There’s a new battle brewing over sweeteners in the Coke vs. Pepsi cola wars.
The age-old Coca-Cola (NYSE: KO) vs. PepsiCo (NYSE: PEP) battle is once again heating up.
Pepsi captured headlines last week when it announced that it will stop using aspartame in Diet Pepsi. This artificial additive has caught a lot of flack in the past over health concerns.
However, Coca-Cola is standing strong, saying that it won’t remove aspartame from Diet Coke. This comes after Diet Coke has been a laggard in the Coca-Cola portfolio. Diet Coke sales were down over 6% last quarter on a year-over-year basis.
But Coca-Cola is a little gun-shy on the whole formula-changing game, given the epic fail of the “New Coke” formula during the 1980s.
Regardless, the news is a positive for Pepsi, as it comes at a time when natural sweeteners are in vogue. This could be the spark that Diet Pepsi needs to finally start gaining traction against Diet Coke, which owns about 8.5% of the U.S. soda market share. Diet Pepsi has market share of about half that figure.
Undoubtedly, we’ve entered the great space race of soda, with companies quickly trying to shift away from artificial sweeteners to natural sweeteners and protein-focused drinks. However, the bigger issue is that the shift away from soft drinks entirely is very real.
Recall that back in February I noted that Pepsi was in fact winning the proverbial cola wars. Yet the two have performed in line with each other since then. But no fear, Pepsi is still the best-positioned player in the industry. That’s because it’s not as reliant on soft drinks as Coca-Cola, and Pepsi is also the world’s largest snack foods company thanks to its Frito-Lay business.
Pepsi’s snack foods business generates over half its revenues. Specifically, Pepsi owns over 45% of the individual market share for salty snacks in the U.S., Brazil and the U.K.
I look for Pepsi to continue its innovation in beverages, but to really focus on leveraging its snacks business in international markets. After all, snacks are more profitable than beverages. Its Americas snack foods segment is generating 40% of revenues but accounts for close to 55% of operating profits.
And as I’ve noted before, Pepsi still has a large opportunity to tap into the snack foods markets, including Africa, Asia and Europe, where it generates less than 30% of its revenues collectively.
Meanwhile, Coca-Cola has been digging itself deeper into beverages by taking stakes in the likes of Monster Beverage (NASDAQ: MNST) and Keurig Green Mountain (NASDAQ: GMCR). Even still, let us not forget that Pepsi is also the leader in the U.S. non-carbonated beverage market with brands like Tropicana and Gatorade.
With the help of snacks and non-carbonated drink success, Pepsi is expected to grow earnings over the next five years at a rate that’s more than 33% higher than Coca-Cola. There’s also the fact that Pepsi is generating a 16% return on invested capital, while Coca-Cola’s ROIC is just around 10%.
Pepsi’s dividend yield is also a hefty 2.8%, albeit a bit below Coca-Cola’s 3.2%. However, both are S&P 500 Dividend Aristocrats, having upped their dividends for well over 40 straight years.
The news of a change in the Diet Pepsi formula from one sweetener to another might not seem like much, but it’s a big positive for Pepsi in terms of publicity.
The cola wars are becoming a much larger battle over who is more appealing to health-conscious consumers. And Pepsi is winning in that respect.
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