Financial analysis of Coca Cola Company vs PepsiCo

The Coca Cola Company


Corporate


Eurasia & Africa


Europe


Latin America


North America


Pacific


Bottling Investment



























1,41%


5

























Corporate FinanceTeacher : M. J.P BELLANDO
Corporate Finance
Teacher : M. J.P BELLANDO

Financial analysis of Coca Cola CompanyvsPepsiCo.Hajar JEHOU, Clémence GRADOS & Marion DEMOLIS

Financial analysis of Coca Cola Company
vs
PepsiCo.

Hajar JEHOU, Clémence GRADOS & Marion DEMOLIS
Coca Cola vs Pepsi Financial Analysis
The report presented below is the financial analysis of Coca Cola and Pepsi Inc, the biggest soda producers in the world.
The report will take the following plan: We will first start with an analysis of The Coca Cola Company then in the same schedule an analysis of Pepsi Inc., and to conclude a comparison of these two business machines.

The financial data was retrieved from MorningStar.com and from the financial statements of Coca Cola Company and Pepsi Inc.

This report had been written by Hajar Jehou, Clémence Grados and Marion Demolis.



































Analysis of Coca Cola
About the company
The Coca Cola Company, founded in 1892 by Asa Griggs Candler, is an American multinational beverage corporation, based in Atlanta, specialized in nonalcoholic beverage.
It has the world's largest market share in the beverage industry.

It is well known for its product invented in 1886: Coca Cola. The company owns and markets four of the world's top five nonalcoholic sparkling beverage brands: Coca-Cola, Diet Coke, Fanta and Sprite.

The Coca Cola Company makes its branded beverage products available to consumers through their network of companies, owned or controlled, that take care of the bottling and distribution operations, as well as independent bottling partners, distributors, wholesalers and retailers.

Over the decade, the company acquired a wide range of beverage brands such as Minute Maid and Schweppes. Nowadays it offers more than 500 brands in over 200 countries.


The success of The Coca-Cola Company revolves around three main factors:
Quality - consistently offering consumers products of the highest quality
Marketing - delivering creative and innovative marketing programs worldwide
Ongoing Innovation - continually providing consumers with new product offerings such as Diet Coke (1982), Coca-Cola Vanilla (2002) and Coca Life (2013).

The Margin Analysis
The Revenue Evolution+ 0.67%- 2.42%+ 3.17%
+ 0.67%
- 2.42%
+ 3.17%

We can see that the global revenue evolution is not important because there was a decrease of 2.42% from 2012 to 2013 and a increase of 3.17% between 2011 and 2012.
The change in sales is therefore not very important.

There are three parameters of the the revenue evolution, and to understand them, we first need to understand how The Coca Cola Company is structured:

While analyzing the three parameters of revenue evolution we have found both favorable and unfavorable impacts that explain the decrease and increase of the revenues over the three years:

The Volume Effect

There is no unfavorable volume effect on the revenue. Sales volume has increased over the three years.

The Price Effect 

In 2013, the company used 80 functional currencies in addition to the U.S dollar and derived $27 Billions of net operating revenues from operations outside the USA.
An unfavorable impact of foreign currency fluctuations decreased the revenue due to a strong U.S dollar (which was weaker) compared to other foreign currencies.



A change in scope

There is an unfavorable impact of the geography mix because of the company's strategy to grow in emerging and developing markets.
And Pacific was unfavorably impacted by the geographic mix as well as shifts in product and package mix within individual markets.

In addition, unexpected and dramatic devaluations of currencies in developing or emerging markets could negatively affect the value of their earnings from those markets, as well as the assets located in them.
The Margin Structure

2011
2012
2013
Gross Profit
28'326
28'964
28'433
Revenue
46'542
48'017
46'854
Contribution margin rate
60.86%
60.32%
60.68%

In 2013, there is an increase of 0.4 point due to the deconsolidation of two bottling operations, Philippine and Brazil.
In 2012, there is a decrease of 0.5 point compared to 2011 reflected by the unfavorable impact in commodity and foreign currency fluctuations.

