9/12/2025
Analysis: If Pepsi Wants to Win, It Has to Play Coke’s Game
Wall Street Journal (09/12/25) Wainer, David
Most people grab a Coke or Pepsi based on taste, habit, or whatever is placed more prominently in the cooler. Few stop to ask who trucks or packages the cans. But in the cola wars, trucks have often mattered as much as fizz. That is why an activist is now pressing PepsiCo (PEP) to do what Coca-Cola (KO) did years ago: unload the distraction of bottling and distributing its beverages. Fifteen years ago, both Coca-Cola and PepsiCo bought back their bottlers to tighten control. Then they split paths. Coca-Cola spun the business back out while PepsiCo kept it in house. That divergence proved crucial. Coca-Cola, freed from trucks and warehouses, doubled down on brand building and pruning underperforming products. PepsiCo — already more complex because of its giant snacks business — was left managing fleets of trucks and armies of sales reps. The payoff has been clear. Coca-Cola’s discipline shows up in steady share gains from stadium coolers to corner stores. PepsiCo, weighed down by a sprawl of products and bottling baggage, has slipped. And while Coke’s asset-light model has lifted profit margins, margins at PepsiCo’s North American beverage division are down from where they were in the past. It is all about incentives. Independent operators have one mission: to move product. They aren't bogged down by corporate layers, and they are highly motivated. What's more, by taking on the capital-intensive business of distribution, they free up resources for the brand owner. They also act as a check on headquarters when corporate ideas just aren't practical at the ground level. Investors could long ignore slippage in PepsiCo's beverage business thanks to Frito-Lay, the salty-snacks profit machine behind Doritos and Cheetos. But that cushion is thinning. Rising food prices and shifting health trends have hit nearly every U.S. food maker — and Frito-Lay is no exception, with its volumes in North America down several quarters in a row. The earnings disappointments have sent PepsiCo shares down nearly 20% over the past two years, while Coca-Cola is up around 15%. Enter Elliott Investment Management, with a $4 billion stake and a blunt message: PepsiCo's sprawl is no longer a strength but a liability. The company's market cap of around $200 billion represents about two-thirds of Coca-Cola's, even though its $92 billion in annual revenue is around double that of its rival. It trades at roughly 17 times forward earnings, well below Coca-Cola's 22 multiple. That gap is a classic example of what Wall Street refers to as the conglomerate discount. For decades, consumer giants promised synergies from megamergers and scale. Instead, they mostly delivered bloat. Investors have lost patience, pushing for breakups of some of America's most-storied consumer-staples businesses. Kellogg (K) split snacks from cereal in 2023, Kraft Heinz (KHC) is carving out meals from condiments, and Keurig Dr Pepper (KDP) is working on separating coffee from soda. Wall Street wants more focus at PepsiCo, too. The company has long argued that its integration of food and drinks delivers efficiencies. Think one HR department instead of two, for example. In practice, that pitch has often sounded more like a slogan than a strategy. “I'm not sure there's ever been much evidence that the synergy they argue for is very powerful,” says David Yoffie, a professor at Harvard and author of cola wars case studies. A full split of snacks and drinks isn't likely at the moment. PepsiCo fought that fight a decade ago when Nelson Peltz's Trian Fund pushed for it, and management dug in. And breakups are no sure bet. Of eight consumer-staples spinoffs in the past decade, five have delivered positive returns while three have had negative returns, according to Edge Group data. Kraft Heinz, which unveiled its breakup plan just last week, has slipped around 5% since then. This helps explain why Elliott's push is narrower. It isn't calling to blow up PepsiCo but to prune it. On the food side, the idea is to shed sluggish brands such as Quaker while right-sizing costs and investing in growth. Many of those steps overlap with what management is already weighing. On bottling, the idea is neither new nor hard to grasp, but management is likely to balk. It has long argued that the integrated system allows better customer service, faster product launches and promotional flexibility, explains RBC analyst Nik Modi, whose call for refranchising presaged Elliott's campaign. Roughly a quarter of PepsiCo's U.S. beverage distribution is handled by independent businesses. Spinning off the remaining operations would certainly be messy. Earnings would take a hit for years. Even Coca-Cola absorbed margin pain and hefty restructuring costs before finally shedding bottling. The pain paid off, though. Coke North America's operating margin was 28.5% in 2024, compared with just 11.2% at Pepsi Beverages North America, according to Modi. Coke's sharper focus also allows it to spend more where it matters: marketing. Coke devoted about 6% of sales to advertising, adjusted to include bottler revenue, versus about 4.4% at Pepsi in 2023, according to Piper Sandler's Michael Lavery. That shows up in the brand. Coke's 2017 relaunch of what is now Coca-Cola Zero Sugar and splashy campaigns have kept the brand front of mind. Pepsi-Cola's namesake blue can, meanwhile, recently slipped to fourth place in U.S. soda sales, behind Dr Pepper and Coca-Cola's Sprite, according to Beverage Digest data. As it loses market share, Pepsi this year dusted off its classic, decades-old “Pepsi Challenge,” this time pitting Pepsi Zero Sugar against Coca-Cola Zero Sugar. It is also promoting the idea that its cola tastes better with food. But this won't fix the company's real problem of focus. “In 25 years of covering the industry, I've rarely seen a brand owner succeed as a distributor,” Modi says. The message is simple: Pepsi doesn't need to reinvent the model — it just needs to follow Coke.
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