“Waiter: I am sorry, we do not have Coke, is Pepsi okay?
Guest: I do not know, is monopoly money okay?”
– viral meme
Same. Same. But different.
Since ever, Coca-Cola, founded in 1886, and PepsiCo, which emerged as Pepsi-Cola in 1898, have engaged in a fierce rivalry, known as the “Cola Wars”. Surprisingly, both were created in pharmacies and were offered as medicine.
Fun fact: Coca-Cola even contained cocaine in its early days.
After more than a century, both companies are not only an integral part of our everyday lives but are also popular with investors. They are regarded as figureheads among quality companies because they pay stable dividends, have solid balance sheets and have grown your capital over decades.
Chart 1: Pepsi ($PEP) & Coca-Cola ($KO) vs. the S&P 500 ($SPX) since 1988
While Coca-Cola has remained steadfast in its commitment to soft drinks such as Coke, Fanta, and Sprite, PepsiCo has diversified its revenue streams.
Today, approximately half of PepsiCo’s earnings are derived from an assortment of snacks, including beloved brands like Doritos and Cheetos. This strategic move was born out of the realization that PepsiCo would always play second fiddle in the soft drink race.
After all, who has ever heard someone ask, “May I have a Pepsi, please?” while casually dining at a restaurant?
The undefeatable power of Coca-Cola’s brand has been immortalized in countless memes. My favorite is even this week’s quote.
Now, in their tireless pursuit of higher profits, both companies are setting their sights on a high-growth niche within the beverage market. And as yesterday’s quarterly results on July 13 made clear, Pepsi is reaping the fruits of a very smart decision.
They copied Coca-Cola…
Growth in an energy-charged niche
In August 2014, Coca-Cola made a farsighted decision.
It acquired a 16.7% stake in Monster Beverage, a US energy drink producer, and seized control of its global distribution. Hardly any company globally has developed better. The energy drinks segment is highly profitable and grows 3-4x faster than the general soft drinks market.
Over the past 20 years, Monster has compounded at a remarkable 43% annually.
To put this into perspective, your $1,000 investment in the company twenty years ago would now be worth over $1’300’000. Mind-boggling!
Chart 2: Energized: Monster Beverage Annual Sales in $ bn
But what if there exists a Monster 2.0?
Enter Celsius Holdings.
Celsius aims to dethrone Red Bull and Monster Beverage as the energy drink leader. Their promise includes muscle building, reduced body fat, and a long-lasting energy boost that allegedly helps burn calories.
On the one hand, Coca-Cola has agreed with Monster Beverage not to enter the energy drink market with any other product.
On the other hand, if you copied their proof-of-concept, that would be a great deal for Pepsi x Celsius, wouldn’t it?
Sure deal.
In August 2021, PepsiCo acquired 9% of Celsius and took over their distribution.
Finger on the Pulse of Time
Celsius has made remarkable strides in the US market, gaining market share from both Monster (37.4%) and Red Bull (35.1%).
Why is that?
This success can be attributed to a shift in consumer lifestyle, a rise in preference for healthy dietary practices, and an increase in health-conscious individuals.
Celsius positions itself as a poster child for these trends.
Chart 3: Celsius Market Share Expectations in the US
Their flagship drinks contain seven vitamins, are sugar-free, and free from high fructose corn syrup, artificial colors, and flavors. Additionally, Celsius strategically collaborates with brand ambassadors and influencers on social media to stay in tune with current fitness demands.
After conquering the US, Celsius recently reached Europe and is now available in select stores, including Switzerland. Of course, as avid followers of the soft and energy drink market, we could not resist taking a research trip to Migros (no affiliation).
Chart 4: Our yield from Migros Stadelhofen at arvy’s field trip
arvy’s takeaway: The eternal battle between Coca-Cola and PepsiCo, driven by fierce competition, takes on a new dimension in an increasingly lucrative market segment. With Coca-Cola offering both a proof-of-concept and a copy-paste opportunity, PepsiCo’s deal with Celsius is a stroke of genius. Once again, an exciting journey unfolds, where captivating stories converge with lucrative investment opportunities for PepsiCo and investors alike. Now it is in the hands of Pepsi x Celsius to deliver in the coming years – time will tell.
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