Moreover, compared to the revenue evolution where the shift in geographic mix had a negative impact on net operating revenues, it has a favorable impact on the gross profit margin due to the correlated impact it has on their product mix. The product mix in the majority of emerging and developing markets is heavier, which generally generates a higher gross profit margin compared to beverages and finished products.





The Break-even point

2011
2012
2013
Fixed cost*
9'652
9'280
9'695
Gross profit margin
60.86%
60.32%
60.68%
BEP
15'859
15'385
15'976
*C.f appendix 1

The breakeven point is stable from 2011 to 2013, but it will vary through time as the level of fixed costs will move up by steps.


2011
2012
2013
security index
66%
68%
66%

In this case, the security index means that the situation of the company is confortable (66%) thanks to its profitability.
Investment analysis (C.f balance sheet appendix 2)
Capital Analysis

2011
2012
2013
Net fixed assets
14939
14476
14967
Gross fixed assets
23'151
23'486
25'032
Investment in fixed capital
64.53%
61.64%
59.79%

From 2011 to 2013, we can see that investments have been made recently and equipments are well-used.
There is no need for an important investment in the near future. The company knows how to use and manage its materials.


2011
2012
2013
Revenue
46'542
48'017
46'854
Net fixed assets
14939
14476
14967
Fixed assets turnover
$3.12
$3.32
$3.13

Again, we can see the profitability of the company thanks to the fixed assets turnover.
In 2013, for $1 of net fixed assets, the company generates $3.13 of revenue.
This ratio shows that the Net Fixed Assets of the company are very profitable.

 
2011
2012
2013
CAPEX
2'920
2'780
2'550
Depreciation
1954
1982
1977
 
1.49
1.40
1.29

This ratio is superior to 1 through the years. It means that there is a harmony between what the company invests and what it needs. The ratio also shows willingness to grow and develop the activity on new markets.
Net working capital
 
2011
2012
2013
Net Working Capital
2091
3830
1150
Sales
46'542
48'017
46'854
Working Capital Turnover
4.49%
7.98%
2.45%

In 2013, The Coca Cola Company has a NWC Turnover ratio of 2.45% in 2013, which means that every 100$ of sales require 2.45$ of NWC.
This ratio has decreased between 2011 and 2013, which shows that the company needs less and less NWC to generate sales.
Days of Sales Outstanding

2011
2012
2013
Accounts receivable
4'920
4'759
4'873
Annual sales
46'542
48'017
46'854
DSO
38.58
36.18
37.96
The delay for the company to gather revenue after the sales have been made is well managed. The DSO is has decreased between 2011 and 2013. It means that the company know how to manage its client for its own benefits.
Days of Payable Outstanding
 
2011
2012
2013
Accounts payable
2'172
1'969
1'933
Cost of Sales
18'216
19'053
18'421
DPO
43.52
37.72
38.30

Here we used the cost of sales instead of the annual purchases.
Over the years, the delay of payables has deacread (43 days to 38 days).
If we look at the DSO, we can see that Coca Cola Company pays its creditors at approximately the same time it receives the money from its clients.
This is not a good point because it means that Coca Cola Company has no money on hand and if cash is tight, the company will need to borrow at a certain point to continue operations.
The short delay could be due to creditors who give companies a discount for timely payments.
Days Sales of Inventory
 
2011
2012
2013
Inventories
3'092
3'264
3'277
Cost of sales
18'216
19'053
18'421
DSI
61.96
62.53
64.93

From 2011 to 2013, Coca Cola DSI's average is high (63 days) to turn their inventories into sales.
This may be due to a decline in beverage sales in stores.
Cash conversion cycle (CCC)

2011
2012
2013
DSO
39
36
38
DPO
44
38
38
DSI
61.96
62.53
64.93
CCC jours
57.01
60.99
64.59
Financing policy
Gearing ratio

2011
2012
2013
Debt leverage
43%
45%
58%
Debt
13'656
14'736
19'154
Equity
31'635
32'790
33'173

Coca-Cola Co.'s gearing ratio has increased from 2011 to 2012 and again from 2012 to 2013.
A low debt to equity ratio indicates lower risk, because it means that debt holders have less claims on the company's assets.
During 2013, the Company issued $7,500 million of long-term debt. This explains the 7% increase between 2012 and 2013 and means that the company wants to be more aggressive in financing its growth with debts.

