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Coke and Pepsi earnings comparison as KO and PEP stocks fall

Coca-Cola Co. and Pepsi Co. soda machines stand in a shopping center parking lot in Jasper, Indiana.

Luke Sharrett | Bloomberg | Getty Images

Coca-Cola and PepsiCo‘s rivalry spans decades, but Coke usually comes out on top.

This quarter was no different.

The beverage leaders’ stocks have struggled this year, hurt by higher interest rates and investor concerns about the possible negative impact of weight loss drugs like Wegovy. (Coke’s $242 billion market cap beats Pepsi’s by roughly $20 billion.)

Even so, both companies topped Wall Street’s estimates for their third-quarter results and raised their full-year forecasts. Strong demand for Coke products drove the Atlanta-based company to raise its forecast, while Pepsi’s cost-management improvements have bolstered its full-year outlook for earnings.

But only Coke managed to report volume growth. The metric, which strips out the effects of pricing and currency, has become more critical to investors in recent quarters as food and beverage companies pause the price hikes that drove sales growth last year. Those same increases have also alienated some shoppers who are trying to save money on their grocery bills.

Coke’s overall volume rose 2% in the third quarter, while Pepsi reported flat beverage volume and a 1.5% decline in its food volume. In North America, the differences between the two businesses were even more stark. Coke reported flat volume, while Pepsi’s North American beverage unit saw volume fall 6%.

Coke also raised both its top- and bottom-line outlook for the full year, while rival Pepsi only upped its forecast for its full-year earnings, signaling the better outlook might not be due to higher demand for its products.

Here’s a rundown of the five key factors that helped Coke edge out Pepsi:

Pricing strategy

Better brands

But Coke is also winning over shoppers with its drinks, while Pepsi is focused on revitalizing some of its non-soda brands like Gatorade.

“Coke has been taking share from Pepsi for many, many quarters,” RBC Capital Markets analyst Nik Modi said.

When its drinks business falters, Pepsi is usually saved by its Frito-Lay unit, which includes Cheetos, Doritos and other snacks. But snacking has slowed as shoppers trade down to cheaper options in the face of Frito-Lay’s double-digit price increases.

“The reason why snacks have done so well relative to other categories is because it was really a trade down option on a meal,” Modi said.

As the price for a bag of chips has climbed, some shoppers have reached for private-label brands — or just leftovers in the fridge.

Pepsi is also getting rid of its less-profitable promotions. The strategy helps its earnings, but resulted in a 2.5% hit to its North American drink volume, executives said on the company’s conference call.

Away-from-home business

International strength

Coke also has a larger international presence than Pepsi. Roughly 40% of Pepsi’s sales come from outside of the U.S., while more than 60% of Coke’s revenue is derived from international markets, according to FactSet.

“There’s stronger growth in those international markets,” Edward Jones’ Quatrochi said.

International success can offset more sluggish domestic demand, like the 6% volume decline for Pepsi’s North American beverage. But that comes at a price.

Some international markets, like Argentina and Turkey, have been dealing with hyperinflation, leading Coke to raise prices even after pausing hikes in the U.S. and Europe. And the strong dollar means Coke anticipates that currency exchange rates will dent its sales and earnings more than previously expected this year.

Franchising its bottling

The biggest difference between Coke and Pepsi isn’t found in their portfolios. It’s how they bottle their soda.

Coke works with independent bottlers who manufacture, package and ship their drinks to customers. Those bottlers know their markets well and can make their own informed decisions for their businesses.

In contrast, Pepsi owns more than three-quarters of its North American bottling operations. The strategy is meant to help the company exert more control and cut costs, but it also requires devoting resources and capital to bottling soda, a category that has faced waning demand for nearly two decades.

“Right now, I think the whole bottling owned versus not owned is showing up in the results,” Modi said.

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