, there has been a robust growth in the company’s ready to drink tea, which represents the strongest growth potential moving forward.
Though the company is majorly trying to increase its still beverage offerings, it still remains majorly concentrated on sparkling sodas, as they make 42% of their revenue from North America. Thus, both the beverage giants The Coca-Cola Company (NYSE:KO) and PepsiCo, Inc. (NYSE:PEP) are testing low-calorie sweeteners to create sodas for the calorie and health conscious customers. The Coca-Cola Company (NYSE:KO) has tested a mid-calorie version of Fanta and Sprite sweetened with stevia, which is yet to be released. PepsiCo, Inc. (NYSE:PEP) has also come up with a mid-calorie Pepsi NEXT, sweetened by stevia, which supposedly contains 30% less sugar.
PepsiCo’s advantage

PepsiCo, Inc. (NYSE:PEP), in its first quarter, reported an overall growth in organic revenues by 4.4% despite the recent pullback in domestic soda sales. However, almost two-third of the company’s revenue from its beverage business accounts from non-carbonated offerings, a segment that represents tremendous growth potential as the North American population becomes more health conscious. More importantly, its non-carbonated segment also offers tremendous scope in emerging markets such as India, which offers almost 28 times more growth potential based on average consumption compared to a U.S. citizen.

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