Coke Vs Pepsi Persuasive Essay

Coke Vs. Pepsi

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We researched Coke and Pepsi as was requested to see which one would be a better
investment over the other. One of the ways to see how a company is doing is to look at
how much (EVA) Economic Value Added that company is producing. EVA is a way of
measuring an operation’s real profitability. EVA is better than conventional ways because
it takes into account the total cost of the operating capital. EVA is simply the after-tax
operating profit minus the total annual cost of capital. Using EVA has advantages as well
as disadvantages.
· EVA sends the message than managers should invest only if the increase in
earnings is enough to cover cost of capital
· EVA allows a good way for companies to set a reward system that is not
overly expensive to implement because is not too difficult for top
management to monitor.
· EVA makes the cost of capital visible to operating managers
· Stock prices track EVA more closely than they track other popular measures.
· Ways to improve EVA
o Increase earnings
o Reduce capital employed
o Invest capital in high-return projects
· EVA does not involve forecasts of future cash flows and does not measure
present value.
· EVA therefore rewards managers who take on projects with quick paybacks
and penalize those who invest in projects with long gestation period.
· Need to make changes in income statements and the balance sheet to measure
economic value.
Looking at the historical trends of Coke and Pepsi in terms of EVA we find Coca-Cola's
EVA has been slowly decreasing while PepsiCo's EVA has been increasing (see Exhibit
1.1). Coca-Cola's NOPAT has decreased in recent years as a result of slowing sales
growth and worsening profit margins. If it were not for Coca-Cola's decreasing WACC,
its EVA would decrease more rapidly. If Coca-Cola used a WACC of 12%, about the
average of the past seven years, its EVA would have been $445,000,000 in 2000.
PepsiCo was able to more than double their EVA in 2000 due to higher NOPAT and
lower WACC. The higher NOPAT, was mainly a result of improved margins which lead
to a higher ROI. The key to EVA is the spread between ROI and WACC. It is important
to invest capital at a higher rate than the capital is obtained at. In theory, as long as there
are enough projects that produce ROI > WACC and enough capital supplied, EVA can
grow indefinitely.
1994 1995 1996 1997 1998 1999 2000
WE mentioned above that the (WACC) Weighted Average Cost of Capital is important.
So now lets take a look at what WACC is and why it is important.

