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Pepsi has suffered many setbacks in recent years, but perhaps few were as symbolic as being jilted by a long-time partner it used to own, KFC.\u00a0<\/p>\n
The fried chicken chain said last week that it would begin replacing PepsiCo\u2019s namesake soft drinks with Coca-Cola products at its 3,700 U.S. restaurants in January. The two companies\u2019 partnership stretches back 40 years, since the time PepsiCo bought the fast food chain. (PepsiCo spun KFC off in 1997.) KFC represents a tiny sliver of Pepsi sales, but the defection reflects the ongoing deterioration of the drink\u2019s brand power.<\/p>\n
How Coke pulled ahead<\/p>\n
For decades, the Coke vs. Pepsi cola wars were a part of mainstream culture, with memorable ads showcasing blind \u201cPepsi Challenge\u201d taste tests of the two drinks. Pepsi\u2019s TV commercials with pop star Michael Jackson and model Cindy Crawford in the 1980s and \u201990s became part of the larger zeitgeist. Back then, Coke\u2019s U.S. market share was just a percentage point or two more than Pepsi\u2019s.\u00a0<\/p>\n
Supermodel Cindy Crawford her iconic \u201990s Pepsi ad in 2002.<\/p>\n
ourtesy of Pepsi\/\u2014Getty Images<\/p>\n
It\u2019s a very different story now. Last year, Pepsi-Cola had 8.1% of the U.S. carbonated soft drinks market by volume last year, far behind Coke\u2019s 18.5%, according to trade publication Beverage Digest. In 2024, Pepsi fell to third place behind Dr. Pepper for the first time and remains there. What\u2019s more, sales of Diet Coke and Coke Zero are multiple times higher than their Pepsi counterparts.<\/p>\n
Pepsi didn\u2019t so much collapse as get outmaneuvered. Coke has reshaped its business around brand building and innovation, shedding its capital-intensive bottling business and successfully betting on faster-growing categories like dairy-centric and protein-based drinks. PepsiCo has remained a sprawling portfolio company where soda was one priority among many, and one that got less attention than it used to. The result is a PepsiCo that generates more than twice as much revenue as Coca-Cola but whose market valuation is only about half as big.<\/p>\n
Soda on autopilot<\/p>\n
Wall Street analysts say that for years PepsiCo CEOs have turned their attention away from the company\u2019s soda business in North America because of what was long seen as soda\u2019s secular decline. And it\u2019s true that soda sales slumped for 16 straight years. But starting in 2021, the U.S. soft drinks industry stabilized, with Americans gravitating toward healthier and more functional beverages, like those featuring protein and energy additives. PepsiCo CEO Ramon Laguarta has admitted that the still-massive business deserves more attention.\u00a0<\/p>\n
\u201cWe do not feel good about the beverage business,\u201d Laguarta told Wall Street analysts earlier this month. \u201cSo we are putting all the urgency of the business and focus on improving our performance in soft drinks.\u201d <\/p>\n
Last quarter, PepsiCo\u2019s $28 billion North American beverage business shrank 2% by volume. That decline occurred even as its non-soda drinks business\u2014including Gatorade, Aquafina and Ocean Spray\u2014improved, suggesting deeper declines for its soft drinks. (PepsiCo does not break out subdivisions within its beverage segment.)<\/p>\n
PepsiCo is a behemoth of a food and snacks and beverage company, taking in nearly $94 billion in revenue last year. Some 58% of that came from its Frito-Lay food and snacks division that includes Fritos and Doritos chips and its Quaker brand. Its beverage business generates the rest of the revenue, with a full 30% coming from North American beverages.<\/p>\n
PepsiCo CEO Ramon Laguarta attends the China Development Forum in Beijing March 22, 2026. <\/p>\n
Qilai Shen\u2014Bloomberg via Getty Images<\/p>\n
The company\u2019s North American Frito-Lay unit has regularly reported operating profit margins twice as large as the domestic beverage business. As a result, the snack business has earned the parent company\u2019s investments at the expense of soft drinks, which PepsiCo has left to run on autopilot, Beverage Digest editor and publisher Duane Stanford told Fortune.<\/p>\n
