Analysis of Coca-Cola and PepsiCo
- Description of the companies
Coca-Cola is a beverage company that owns or licenses and markets non-alcoholic brands. The company started as a Coke brand in Atlanta back in the year 1886. The brand was started by Dr. John S. Pemberton, who was a pharmacist. Large scale bottling of the product commenced in 1899. Coca-Cola currently operates in more than 200 countries, with its daily sales averaging 1.9 billion beverage servings. The company distributes its products through its controlled and distribution stores. It offers a variety of non-alcoholic drinks including Coca-Cola, Diet Coke, Coco-Cola zero, Sprite, Fanta, water, juices and juice drinks, among other beverages.
Key customers of Coca-Cola are large chains of retailers, wholesalers, restaurants and other small stores. Suppliers of the company are those businesses that raw materials used in manufacturing the drinks, as well as firms offering packaging materials. One of the principal suppliers of the Coca-Cola is Imbera, which supplies coolers. It is led by a board of directors chaired by Muhtar Kent who is also the Chief Executive Officer of the company. Like many companies applying the principles of corporate governance, the board of Coca-Cola is subdivided into committees such as audit, compensation, executive, corporate governance and finance and management committees.
PepsiCo
PepsiCo is a global company dealing in foods and beverages. It was incorporated in 1919 in Delaware and was later reincorporated in 1986. Its primary product is the Pepsi-Cola drink which was introduced in 1898 by Caleb Bradhan, a pharmacist. Other beverages and drinks offered by the company include Mountain Dew, Gatorade, Diet Pepsi, 7UP, Tropicana Pure Premium, Aquafina, Miranda, among others. The company sells directly to retailers through its plants and distribution facilities and also through licensed independent bottlers.
PepsiCo’s major customers are independent distributors and licensed bottlers. Its top customers are Walmart Stores and PBG, among other retailers. It relies on its top customers with the top five clients accounting for 13% of its total revenue. Its principal suppliers are the providers of food products and those offering packaging goods and services. Some of the key suppliers are Dole Foods Company and E2M. The company is run by a competent board of directors headed by Indra K. Nooyi. Nooyi also serves as the Chief Executive Officer of PepsiCo. The board of the company is also made up of committees with each committee charged with distinct duties. The committees include the audit, nominating, corporate governance and the compensation committees.
- Profitability ratios
Coca-Cola
PepsiCo
- Net profit margin
Net profit margin gives a measure of the amount of net profit a company earns for each dollar of total net revenue during a specified period (Rich, 2010). In 2013, the net profit margin for Coca-Cola was 18.41% implying that it made a net profit of $0.1841 from each dollar of net revenue. The ratio declined by 2.706% from 18.92% in 2012 indicating a decrease in the profitability of the company. The net profit margin for PepsiCo in 2013 was 10.22% implying that it earned a net income of $0.1022 from every dollar of net revenue during the year. PepsiCo’s net profit margin increased by 7.703% in 2013 from 9.49% in 2012. This indicates that the profitability of PepsiCo improved in the year 2013.
As shown by the above figures, Coca-Cola Company was more profitable than PepsiCo since its net profit margin is higher than that of PepsiCo. However, the two years under consideration indicates that the profitability of Coca-Cola declined while that of PepsiCo improved in 2013. PepsiCo can enhance its net profit margin by improving efficiency of its operations to reduce operating costs. In addition, the company should use proper distribution channels in order to reduce distribution costs. The company can also improve by controlling cost at the source. This implies purchasing raw materials from suppliers that offer favorable prices or terms of purchase (Gallagher & Andrew, 2007). It can also increase profit margin through diversification and extensive advertising and sales promotion. These measures will boost the company’s revenues thereby increasing its profitability.
- Return on total assets
The ratio gives the amount of income a company earns for every dollar of total assets used by the company during the year (Gibson, 2008). Coca-Cola’s return on total assets for 2013 was 9.579% showing that it made a net income of $0.09579 for each dollar of total assets used in the business. The ratio declined by 9.154% in 2013 from the 10.54% in 2012 suggesting a decrease in the profitability of the company. On the other hand, the return on total assets for PepsiCo was 8.76% indicating that it earned a net income of $0.0876 for each dollar of total assets used during the year. It increased by 5.218% in 2013 showing an increase in the profitability of PepsiCo.