This mostly means that the company is using debt financing to lower its overall cost of capital which will increase its return on shareholder's equity.

Since the ratio is less than 1, it means that the shareholders are investing more than the long term lenders and creditors. The increase of the ratio shows a moderate amount of risk for the company.

Finally, Coca-Cola's bond rating currently stands at "AA-". This indicates that the company has a "Very strong capacity to meet financial commitments."
ROCE

2011
2012
2013
ROCE
17.95%
18.06%
17.07%
Operating margin
21.82%
22.45%
21.83%
Capital employed turnover ratio
0.82
0.80
0.78

For every dollar invested in capital employed, the company made $17 of profits.
This ratio is stable over the years, which is an important point for potential investors.
This shows that the company uses its capital very efficiently to generate profit.

ROE

2011
2012
2013
ROE
27.10%
27.51%
25.88%
net profit
8'572
9'019
8'584
Equity
31'635
32'790
33'173

In general, financial analysts consider return on equity ratios in the 15-20% range as representing attractive levels of investment quality.

Even if there was a decrease over the years, we can see that Coca Cola's ROE is above the average, which means that the company is high growth company with good profitability.

The ratio has decreased slightly in 2013 because of the increase in equity as well as the decrease in Net Profit. This is due to the fact that more equity invested generated less return.

































Analysis of PepsiCo
About the company
First known as Pepsi Cola Company, created in 1893 by Caleb Bradham, then today as PepsiCo Inc. It's the world's second-largest food and beverage business.

Formed in 1965 with the merger of the Pepsi Cola Company and Frito-Lay, PepsiCo Inc. is an American multinational food and beverage corporation.
The company make, market and sell their products in worldwide.

















Over the decade, the company acquired a wide range of beverage and food brands, the largest of which includes Tropicana, Quaker oats etc. Nowadays it offers 22 brands in over 200 countries.





In 2013, the net sales revenues has been distributed has followed:

The revenue evolution

-0,13%The graphic followed represent the evolution of Pepsi's Revenue between 2011 and 2013:
-0,13%

-1,52%
-1,52%

The global evolution of Pespi's Revenue stay non significate between 2011 and 2013. Like Coca Cola, 2012 had been a difficult period to maintain the level of sales.

Indeed, after a decrease of 1.52% from 2011 to 2012, the revenue has raised of 1.41% from 2012 to 2013.

To understand this evolution, we have to compare it firstly to its market, food or beverage, and secondly through the revenue location:

The volume effect

PepsiCo has been affected by multiple changes:
The unfavorable/favorable product mix of its different brand for food as well as for beverage
A decline in non-carbonated beverage in US and Latin America
Arrival on new emerging markets like Brazil



The price effect 

Like Coca Cola, Pepsi is a worldwide brand, its products are distributed all around the world, it has to trade in multiple currencies.
In 2013, unfavorable foreign exchange reduced net revenue growth by 6 percentage points, only for Latin America Foods department.

A change in scope

Today, emerging markets represent an inevitable opportunity for Pepsi. It financial performance could be adversely affected if they are unable to grow them business in emerging and developing countries.
In 2012, Acquisitions and divestitures in Argentina and Brazil in the prior year contributed 2 percentage points to net revenue growth, for example.
The margin structure


2011
2012
2013
Gross Profit
34'911
34'201
35'172
Revenue
66'504
65'492
66'415
Contribution margin rate
52.49%
52.22%
52.96%

Pepsi's turnover stayed stable between 2011 and 2013, trade policy is therefore well lead face tough concurrency.
However, the sales and marketing policy does not seem sufficient to capture new market share.
Important point: Even with a decrease of revenue in 2012, Pepsi succeed to keep its contribution margin to a stable level compare to 2011 and 2103.
The scale of Pepsi makes them easy to draw forecast. We can expect a growth of 1 to 2 % per year.

