Coke Still Leading in the Cola Wars

 |  Includes: DPS, KO, PEP
by: Wall Street Strategies

By David Silver

For the first time, one company holds the two top market share spots in the carbonated soft drink (CSD) industry. It has always been Coca-Cola Classic (NYSE:KO) on top, with Pepsi (NYSE:PEP) coming in second. In recent years, Diet Coke has been in the number 3 spot behind Pepsi but has been eating into Pepsi's lead. During 2009, Pepsi sold 100,000 more cases than Diet Coke (936.4 million vs. 936.3 million) with an identical market share of 9.9%.

Coke had a market share that was almost as large as its next two competitors during 2009, 17.0% compared to 19.8% for Pepsi and Diet Coke combined. Last month, Beverage Digest reported Pepsi-Cola's market share fell 0.5 percentage points while Diet Coke slipped just 0.1 percentage points in U.S. supermarkets, convenience stores and other retail outlets. The data released today encompasses food-service data (restaurant fountain soda sales).

So what does it mean for the two companies that seemingly compete on everything from volumes and market share to new technology? (See Pepsi's new 100% plant-based bottle, which surpasses Coke's 30% plant-based bottle.) Pepsi has been struggling over the past several years (showing a brief bounce back in volumes in North America over the past few quarters) in terms of volumes in North America, and has been losing ground to Diet Coke; however, it hasn't been all peaches and cream for market leader Coke either. It lost market share between 2008 and 2009, and then again this year as the market continues to fragment.

The top three companies are unchanged, with Coca-Cola Company holding 42.0% of the market (up from 41.9% year over year), PepsiCo holding 29.3% of the market (down from 29.9% year over year) and Dr Pepper Snapple Group (NYSE:DPS) holding 16.7% of the market (up from 16.4%).

However, grabbing the headlines is the shakeup that has occurred in terms of the top 10 brands. Diet Coke surpassed Pepsi as the second-most popular brand, holding 9.9% of the market, which is flat from 2009; however, Pepsi dropped 40 basis points to hold 9.5% of the market (down from 9.9% year over year). The biggest reason was the 4.8% drop in Pepsi's volumes. Additionally, the fact that Diet Pepsi lost its 6th place spot to Sprite could be bigger news than the switch at number 2. Diet Pepsi saw volumes decline 5.2% year over year, while Sprite saw its volumes increase 2.0% year over year.

To illustrate the lead that the Coca-Cola Company now has in the North American market, think about this stat: The combination of Pepsi and Diet Pepsi volumes equals 1. 4 billion cases, which is approximately 87% of the volumes of Coca-Cola Classic.

The end result is that nothing will likely change between Coke and Pepsi. The two companies compete on just about every level; from Coca-Cola Classic and Pepsi volumes to Powerade vs. Gatorade to environmental issues (think polyethylene terephthalate (PET) plant-based bottles or recycling efforts).

Coke is still winning the beverage battle, but Pepsi has something that Coke doesn't: A food business. It sells Frito's and Lay's potato chips in the United States and some of the other most popular snack food brands around the world. This could be a slight detour in what CEO Indra Nooyi has been preaching. Pepsi has been going for the responsible marketing approach, but Pepsi Max has tracked well with its new ads; Pepsi should hope that the new strength can be utilized to help momentum for its other products.

So what happens from this development? Nothing. Pepsi is not all of a sudden going to change how it operates, and while the Coca-Cola Company may take a victory lap, it doesn't change the fact that it will have to keep working to keep that number 2 spot.