The return on total assets for Coca-Cola was more than that of PepsiCo indicating that Coca-Cola was more efficient in using its total assets to generate income. PepsiCo can improve its return on total assets by enhancing efficiency its operations through innovation. Efficient operations will reduce total costs of production thereby increasing net income. In addition, the company can improve the ratio by using the optimal amount of assets. It should dispose of assets that are not being used in operations. For instance, the PepsiCo should reduce its inventory to appropriate levels and dispose of redundant fixed assets (Gallagher & Andrew, 2007). This will further decrease the cost of maintenance expenses incurred on the assets.
- Return on equity
Coca-Cola’s return on equity in 2013 was 25.8% indicating that its shareholders earned a net income of $0.258 for every dollar invested in the shares of the company. The 2013 saw a 5.835% reduction in Coca-Cola’s return on equity. This indicates a fall in the profitability of the company (Stice & Stice, 2012). PepsiCo, on the other hand, had a return on equity of 27.83% in 2013 showing that its shareholders earned a net income of $0.2783 from every dollar invested in the equity of the company. The ratio increased by 0.3% in 2013 indicating a slight improvement in the profitability of the firm.
The figures show that shareholders of PepsiCo earned more per dollar of equity than that made by the shareholders of Coca-Cola. Since Coca-Cola had a higher net profit margin and higher return on total assets than those of PepsiCo, the lower return on equity could be due to the large amount of equity in the company. Coca-Cola can improve its return on equity by increasing the use of debt in the enterprise up to the optimal point. Increased leverage may improve profitability since interest on debt is allowable for taxation purposes. In addition, the total amount of equity can be reduced through stock repurchases instead of paying cash dividends. Share repurchases will reduce the amount of equity thereby increasing the company’s net income per dollar of equity (Gallagher & Andrew, 2007).
- Major events
One of the main events for Coca-Cola was the acquisition of 50% shareholding in Aujan Industries. Aujan Industries is one of the largest beverage companies in Middle East. Coca-Cola paid $820 million for 50% shareholding in Aujan in 2012. The acquisition reduced cash balance and was included as cash used in investing activities. The company also incurred expenditure on merger and integration. It, however, enhanced confidence among investors as it Coca-Cola would be able to gain control in the Middle East. Another event was the acquisition of Fresh Trading Ltd in November 2013. These acquisitions have enabled Coca-Cola to acquire control of bottling and other operations.
PepsiCo announced the acquisition of 75.5% shareholding in Lebedyansky JSC in February 2014. This reduced cash balance, in the year of purchase of the business. In addition, the company will incur merger and integration charges. PepsiCo also announced a joint venture with Muller Quaker Diary in July 2012. The investment enabled PepsiCo to enter the dairy products market.
- Analysis of the income statements
Analysis of the income statement shows that in the year 2013, Coca-Cola’s cost of goods sold was 39.32% of total revenue. This a decline from 39.68% in 2012 as revealed by the vertical analysis of the income statement. This indicates that it is profitable as its cost of sales only constitute about 39% of total revenue. Horizontal analysis shows that the cost of sales of the firm declined by 3.32% in 2013. The reduction in the percentage of the cost of sales shows an improvement in the profitability of the company. On the other hand, vertical analysis of the income statement of PepsiCo indicates that its cost of sales were about 47.04% of its total sales revenue in 2013. This is a 0.15% reduction from the 47.78% in the year 2012. The above figures show that Coca-Cola incurred less in cost of sales as compared to PepsiCo hence the former is doing better than the former.
Coca-Cola’s selling, general and administrative expenses were 36.94% of its total revenue in 2013. The percentage was similar for both 2013 and 2012. Horizontal analysis indicates that the amount spent on selling, general and administrative expenses decreased 2.41% implying an improvement in the efficiency of operations. PepsiCo’s selling, general and administrative expenses were 38.18% of the total sales. The expense was up 1.5% in the year 2013 suggesting a decline in the efficiency of PepsiCo’s operations. The results indicate that Coca-Cola was more efficient than PepsiCo in keeping its selling and administration expenses hence it was more profitable as expenses directly influence the profitability of the firm.
In the year 2013, operating profit for Coca-Cola was 21.83% of total revenue up from 22.45% in 2012. The company’s operating profit declined by 5.11% in 2013 as indicated by the horizontal analysis. PepsiCo’s operating profit, on the other hand, was 14.61% of the company’s total revenue. The operating profit decreased by 7.56% in 2013 indicating a fall in the profitability of PepsiCo. Therefore, Coca-Cola outperformed PepsiCo.
The horizontal analysis further suggests that Coca-Cola’s total revenue declined by 2.42% in 2013 while that of PepsiCo increased by 1.41% in the same year. This suggests that the profitability of Coca-Cola is deteriorating while that of PepsiCo is improving.