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Firms must use capital
for operations. We want to know what the cost of that capital is to that firm. Therefore we
look at the cost of the companies’ debt, the companies’ equity, and other costs when
applicable such as preferred. Once we determine these costs we weight them so they
reflect the true structure of the company. Calculating the WACC is important because it
is the opportunity cost of capital or what the owners would expect to earn on their money
in an equally risky project elsewhere. It is the financial managers who usually set the
WACC. They do so with the aid of published sources, financial advisors, and other
sources to estimate values for Beta, risk free rate, and market premium. The type of
company sometimes influences the weighting of debt to equity. A new company that
faces potential bankruptcy will often take that cost into account and will be much more
equity financed. A company that is relatively certain of profits will lean toward more debt
to take advantage of the tax shields available.
To get a good idea of how Coke and Pepsi compare in WACC we calculated their
WACC projecting out to 2003 and assuming a 35 percent tax rate (see appendix 1.2).
When we look the WACC for Coke and Pepsi we can see that Cokes’ WACC is
consistently close yet slightly higher than Pepsi’s. However in 1997 when Pepsi’s
CEO Roger Enrico spun off the fast food chains KFC, Taco Bell, and Pizza Hut,
Pepsi’s WACC jumped significantly higher and then returned to normal in 1997. We
can conclude that both Coke and Pepsi have similar costs of capital.
Continuing with EVA we used Coke and Pepsi’s forecasts to see how their EVA war
would play out (see Exhibit 1.3). We can see that Pepsi takes the lead in 2000 with an
EVA of $1,201 million compared with Coke Cola $1,016 million. By 2001 Coke Cola
takes the lead with $2,470 million in EVA and Pepsi at $2,102 million. In 2002 Coca
Cola will have risen to $2,871 as compared to Pepsi’s $2,419. Then in 2003 Coke Colas
EVA is now projected at $3,124 million compared to Pepsi’s $3,555 million.
If you have to choose between Coke and Pepsi which would you choose and why.
According to the Sept 20, 1993 Fortune article titled The Real Key to Creating Wealth,
by Shawn Tully: One of EVA’s most powerful properties is its strong link to stock prices.
In the article the CFO for AT&T James Meenan found that there was almost a perfect
correlation between EVA and their stock price. EVA does a better job telling investors
what they really care about which is their net cash return on their capital.
Therefore we could conclude that it will be a better investment to invest in Coke Cola’s
stock over Pepsi’s stock because they will create more Economic Value Added and hence
create more value for the shareholders over this period.
Exhibit 1.3
2001 2002 2003 2001 2002 2003
Pretax Income 5605 6313 6874 4394 4979 5571
Equity Income (197) (227) (261) (157) (186) (239)
Goodwill 295 295 295 236 295 295
Cash Taxes (1738) (1957) (2131) (1142) (1245) (1504)
Interest Income (295) (244) (254) 0 0 0
Interest Expense 310 280 264 148 92 37
NOPAT 3980 4460 4787 3479 3935 4160
Debt 5426 5172 4919 6833 6810 6304
Equity 11267 11898 12368 9282 11648 11382
Acc. Goodwill 487 782 1077 987 1282 1577
Cash and Equivalents (2238) (2406) (2432) (2241) (4143) (2923)
Invested Capital 14942 15446 15932 14861 15597 16340
ROI 26.64% 28.87% 30.05% 23.41% 25.23% 25.46%
WACC 10.11% 10.29% 10.44% 9.26% 9.72% 9.82%
Spread 16.53% 18.59% 19.61% 14.15% 15.51% 15.64%
EVA 2470 2871 3124 2102 2419 2555
Coca-Cola PepsiCo
1994 $1,602 ($464)
1995 $1,814 ($760)
1996 $1,292 ($916)
1997 $1,601 $24
1998 $1,422 $428
1999 $1,063 $522
2000 $1,016 $1,201
2001 $2,470 $2,102
2002 $2,871 $2,419
2003 $3,124 $2,555
Coke Pepsi
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Coke 2001 2002 2003 Pepsi 2001 2002 2003
% Debt 32.50% 30.30% 28.45% 42.40% 36.89% 35.64%
% Equity 67.50% 69.70% 71.55% 57.60% 63.11% 64.36%
Beta 0.88 0.88 0.88 0.88 0.88 0.88
Risk free rate 6.15% 6.15% 6.15% 6.15% 6.15% 6.15%
Market risk premium 7.50% 7.50% 7.50% 7.50% 7.50% 7.50%
Cost of Debt 7.10% 7.10% 7.10% 6.97% 6.97% 6.97%
Cost of Equity 12.75% 12.75% 12.75% 12.75% 12.75% 12.75%
Tax Rate 35.00% 35.00% 35.00% 35.00% 35.00% 35.00%
WACC 10.11% 10.29% 10.44% 9.26% 9.72% 9.82%
Coca-Cola: 2001
Coca-Cola: 2001
WACC = Rd (1-Tc) (D / V) + Re (E / V)
0.071 (1 -.35) (5426 /16693 ) + 0.1275 (11,267 / 16693)=10.11%
Cost of debt = 7.1%
Cost of Equity = Ke =Rf +b(Rm-Rf) =6.15%+0.88(7.5%)=12.75%
The average Beta is 0.88, Market premium: 7.5%…. Arithmetic mean
Pepsi: 2001
WACC = Rd (1-Tc) (D / V) + Re (E / V)
0.071(1 -.35) (6833 / 16115) + 0.1275(6833 / 16115)=9.26%
Cost of debt = 6.97
Costt of Equity = Ke =Rf +b(Rm-Rf) =6.15%+0.88(7.5%)=12.75%
The average Beta is 0.88, Rm=6.15%…..T-bill three months , Rf=7.5….. Arithmetic mean
Coke Pepsi
1994 0.12% 0.12%
1995 0.11% 0.11%
1996 0.13% 0.21%
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Comparison between Coke and Pepsi

