Coca-Cola vs. Pepsi. It’s one of the greatest rivalries in history. But after years of publicized taste tests — initiated by the “Pepsi Challenge” marketing campaign popularized during the 1980s — we are no closer to a definitive conclusion about which product is better.
In double-blind experiments where marketing bias is removed from the element of choice, more people preferred the sweeter taste of Pepsi. Regardless, the Coca-Cola brand is culturally synonymous with American capitalism and remains the undisputed king of the colas.
During the early 1980s, Pepsi — backed by its double-blind commercials — gained market share at a quicker pace than its rival, forcing an egregious response in the form of New Coke. However, consumers aggressively favored the original Coca-Cola recipe, and management relented, eventually phasing out New Coke and restoring the status quo.
The battle continues to reverberate in pop culture today. Katy Perry is seen promoting Pepsi — amongst other things — whereas Taylor Swift is aligned with Diet Coke.
We can spend eternity debating which product is better, but there’s a more important question for investors: Which one of the publicly-traded cola producers wins out in the financial markets? Let’s take a closer look at the charts.
Dr Pepper Snapple (DPS)
The third-wheel in the battle of the colas, Dr Pepper Snapple Group (DPS) shouldn’t be overlooked if its fundamental performance is anything to go by. Following a strong fiscal year 2014, DPS exceeded Wall Street expectations for both revenue and earnings for the first quarter of FY2015, despite the challenges posed by unfavorable international currency fluctuations.
Much of the gains made in the markets for DPS stock can be attributed to its Rapid Continuous Improvement, a protocol introduced by the DPS management team to promote cost-savings and increased profit margins. Additionally, DPS has benefitted from an influx of memorable and engaging marketing campaigns, clearly leveraging “Millennial cool.”
However, prominent market analysis firms such as Zacks Equity Research are not fully convinced that DPS — and its cutthroat competitors — can overcome serious headwinds affecting the industry, including weak consumer spending and healthy lifestyle promotion campaigns, most notably represented by First Lady Michelle Obama’s Let’s Move! initiative.
More pointedly, the markets are tipping their hand regarding DPS stock. Since jumping above the $78 threshold in January of this year, DPS has staged repeated — and futile — attempts to take out the psychological target of $80. Worse yet, both the upper and lower extremes of DPS’ trading range is teetering towards the wrong direction, a sign of no confidence.
Dr Pepper may indeed be the flavorful cola alternative, but as an investment, DPS has lost its fizz.
PepsiCo (PEP)
As much as PepsiCo (PEP) would like their brand of cola to be the choice of a new generation, perhaps it should learn to be more comfortable with its current position. Despite throwing everything at its bitter rival — including offering a broad range of health-branded products — PEP can’t seem to take pole position.
You can’t blame PEP for a lack of creativity or effort. Taking a page out of the craft beer manifesto, PEP recently introduced a product line of “craft-like” soda, featuring high-brow hipster flavors like Lemon Berry Acai and Orange Hibiscus.
The novelty drinks, called Stubborn Soda, will be delivered through an Ikea-ish modernist fountain dispenser, which PEP hopes will change public opinion about the sordid long-term health effects of drinking sodas. The fountains will also feature taps similar to those found in craft beer dispensers, subtly taking cues from the burgeoning craft brewery industry.
What does this mean though for PEP stock as an investment? Technically, PEP is charting a series of “step-wise” patterns, which is defined as a sharp rally followed by a consolidation phase before eventually continuing on its bullish trek. Presently, PEP is consolidating the gains made in the markets between the spring and winter seasons of 2014.
Judging from similar patterns in the past, PEP has a better-than-random-chance probability of moving past the consolidation with another upside swing.
While it may play second-fiddle in mainstream perception, the synergy behind PepsiCo makes PEP a solid investment opportunity.
Coca-Cola (KO)
Needing no introduction, Coca-Cola (KO) remains the brand within the beverage industry. KO’s vast army of over 146,000 global employees leveraging an enterprise value of nearly $200 billion, Coca-Cola is recognized universally, both as a product and as a cultural phenomenon.
It is this combination of ruthless business acumen and intangible marketing appeal that gives Coca-Cola the lion’s share of sales within the soft drink arena — 26% of market share compared to runner-up Pepsi at 15%.
Of course, as with any entity no matter how successful, KO is not without its detractors. Primarily, the waters that KO and its rivals are traversing are rapidly shrinking. According to a report from the Beverage Digest, sales of soft drinks have declined for 10 consecutive years, a byproduct likely caused by shifting health perceptions. Total beverage sales — including non-carbonated drinks and water products — increased by 1.7% last year, showing that a slowdown in the broader beverage industry isn’t to blame.
The difference in response between KO and PEP comes down to social currency. While PEP has pulled out all the stops to try to dethrone Coca-Cola, KO has taken the subdued approach, careful not to tinker too much with a winning formula.
How will this play out in the markets? Surprisingly, the trajectory of KO and PEP have taken divergent paths. First, on a long-term basis, the general trend of KO stock has been very choppy. Although KO’s price action is upwardly inclined, the slow average performance of the stock — which lost 1.13% of market value in three months time — nets a probability of only 48% that the price will move higher by September of this year.
Second, on a near-term basis, the recent slide in KO shares and its rather impotent response is exceedingly worrying. The traditional technical interpretation would be to run, not walk, away from this otherwise enviable company.
In the hearts and minds of people across the globe, Coca-Cola will always be No. 1, but as an investment, KO currently lacks PEP’s knockout punch.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
