Synopsis Coca Cola and PepsiCo

The company Pepsi was incorporated in Delaware in 1919 and then in North Carolina in 1986. The company is he one of the world’s leading food and beverage companies. We carry a variety of brands including Frito-Lay, Pepsi-Cola, Gatorade, Tropicana, and Quaker. Through its operations, contract manufacturers and licensed bottlers, PepsiCo manufactures, distributes, markets and sells a variety of fun and convenient beverages, snack foods and food products. Pepsi currently operates in over 200 countries. Purposeful performance is the company’s primary objective to create sustainable value through its diverse beverage and food offerings.

Besides, the company is looking for modern ways to reduce the impact on the environment and to lower cost of production through water and energy conservation. The company was recognized in the year 2013 by Dow prestigious Dow Jones Sustainability World Index for its leadership roles in supporting, investing and respecting the local communities in which it operates. Direct-store-delivery (DSD), distributor networks and customer warehouse are the strategy used by the company to distribute its products in the market. The type of the distribution channel used depends mainly on the needs of the customer, local trade practices and the characteristic of the product (Pepsi Company, 2015).

On the other hand, the Coca Cola is the leading beverage corporation in the world. It owns and market more than five hundred nonalcoholic beverage brands which include flavored water, waters, coffees, energy drinks, sport drinks and juices and juice drinks among others. Some of the top four brands of the company include Fanta, Sprite, Diet Coke and Coca Cola. The company operates in more than two hundred countries, in these countries, the company makes branded beverage products which are available to the consumers throughout the world through the network owned by the company (The Coca Cola Company, 2015). They include distribution operations and independent bottling partners, wholesalers, retailers and distributors.

The most important goal of the company is to utilize its assets in order to be more competitive in the industry and to boost growth in a way that add more value to the shareholders. The company uses a separate contract to work with the bottling partners with regard to the sale and manufacture of the Company products. In condition with the specified terms and condition, the bottler’s agreement authorizes the bottlers to make a particular Company Trademark beverage and to package the same in the authorized bottles. In addition, they are required to sell the same in a specified territory.

Profitability Ratios

Profitability ratios are the ratios which show the company’s overall performance and efficiency. All firms are always concerned with their profitability, the tools to use are the profitability ratios. Some of the common profitability ratios include gross profit margin, operating profit margin, net profit margin, returns on assets and returns on investment among others. This paper will only discuss three of them with regard to PepsiCo and Coca Cola Company.

Profitability Ratios for PepsiCo and Coca Coca for 2015 and 2014

Ratios PepsiCo Coca Cola

2015 2014 2015 2014

Net Profit Margin=Net profit/Net Sales (5,501/63,056)*100%

8.72% (6,558/66,683)*100

9.83% (7,351/44,294)*100%

16.60% (7,098/45,998)*100%

15.40%

Return on Assets=Net Income/Toal Assets (5,501/69,667)*100%

7.90% (6,558/70,509)*100

9.30% (7,351/89,996*100%

8.17% (7,098/92,023)*100%

7.71%

Return on Equity=Net income/Stockholder’s Equity (5,501/12,030)*100%

45.73% (6,558/17,548)*100

37.37% (7,351/25764)*100%

28.53% (7,098/30,561)*100%

23.23%

Both of the companies made some profits in the year 2014 and 2015, but the profitability of Coca Cola is higher than that of PepsiCo in the two year period. Profitability of Coca Cola increased in the year 2015 as compared to 2014, but that of the other company reduced in the same period (The Coca Cola Company, 2015). The net profit margin show that Coca Cola was more efficient when it come to the expenses incurred during the business operations. ROA ratio is a vital profitability ratio, which measures the effectiveness with which the organization is managing all its investment in assets and utilizing the same in generating profit. Based on the calculation provided in the table, ROA for Coca Cola increased from 7.71% to 8.17% between 2014 and 2015. On the other hand, ROA for PepsiCo reduced from 9.3% to 7.9% in the same period (Pepsi Company, 2015). This shows that the efficiency of the Coca Cola company in utilizing its assets to generate profits was increasing while that of PepsiCo was decreasing. Return on equity is the most significant financial ratio for the investors of any firm. It enables them to measure the return on the money the shareholders have invested in the company. Most of the potential investors use this ratio to make their investment decisions for the company. The higher the ratio, the better the returns for the investors, hence most of the investors invest in companies with higher ROE. PepsiCo has a higher ROE as compared to Coca Cola, which shows that it is better for the investor to invest their investment on PepsiCo as provided by the calculation.