There are two famous beverage companies, Coco-Cola and Pepsi, have competed dramatically and distributed the beverage market profit for several decades. In the free market, it is hard to exactly tell which one is the winner within the perfect competition, because both companies use different style of commercials and product to expend their markets. Personally, I believe that Coco-Cola earn higher profit than Pepsi because Coco-Cola has better marketing strategies and the representatives for their commercials and TV ads cost is lower. I would choose to drink Coke over Pepsi. Because Coke has fair marketing strategy that attracts all generation of people of all ages, whereas Pepsi targets mostly younger generation, and tries to make an image of Coke as an uncool drink, and Coke has made more people to appreciate its value and product than Pepsi. Therefore, we should drink Coke that knows how to appreciate all audiences of all ages, regardless of their ages and genders.

It is interesting to hear Pepsi won the taste test. So, have coke. How can this be? Coke tastes better than Pepsi and Pepsi tastes better than Coke. What is the difference between Coke and Pepsi? If we compare the two labels on those two cans, the only difference between them is that Pepsi adds phosphoric acid in contains and Coke does not. Some people might say that those tests truly reflect the market demand and people s preferences but I doubt it. If they did, why we cannot find the only and exact answer to convince us which one is cola giant in the market? In the other hand, do they try both, and then decide for themselves? They are probably cheating on those taste tests. They probably report only favorable taste tests, and throw out the unfavorable ones.

What is the real different between Coco-Cola and Pepsi-Cola? Both Coca-cola and Pepsi are entrenched firms in the beverage market but I think Coke gain higher profit than Pepsi. The advertisement lines for these two famous soft drinks are .Enjoy Coco-Cola x from the Coco-Cola Company and .Joy of Cola . from the Pepsi. Comparing those two drinks commercial ads, there is a major thing that we can pick up from them, which is the representative of their products. In other words, who are the representatives in both commercial ads? In Coco-Cola company the two famous representatives are the two fiction characters the Cola Bear and the Cola Santa. In addition, in his commercial ads, the mangers try to make the ads related to our environment and culture. They try to establish an image to the public is that Coke is closely related to our living. We need it anytime and anywhere. On the contrary, Pepsi-Cola Co. uses a lot of super stars or famous figures such as Kiss, Dinger, Sisqo, Einstein, Faith Hill, etc. This commercial method of using the super stars or famous personage in Pepsi commercial ads is not only happen in America but also in Asia. The Pepsi commercial ads in Asia also use a lot of Asian super stars to representative their products. The reason why did Pepsi mangers try to break his competitor and contest the limited consumers by the idols charm. Both are good business strategies to raise the profit. However, because of Pepsi hires the super stars performing in the ads, it must spend lots of money so that it must have raised the company s cost which reduces the profit. On the other hand, Coco-Cola could reduce the cost by not hiring those super stars and famous actors and actresses.

The collectibles would reinforce image regarding their trademark and consolidate his consumers. On the other hand, they also can create lots of money so that raise the company profit. Compare to Pepsi, Coco-Cola has a lot of collectibles, such as teddy bears, watches, toy trucks, staples, etc and all of them put the Coco-Cola trademark on those products and we can almost find them in any market. On the contrast, Pepsi does not have collectible so that they might spend lots of time and money to gain more consumers and to expand its market. The most interesting parts of this are that there are Coco Cola museums but no Pepsi museums could be found.

For some people, they argue that the taste of Coke and Pepsi are the same. However, there are some people argue that Pepsi tastes sweeter and has much bubbles in it; therefore, Pepsi win more consumers, especially the young generation. However, this is not true. The young generation will change their preferences more quickly than the old generation, if a company uses young generation to determine most parts profit they gain from them, which is not going to make those profit very stable. Thus, Pepsi Co. would lose their customers easier. Compare to the Coco-Cola Co., more older generation customers are more stable at their preferences. This situation would benefit for the Coke so that Coco-Cola will earn more profit and outlast in beverage market.

I believe that Coco-Cola Co has more advantages to win this beverage war. For instance, some people prefer to see Pepsi s commercial ads and they might like Coco-Cola s taste. Imagine that if those two companies merger together, we will not have second choice while we drink coca and we will lose the chance to see the different and interesting ads. The beverage market will become bored. Therefore, no matter which one is really coca giant in the market, we prefer get more choice and fun from both of them.

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