I think I like Coke Zero more than Pepsi Zero. I can't say for certain, because I've been hitting the Atomic Fireball candies again, and they leave me with the palate of a trash dump goat. Also, studies with real-time brain scans show that the sight of a Coke label can light up the sensory pleasure region, even for subjects who like Coke and Pepsi equally in blind tests. So, in addition to me being periodically tongue-anesthetized, I might also be partially zombified from a half-century of Coke ads.
All I know is that although I don't mind Diet Pepsi, I reach first for Coke products, and for Zero sodas before Diet ones. So, apparently, do many of you. That goes a long way toward explaining why Coca-Cola is clobbering PepsiCo right now, although there's more to it, which I'll explain.
Over the past decade, investors have done much better in the S&P 500 index than in Coke or Pepsi. Year to date, however, Coke has made 26%, almost double the index's return, while Pepsi is down a little, even after dividends. Late last month, Coke delivered a near-perfect second-quarter financial report, and shares jumped 5% in a day. The company has been gaining share in cola, orange, and lemon-lime soda flavors, and killing it with Zero, a major growth driver. What's interesting is that Diet Coke and the classic stuff have been gaining share, too, largely at the expense of Pepsi.
Behind the scenes, Coke is a transformed company. Just over a decade ago, it collected more than half of revenue from stakes in regional bottling operations, which manufacture soda from concentrate and put it on trucks for local delivery. Today, Coke has sold, or is close to selling, nearly all of its bottling operations. That makes it an asset-light marketing company, which investors like. It's part of the reason that Coke trades at 26 times this year's projected earnings, versus 22 times for the broad market, and 16 times for Pepsi, which remains vertically integrated.
Pepsi is also more than half food, especially snacks, thanks to its Frito-Lay and Quaker Foods divisions. At the moment, much of Big Food is slumping, and the rise of GLP-1 drugs appears to be a key reason. These drugs can quiet the "food noise" that drives impulse purchases of cookies and chips.
Back to diet soda, and the briefest of histories: There was a soda entrepreneur and philanthropist named Hyman Kirsch, who founded a small hospital in Brooklyn called the Jewish Sanitarium for Chronic Disease, and decided that diabetics needed a soda of their own. In 1952, he and a scientist concocted No-Cal, the first diet soda, in ginger ale and black cherry flavors to start. It was sweetened with something called cyclamate, which would later be banned after studies linked it to cancer in rats, and it remains banned in the U.S. even though the studies have been discredited, but never mind all of that. No-Cal became a regional hit, and not just with diabetics. One marketing poster showed a fit-looking woman struggling with the last two inches of her skirt's side zipper. "Time to switch to No Cal," it read. Another featured a movie star of the day in a bathing suit. "Kim Novak is a No-Cal girl!" it said. "No-Cal never adds an inch to her waist or an ounce to her weight."
No-Cal's growth caught the attention of a larger soda player in Chicago called Royal Crown, which launched Diet Rite, and that did so well that Coke and Pepsi were forced to respond, only neither wanted to risk its namesake brand on something so experimental. Coke launched Tab, and Pepsi, something called Patio, with both aimed at weight-conscious women. Eventually, these gave way to Diet Coke and Diet Pepsi.
I've always assumed that Diet Coke, which made its debut in 1982, was just a bad attempt to mimic the taste of regular Coke. In fact, it was intentionally made more citrusy to mask the metallic aftertaste of sacharrin, which was later replaced with aspartame. Remember New Coke? Diet Coke was such a success that executives combined the same flavor profile with high-fructose corn syrup. It flopped.
Coke Zero, officially called Coca-Cola Zero Sugar, made its debut in 2005, and crucially, this was 11 years before Pepsi got into the Zero game. The idea was to copy Classic Coke's taste and to avoid the "Diet" label, in part because men had been conditioned to view it as feminine. Coke Zero is sweetened with a blend of aspartame and something called Ace-K, because the two help cancel each other's aftertaste.
I must be a Moderately Manly Man (trademark still available), because although I drank Diet Coke for years, I've now switched to Zero. Coke is benefiting from its head start in Zero, and its continuity. Coke Zero cans today look almost identical to Coke cans. Pepsi went through a weird detour with something called Pepsi Max, which had ginseng, extra caffeine, and the same sweeteners as Coke Zero. But it wasn't obvious from the name that it had zero sugar. In 2016, Pepsi finally dropped the ginseng, normalized the caffeine, and changed the name to Pepsi Zero Sugar. The packaging has changed too many times to count.
Hopefully, that helps explain why Coke today is stronger in Zero, which ranks behind Classic and Diet in sales but is growing much faster. One investment bank's bull case on Coke, with its 2.4% dividend yield, is that investors should value it like asset-light success stories in other industries -- for example, Marriott International, at 31 times earnings. I'm not feeling it. Pepsi, yielding 4.3%, looks ripe for a soda turnaround, but the snacks give me pause. If I had to choose one, I'd choose Coke, but until there's a better entry point, the best Big Soda stake might be zero.
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