With the graphic above, we can easily see that Pepsi manages its costs perfectly.
The break-even point
Unlike Coca Cola report, Pepsi report did not provide us the detail of the "Sales, General and Administration Expenses" so we consider all expenses as variable cost, which means that all the expenses are depending on the sales.

It means that Pepsi Co is far to its break-even point, so there is almost no volatility. This guarantee a stability of the net income.

However, demand for its products may be adversely affected by changes in consumer preferences or any inability on its part to innovate or market our products effectively.
Investment analysis (C.f balance sheet appendix 3)
Capital Analysis

2011
2012
2013
Net fixed assets
19'698
19'136
18'575
Gross fixed assets
35'140
36'162
36'961
Investment in fixed capital
56.06%
52.92%
50.26%

From 2011 to 2013, we can see that this ratio decreased, it means that



2011
2012
2013
Revenue
66'504
65'492
66'415
Net fixed assets
19698
19136
18575
Fixed assets turnover
3.38
3.42
3.58


Colonne1
2011
2012
2013
CAPEX
3'339
2'714
2'795
Depreciation
2'737
2'689
2'663

1.22
1.01
1.05


Investment analysis (C.f balance sheet appendix 2)


2011
2012
2013
Revenue
46'542
48'017
46'854
Net fixed assets
14939
14476
14967
Fixed assets turnover
$3.12
$3.32
$3.13

Again, we can see the profitability of the company thanks to the fixed assets turnover.
In 2013, for $1 of net fixed assets, the company generates $3.13 of revenue.
This ratio shows that the Net Fixed Assets of the company are very profitable.

 
2011
2012
2013
CAPEX
2'920
2'780
2'550
Depreciation
1954
1982
1977
 
1.49
1.40
1.29

This ratio is superior to 1 through the years. It means that there is a harmony between what the company invests and what it needs. The ratio also shows willingness to grow and develop the activity on new markets.

Net working capital
According to Pepsi Annual Report, the business is affected by seasonal variations but with this analysis we couldn't study the effect.


2011
2012
2013
Net working capital
1'067
-173
-8
Sales
66'504
65'492
66'415
Net working turnover
1.60%
-0.26%
-0.01%

This ratio becomes inferior to 1. It could indicate that PepsiCo has trouble fulfilling its short-term liabilities but it's not as significant because we don't have enough years to compare.
Moreover, the net working turnover do not increase as well as the turnover.
Days of sales outstanding
Pepsi customers include:
Wholesalers & other distributors
Foodservice customers
Grocery stores
Drug stores
Convenience stores…
In 2013, sales to Wal-Mart represented approximately 11% of them total net revenue.
Accounts ReceivablesAnnual Sales*360



Between 2011 and 2013, Pepsi has been able to manage them customer delays.
This is due to exclusive contracts, those arrangements provide them the right to charge royalties and rights.
Moyenne avec le secteur
Days of payable outstanding
Accounts PayableAnnual Purchases*360

This graphic means that Pepsi has important control on its suppliers, Pepsi has paid its suppliers after its customers. Therefore, Pepsi has driven a policy which provides us a gap and consequently cash from operations.
Days sales of inventory
InventoryCost of sales*360


From 2011 to 2013, Pepsi DSI's average is 41 days to turn their inventories into sales. This ratio has been improve through the period. It could be due to an improvement of the inventory policy.

Cash conversion cycle (CCC)
The cash conversion cycle measures the time between outlay of cash and cash recovery.
This ratio is used to track Pepsi over the time and to compare Pepsi with its competitors, the Coca Cola Company is its primary beverage competitor in all around the word.

To
2011
2012
2013
DSO
37.94
33.76
33.16
DPO
47.17
51.92
56.94
DSI
44.21
41.77
39.83
CCC Days
34.98
23.61
16.04






Over the time, Pepsi has reduced the delay between when the cash is received from customers and paid to suppliers. Pepsi's cash conversion is consequently quick.
This is due to an improvement of all the component over the year:
Stocks well managed
Suppliers are paid with a credit more important than customers pay Pepsi

Pepsi therefore emerges from its activities an important cash which needs to be save and manage.
To support this argument, we can show the evolution of cash in the balance sheet, between 2011 and 2013 there has been an evolution of + 54%.
This cash could be used to develop the activity, the operational.

