Pepsi Loses KFC Soda Deal, Faces Brand Decline Amid Cola Wars

KFC said last week that Coca-Cola products would begin replacing PepsiCo drinks at KFC's 3,700 U.S. restaurants in January. The partnership dates back 40 years to PepsiCo's purchase of KFC, which PepsiCo spun off in 1997. KFC accounts for only a small portion of Pepsi sales, but the switch reflects declining strength in the Pepsi brand.

Beverage Digest puts Pepsi-Cola's share of U.S. carbonated soft drink volume last year at 8.1%, compared with Coke's 18.5%. Pepsi dropped behind Dr. Pepper into third place for the first time in 2024 and still holds that position. Diet Coke and Coke Zero each generate sales several times those of the corresponding Pepsi products. Coca-Cola has concentrated on brand development and innovation, divested bottling operations and expanded successfully into faster-growing dairy-centric and protein-based drinks. PepsiCo maintains a diversified portfolio in which soda receives less attention, generating more than twice Coca-Cola's revenue but carrying only about half Coca-Cola's market valuation.

Wall Street analysts say PepsiCo CEOs spent years directing attention away from North American soda because soda was considered a business in long-term decline. Soda sales fell for 16 consecutive years before the U.S. soft drinks industry stabilized starting in 2021, with consumers favoring healthier and functional beverages. Laguarta acknowledged earlier this month that beverages deserve greater attention and told analysts that PepsiCo was urgently focusing on improving soft drink performance. PepsiCo's $28 billion North American beverage business recorded a 2% volume decline last quarter. Non-soda drinks, including Gatorade, Aquafina and Ocean Spray, improved during the quarter, suggesting a steeper decline in soft drinks. PepsiCo does not disclose results for individual subdivisions of the beverage segment.

PepsiCo generated nearly $94 billion in revenue last year, with about 58% coming from the Frito-Lay food and snacks division and the Quaker brand. Beverages provided the remaining revenue, with North American beverages accounting for a full 30% of company revenue. The North American Frito-Lay unit has regularly produced operating profit margins double those of the domestic beverage business. Beverage Digest editor and publisher Duane Stanford said the higher snack margins attracted investment at the expense of soft drinks, which PepsiCo largely left unmanaged. North American snack sales are flat so far this year as inflation-conscious consumers resist high prices. Bloomberg reported earlier this year that some PepsiCo chip prices had increased 50% since 2021. A party-size bag of Tostitos cost $7.29 at one point, and PepsiCo reduced some snack prices this spring after consumer resistance. PepsiCo holds 38% of the $80 billion U.S. savory snacks market, but JPMorgan analyst Andrea Teixeira said meaningful sequential improvement is difficult to forecast without a substantial change in consumer economic conditions.

Laguarta's earnings-call remarks suggest PepsiCo will seek stronger soda sales through brand development for Pepsi, Mountain Dew and Poppi, acquired last year for $2 billion. The effort will probably require more advertising and marketing spending, payments to retailers for shelf space and product presentation, and price reductions where necessary. Nelson Peltz spent two years in the 2010s unsuccessfully pressing PepsiCo to divide food and beverages into separate companies. Elliott Management described PepsiCo as a major underperformer a year ago and urged consideration of measures including re-franchising company-owned bottlers. Coca-Cola has no food business and uses franchisees for bottling and manufacturing instead of operating those facilities directly. Coca-Cola and PepsiCo both bought bottlers in 2010 because the companies considered integrated production and distribution essential. Coca-Cola soon reversed course, reducing bottling-related cost pressures and freeing resources for brand development and innovation, strengths that helped persuade KFC to switch. KFC U.S. president Catherine Tan-Gillespie told staff that Coca-Cola would support innovation, respond to changing tastes and provide customers with more reasons to choose KFC. Taco Bell has extended Taco Bell's Pepsi contract for another 10 years since KFC dropped Pepsi.

Laguarta raised re-franchising earlier this month and said the approach could improve execution and potentially margins. However, Barclays analyst Lauren Lieberman warned that accelerated re-franchising, even if appropriate, would involve significant disruption. Analysts say complete re-franchising could require a decade or longer, while Coca-Cola's program took roughly a decade to deliver results. Laguarta, CEO for eight years, said PepsiCo was willing to reconsider every option. A PepsiCo spokesman declined to discuss re-franchising beyond Laguarta's comments.

Gatorade sales have increased this year because of updates including a lower-sugar version introduced in March, although PepsiCo has not quantified the gains. Stanford said PepsiCo can rebuild the soda business, but leadership must change a mindset shaped by years of viewing soft drinks as low-growth products. Stanford argued that dismissing carbonated soft drinks was a mistake and that PepsiCo has the execution capabilities but must decide to use those capabilities.