Recommendations to PepsiCo
Income statement analysis reveals that Coca-Cola outperformed PepsiCo during the two years under consideration. In order to reduce the amount it incurs on cost of sales, PepsiCo should revise its purchasing strategy to minimize the cost of raw materials. This encompasses purchasing in bulk, entering into long-term contracts for the supply of raw materials at lower prices, among other measures (Besley & Brigham, 2007). In addition, improving efficiency at the plants by using appropriate technology and production procedures will reduce direct costs thereby reducing the cost of sales (Besley & Brigham, 2007). These measures will lower the percentage of the cost of sales to the total revenue.
PepsiCo can also outsource certain front office operations at its offices. Outsourcing may reduce the cost of performing such operations. This will lower administrative expenses and allow the company’s staff to concentrate on core activities (Besley & Brigham, 2007). It will in turn improve the quality of products thereby increasing total revenue. Furthermore, it can use direct among other appropriate channels of distribution in order to reduce selling and distribution expenses. As the company deals with a variety of products, diversification may lead to increased revenues. Rather than concentrating on the core product, the Pepsi-Cola, the company should allocate adequate resources to other products. These, among other measures, will reduce the company’s operating costs and improve its revenues thereby boosting its overall profitability.
- Vertical analysis of balance sheets
The analysis of the balance sheet shows that cash and cash equivalents for Coca-Cola were 19% of the total assets in 2013 up from 15.62% in 2012. On the other hand, PepsiCo’s cash and equivalents were only 12% of the total assets in 2013 and 8.44% in 2012. This implies that Coca-Cola was more liquid than PepsiCo. The increase in this percentage in both companies suggests an improvement in their liquidity.
Coca-Cola’s current assets were 34.76% of its total assets in 2013, a decline from the 35.19% in 2012. During the same period, the current liabilities of the company were 30.88% in 2013 and 32.28% in 2012. This indicates that current assets were more than current liabilities in both years implying that Coca-Cola is liquid. PepsiCo’s current assets were 28.66% of the total assets in 2013 while its current liabilities were 23.02% of total assets. This shows that PepsiCo was liquid as its current assets were more than current liabilities. Coca-Cola appears to be more liquid that PepsiCo.
Coca-Cola’s inventory was 3.64% of total assets in 2013 compared to 4.4% of PepsiCo. This indicates that PepsiCo is keeping high levels of inventory that may adversely affect its liquidity. In addition, accounts receivable for Coca-Cola in 2013 were 5.41% of total assets compared to the 8.89% in PepsiCo. This indicates that Coca-Cola is more efficient in collecting money from its debtors.
Total liabilities were about 62.86% of total assets in Coca-Cola implying that it financed 62% of its assets through borrowing. PepsiCo’s total liabilities were 68.52% of total assets in 2013. This indicates that Coca-Cola is more solvent/financially stable than PepsiCo. On the same note, total equity in Coca-Cola was 37% compared to the 31% of PepsiCo.
Recommendations to PepsiCo
The above results indicate that PepsiCo is lagging behind Coca-Cola in terms of liquidity and solvency. It should reduce its levels of inventory as this will decrease the amount of capital tied down as well as the cost of holding inventory thereby improving its cash availability (Besley & Brigham, 2007). In addition, it should use aggressive debt management policy that includes cash discounts to encourage prompt payment as well as limiting credit facilities to only credit worthy customers. This will improve debt collection thereby enhancing the liquidity of the company.
In addition, the company can adopt a conservative dividend policy. This will reduce the amount of dividends paid to shareholders thereby lowering the need for borrowing (Besley & Brigham, 2007). Furthermore, it should raise capital through issuing new equity rather than borrowing in order to reduce its gearing.
References
Besley, S., & Brigham, E. (2007). Essentials of managerial finance. (14th ed). Mason, OH: Cengage Learning.
Gallagher, T., & Andrew, J. (2007). Financial management: Principles and practice. Upper Saddle River, N.J.: Prentice Hall.
Gibson, C. (2008). Financial reporting and analysis: Using financial accounting information. 11th ed. Cincinnati, Ohio: South-Western College Pub.
Rich, J. (2010). Cornerstones of financial and managerial accounting: Current trends update. Mason, OH: South-Western/Cengage Learning.
Stice, E., & Stice, J. (2012). Intermediate financial accounting. (18th ed). Mason, Ohio: South-Western Cengage Learning.
Appendices
- Analysis of income statements
Coca-Cola
PepsiCo
- Analysis of the balance sheet
Coca-Cola
PepsiCo