To improve the net profit margin, the management should cut on all unnecessary expenses, and this can only be achieved with the use of efficient and effective technology. To improve ROA, the company should reduce the cost of assets as much as possible. This can be achieved through leasing or renting equipment instead of purchasing them. Increasing revenues is another way to improve ROA, and this can be achieved through improving customer services and exploring new market segment in order to make more sales (Johnston, 2015). To improve ROE, the company should take advantage of any government subsidies, incentives and policies which favor the industry. In addition, the company should have a high rate of asset turnover, therefore, the assets should not be left idle but should be used to generate more income.

Mergers and Acquisition

The Coca Cola Enterprises merge with the Portuguese bottler Coca Cola Iberian and Coca Cola Erfrischungsgetranke in the year 2015. They all merge to form Coca Cola European Partners which was expected to produce a total revenue of $12 billion annual, thus becoming the largest independent bottler of the Coke beverages. The strategy was part of the effort by the company to reduce the costs, as a result of the dramatic reduction in the soda consumption globally (The Coca Cola Company, 2015). The reduction in consumptions is as a result of people becoming more sensitive about their health. In addition, the merger has promoted efficiency in the distribution and production of the products hence increasing the profitability. The other merger, which has been organized by the Coca Cola Enterprises is its merger with the European bottlers of the Coca Cola that is Coca Cola Erfrischungsgetranke AG and the Coca Cola Iberian Partners in order to form the Western Europeans bottlers. The merger has resulted in the formation of the largest independent Coca Cola bottler when in comes to the revenues. The Coca Cola company has been adopting the merger strategy in its bottling operations in order to revamp the bottling system so as to improve profit margins and to drive growth of the company. Most of the stakeholders such as creditors and the potential investors have been taking positively these mergers since this is the strategy which is being adopted by most of the players in the industry.

Quaker acquisition by PepsiCo was the biggest move by the company. PepsiCo acquired Quaker after Coca Cola withdrew from the bidding process claiming antitrust issues. Through the acquisition, PepsiCo was able to gain brands such as Gatorade, Quaker, Cap’n Crunch, and Aunt Jemima. This move directly increases the Pepsi’s noncarbonated beverage share from 13% to 33% (Pepsi Company, 2015). While the Coca Cola company has gained dominance in the soft drink wars for a number of years, the acquisition assist a lot in growing Pepsi’s growth in the food. This helps a lot in cutting down the consumption of the carbonated soft drinks, and this has set PepsiCo up for success. This has been seen in the company’s financial statement. For instance, in the year 2014, Quaker Foods and Frito-Lay North America produced a revenue amounting to $17.1 billion. In the fiscal year PepsiCo America had a total revenue of $21.2 billion. The two food segments of the North America produced $4.7 billion as income compared to the beverage segment of North America, which produced an income of $2.8 billion in the same period. This shows that the acquisition of Quaker has boosted significantly the profitability of the food segment of Pepsi. The stakeholders such as the creditors have responded positively to this acquisition, since it has increased the revenue base of the company, thus making it more profitable and competitive in the industry.

Analyzing of the Company’s Income Statement

Coca Cola Company PepsiCo

2015 2014 Increase/Decrease 2015 2014 Increase/Decrease

Revenues $44,294 $45,998 (3.7%) $63,056 $66,683 (5.4%)

Gross Profit $26,812 $28,109 (4.6%) $34,672 $35,799 (3.1%)

Total expenses $18,084 $18,401 (1.7%) $29,171 29,241 (0.2%)

Net Earnings $7,351 $7,098 3.5% $5,501 $6,558 (16.1%)

Earnings per Share $1.69 $1.62 4.3% $3.71 $4.31 (13.9%)

Based on the revenues collected by the two companies in the two years, PepsiCo revenues are higher than that of Coca Cola, which shows that PepsiCo make more sales, hence there is a need for the latter to increase its market share in the industry. In addition, revenues decrease for the two companies between 2014 and 2015, therefore, there is a need for the firms to improve their marketing strategies in order to increase sales, which in most cases translate to higher earnings (The Coca Cola Company, 2015).