Mettre en complement :
Return on equity
Return on assets



Financing policy


Gearing


2011
2012
2013
Debt leverage
100%
106%
100%
Debt
20'568
23'544
24'333
Equity
20'588
22'294
24'279

ROCE


2011
2012
2013
ROCE
17.05%
16.35%
17.56%
Operating margin
14.48%
13.91%
14.61%
Capital employed turnover ratio
1.18
1.17
1.20

ROE


2011
2012
2013
ROE
31.29%
27.71%
27.76%
net profit
6'443
6'178
6'740
Equity
20'588
22'294
24'279







The Coca cola Company Vs. PepsiCo
Summary

 
The Coca Cola Company
PepsiCo
Founded
1886
1898
Founders
Asa Griggs Candler (company) John Pemberton (coke)
Donald Kendall (company) Caleb Bradham (Pepsi)
Type
Public
Country of origin
United States
Headquarter
Atlanta
Purchase
Industy
Beverages
Food and beverages
Area served
Worldwide
Brands
> 200
22
Revenue
$46.8 billion
$66.4 billion

tableau excel
Similarities and Differences

Tableau points communs et différences

comparer CA Gross profit margin DSO DPO DSI ROE ROCE etc.

Focus on the CCC

With this graphic, we can definitely say that Pepsi manage its cash conversion cycle better than Coca Cola. Indeed Pepsi needs 16 days while Coca Cola needs 64 days which equal a difference of 49 days.

Competition


The Coca-Cola Company has always been considered PepsiCo's first competitor in the beverage market, and in the end of 2005, PepsiCo surpassed The Coca-Cola Company in market value for the first time in 112 years since both companies began to compete.
Conclusion


























Appendix 1
 
2011
2012
2013
Variable costs
 
 
 
Cost of revenu
18'216
19'053
18'421
Operating expenses
18'172
18'185
18'205
Bottling and distribution expenses
8502
8905
8510
Total
44'890
46'143
45'136
Fixed costs
 
 
 
stock-based compensation expense
354
259
227
Advertising expenses
3256
3342
3266
Other operating expenses*
5310
5232
5307
Other operating expenses
732
447
895
Total
9652
9280
9695


* Consider as fixed costs because implement for the reinvestment programm and impairement of certain intangible asset


























Appendix 2

The Coca Cola Company's Balance sheet
Assets
2011
2012
2013
 
 
 
 
Receivables
8'370
10'513
7'759
- payables
9'371
9'947
9'886
+ Inventories
3'092
3'264
3'277
 
 
 
 
Net Working Capital
2'091
3'830
1'150
 
 
 
 
+ Net Fixed Assets
54'477
55'846
58'751
 
 
 
 
Capital employed
56'568
59'676
59'901
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Financial debt
38'968
43'437
46'996
- cash & bank
14'035
16'551
20'268
 
 
 
 
Net financial debt
24'933
26'886
26'728
 
 
 
 
+ Stockholders' Equity
31'635
32'790
33'173
 
 
 
 
Capital employed
56'568
59'676
59'901




















Appendix 3

PepsiCo's balance sheet
Assets
2011
2012
2013
 
 
 
 
Receivables
9'189
8'520
9'116
- payables
11'949
12'274
12'533
+ Inventories
3'827
3'581
3'409
 
 
 
 
Net Working Capital
1'067
-173
-8
 
 
 
 
+ Net Fixed Assets
55'441
55'918
55'275
 
 
 
 
Capital employed
56'508
55'745
55'267
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Financial debt
40'345
40'070
40'666
- cash & bank
4'425
6'619
9'678
 
 
 
 
Net financial debt
35'920
33'451
30'988
 
 
 
 
+ Stockholders' Equity
20'588
22'294
24'279
 
 
 
 
Capital employed
56'508
55'745
55'267

CCC Days






Income Statement Evolution







The Coca Cola Company
Corporate
Eurasia & Africa
Europe
Latin America
North America
Pacific
Bottling Investment
Worldwide distribution
North America; 28%
Latin America; 23%
Income Statement Evolution














Worldwide Distribution