\u201cIt worked so long as the Frito-Lay continued to be a powerful engine,\u201d said Stanford. The problem now is that PepsiCo\u2019s North American snacks business is under pressure as inflation-wary consumers balk at high prices. Sales are flat so far this year. Earlier this year, Bloomberg reported that prices for some of PepsiCo\u2019s chips had risen 50% since 2021. At one point, a party-size bag of Tostitos cost $7.29. Consumers have pushed back, and PepsiCo cut snack some prices this spring.<\/p>\n
No one should expect any quick relief for PepsiCo\u2019s snacks business, which has a 38% share of the $80 billion U.S. savory snacks industry. \u201cIt\u2019s tough to forecast much sequential improvement absent a material change in the consumer macro environment,\u201d JPMorgan analyst Andrea Teixeira said. That puts even more pressure on PepsiCo\u2019s beverage business to shape up.\u00a0\u00a0<\/p>\n
Laguarta\u2019s earnings call comments suggest the company will try to lift soft drink sales by building the brands of its soda lineup that include Pepsi, Mountain Dew, and Poppi, a prebiotic soda it bought last year for $2 billion. That investment will likely mean pouring more money into marketing and advertising, paying retailers for more shelf space and presentation, and lowering prices as needed.<\/p>\n
Is a breakup the answer?<\/p>\n
Over the years, activist investors have proposed a far more radical solution to PepsiCo\u2019s woes: split up the sprawling portfolio company.<\/p>\n
In the 2010s, investor Nelson Peltz spent two years trying\u2014ultimately unsuccessfully\u2014to convince PepsiCo to separate its food and beverage businesses into two companies to better \u201cunlock\u201d the value of each.<\/p>\n
More recently, investors have pushed PepsiCo to follow some of the moves employed by Coca-Cola, which has no food business and relies on franchisees\u2014rather than its own facilities\u2014for its bottling and manufacturing needs. <\/p>\n
A year ago, Elliott Management called PepsiCo a \u201cdramatic underperformer\u201d and urged it to consider, among other things, re-franchising its company-owned bottlers. In 2010, both Coca-Cola and PepsiCo acquired their bottlers believing that a vertically integrated approach to production and distribution was essential. Coke quickly reversed the decision, which has reduced the cost pressures stemming from the capital-intensive activity. It also freed Coke to invest in brand building and innovation, two strengths that helped sway KFC to switch to Coke.<\/p>\n
\u201cA new partner in Coca-Cola gives us a platform to innovate, meet changing tastes and give customers more reasons to choose us,\u201d KFC U.S. president Catherine Tan-Gillespie wrote in a memo to staff. (Since KFC dropped Pepsi, fast food rival Taco Bell has extended its contract with Pepsi for another 10 years.)<\/p>\n
Laguarta surprised analysts earlier this month with the mere mention of re-franchising; he said it could lead to \u201cbetter execution and potentially better margins.\u201d At the same time, re-franchising shouldn\u2019t be seen as a panacea, analysts warned. \u201cIf \u2018accelerated\u2019 re-franchising is indeed the right path, [but] this would not be without significant disruption,\u201d Barclays\u2019s Lauren Lieberman wrote in a note.\u00a0Analysts say it could take a decade or more to re-franchise entirely: Coca-Cola\u2019s re-franchising took a decade or so to pay off.\u00a0<\/p>\n
\u201cWe\u2019re open to revisiting every option,\u201d the CEO of eight years said on the earnings call. A PepsiCo spokesman declined to comment on re-franchising beyond the CEO\u2019s remarks.<\/p>\n
PepsiCo does have one beverage bright spot that could serve as a model going forward: Gatorade. The drink\u2019s sales have risen this year (the company does not quantify those gains) thanks to updates such as the March launch of its lower sugar variation. Beverage Digest\u2019s Stanford thinks PepsiCo can indeed rebuild its soda drinks empire, but doing so will require a shift in mindset after years of the board and CEOs seeing soft drinks as products with dim growth prospects.\u00a0<\/p>\n
\u201cEveryone counted carbonated soft drinks out and now we see that was a mistake,\u201d he said of PepsiCo leadership. \u201cThis is a conglomerate that knows how to execute. They just have to make the decision to do it.\u201d<\/p>\n
#Pepsi #fell #cola #warsand #lost #KFC<\/p>\n","protected":false},"excerpt":{"rendered":"
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