When it comes to the expenses, PepsiCo incurred a lot of expenses as compared to Coca Cola in the same period. In addition, the expenses incurred reduces for both companies, but that of Coca Cola reduced at a higher rate as compared to PepsiCo. Therefore, there is a need for PepsiCo to be more effective and efficient in its operation in order to reduce the expenses which eats a lot on the revenues collected hence reducing the net earnings. The net revenues of Coca Cola are higher than those of PepsiCo as a result of higher expenses being incurred by PepsiCo. In this case, the biggest undoing of PepsiCo as a company in these periods is higher operating expenses which eats on the revenues collected. PepsiCo has higher EPS as compared to the Coca Cola, and as a result, PepsiCo is the company the potential investors should consider investing their money. To increase the net incomes or revenues the company should consider cutting on its expenses incurred in the operation. For instance, the revenues of Coca Cola are less than that of PepsiCo in 2014 and 2015, but the net earning of Coca Cola in the same period is higher as compared to that of PepsiCo, this was possible because Coca Cola incurred less expenses in that period.

Vertical Analyzing of the Company’s Statement of Financial Position for the year 2015

The Coca Cola Company

Details $Total Percent

Cash and Cash Equivalents $15,631 17.35%

Other Current assets $33,395 37.07%

Non Current assets $41,067 45.58%

TOTAL ASSETS $90,093 100%

Current liabilities $26,930 29.90%

Non Current Liabilities $37,399 41.50%

Equity $25,764 28.60%

TOTAL LIABILITIES AND EQUITY $90,093 100%

The PepsiCo

Details $Total Percent

Cash and Cash Equivalents $9,096 13.06%

Other Current assets $13,935 20.00%

Non Current assets $46,636 66.94%

TOTAL ASSETS $69,667 100%

Current liabilities $17,578 25.23%

Non Current Liabilities $40,059 57.50%

Equity $12,030 17.27%

TOTAL LIABILITIES AND EQUITY $69,667 100%

Vertical analysis indicates every line of the financial statement as the representation of the percentage of the main focus of the statement. For the balance sheet, every line item is taken as a representation of the total assets. The analysis allows the financial statements of the company to be represented within the standard process across the industry (Nikolai, Bazley, & Jones, 2009). It provides a very useful insights about the company’s performance by taking into consideration a number of components of the firm. The current assets of the Coca Cola and PepsiCo was 54.42% and 33.06% respectively of the total current assets (Pepsi Company, 2015). This shows that the latter has no sufficient current assets to settle short term liabilities. The management of PepsiCo should increase their current asset base so as to enable them be in a position to settle short term liabilities such as account payable. In addition, the percentage show that PepsiCo could encounter a shortage of liquid cash enable the company run smoothly.

The non-current asset to the total assets of the two companies is 45.58% and 66.94% for Coca Cola and PepsiCo respectively. This shows that PepsiCo has a strong base to settle long term liabilities as compared to Coca Cola, at the same time it shows that the PepsiCo has set aside more of its assets to be used in the generation of revenues. It also shows that Pepsico has invested much in the non current assets as compared to Coca Cola (The Coca Cola Company, 2015). The management of Coca Cola should consider increasing their non current base, so as to increase their revenue base. The analysis also shows that PepsiCo is heavily financed by the long term borrowing (57.5%) compared to that of Coca Cola (41.5%). Besides, Coca Cola depends much on short term borrowing (29.90%) compared to that of PepsiCo (25.23%). On the other hand, Coca Cola’s equity is at 28.60% compared to that of 17.27% of PepsiCo. Therefore, it can be concluded that the performance of Cola Cola with regard to investment in higher than that of PepsiCo. The management of PepsiCo should increase investment in the assets so as to improve their performance.

Conclusion

The analysis provides an overview of the Coca Cola as well as that of PepsiCo regarding their financial performance in the beverage and food industry. Based on the profitability ratios, it shows that the profitability of Coca Cola is higher than that of PepsiCo, but PepsiCo returns to the shareholders is higher in the fiscal years analyzed. Both companies have undertaken some mergers and acquisitions, mainly to improve their market share and profitability in the industry. The revenues and net earnings of the two companies decrease at different rates between the year 2014 and 2015, but the decrease in net earnings of the PepsiCo company is higher than that of the Coca Cola. It is the responsibility of the management of the two companies to look for ways in which they can reduce expenses incurred and make the company be more efficient so as to improve their profitability.

References

Johnston, K. (2015). How to Improve a Return on Total Assets. Retrieved March 10, 2017, from Chron.com: http://smallbusiness.chron.com/improve-return-total-assets-56271.html

Nikolai, L. A., Bazley, J. D., & Jones, J. P. (2009). Intermediate Accounting Update. New Jersey: Cengage Learning.

Pepsi Company. (2015). PepsiCo 2015 Annual Report. New York: Pepsi Company.

The Coca Cola Company. (2015). Annual Report for 2015. Atlanta: The Coca Cola Company.