Background of Companies
Coca-Cola
Coca-Cola is the world’s largest beverage company, with operations in all regions, including Europe, the Middle East and Africa, Latin America, North America, and the Asia Pacific. Founded in the US in 1886, the company has continued to expand its number of non-alcoholic brands and its geographical reach. It operates in over 200 countries (The Coca-Cola Company, 2018).
Coca-Cola distributes a range of products, including juices, water, and soft drinks. Some of its most popular products and brands include Dasani, Sprite, Fanta, Minute Maid, Coca-Cola, and Fanta Orange (The Coca-Cola Company, 2018). The company is recognized for its innovation and focus on producing consumer-friendly products, such as reusable bottles and zero-carbonated sugar drinks, which prioritize consumer health.
The company operates in the food and beverage industry, but a US-based company has found ways to dominate the market by specializing in non-alcoholic beverages. This company, with its headquarters in Atlanta, Georgia, has several competitors, including PepsiCo, Keurig Dr Pepper, and Nestlé Waters (Guo & Wen, 2021). The company also faces a threat of new entrants, as seen with Keurig Dr Pepper in 2018, which could result in reduced sales or profits (Guo & Wen, 2021). However, the company’s strong campaigns, reasonable supply chain procedures, and sustainable environmental efforts are likely to keep the company competitive in the foreseeable future.
Keurig Dr Pepper
Keurig Dr Pepper is a relatively new company, established in 2018 when Keurig Green Mountain and the Dr Pepper Snapple Group merged. The company has its headquarters in Massachusetts, US, and specializes in manufacturing non-alcoholic soft drinks, coffee, and water (Keurig Dr Pepper Inc., 2019). The company operates in the food and beverage industry, specializing primarily in non-alcoholic beverages. Some trademark brands associated with Keurig Dr Pepper include Snapple, Keurig, and Dr Pepper.
As a relatively new company in the food and beverage industry, the company faces several competitors, many of whom have been in the industry for a long time, such as Coca-Cola, PepsiCo, and Nestlé Waters. However, this could also serve as a competitive advantage for the company as it seeks to diversify its portfolio and develop new products that meet its customers’ needs (customers’ Pepper Inc., 2019). The company is also committed to ensuring sustainability in the community, having made efforts to reduce greenhouse gas emissions and utilize sustainable energy resources.
PepsiCo
PepsiCo is a multinational beverages manufacturing company that was first incorporated in 1919 in Delaware and then reincorporated again in 1986 in North Carolina. The company operates in the food and beverage industry, mainly producing and distributing non-alcoholic drinks. Some of the most popular products and brands produced by PepsiCo include juices, carbonated beverages, and bottled water. The company also produces snacks, including chips and popcorn. Some of the most popular brands associated with PepsiCo include Gatorade, Lay’s, Doritos, and L (Mountain View, Varadarajan, 2023).
Pepsi’s diverse beverage products are a significant differentiator against its close rivals, such as Coca-Cola, Keurig Dr Pepper, and Nestlé Waters. Pepsi has long been the second biggest producer of non-alcoholic beverage drinks after Coca-Cola, and its strong marketing campaigns have resulted in the company enjoying sustainable growth for some time. PepsiCo has been recognized for its environmental sustainability measures, including initiatives to reduce greenhouse gas emissions and utilize renewable packaging materials.
Comparison of Accounting Methods
Accounts Receivable
Two primary methods are used to calculate accounts receivable: the allowance method and the direct write-off method. The allowance method involves establishing a reserve for the bad debts that a business organization anticipates (Miller-Nobles et al., 2018). The direct write-off method involves writing off bad debt expenses directly against the respective accounts receivable (Santoso et al., 2021).
Coca-Cola uses the allowance method for accounts receivable, which records trade accounts receivable at net realizable value (The Coca-Cola Company, 2018). The allowance is based on past write-offs, outstanding accounts, and the company’s shipments with partners and customers. Keurig Dr Pepper also uses the allowance method, where all allowances for doubtful collections are recorded against the due accounts (Keurig Dr Pepper Inc., 2019). Similarly, PepsiCo uses the allowance method to record accounts receivable at net realizable value (PepsiCo, 2016). This analysis of beverage companies shows they all prefer the allowance method over the direct write-off method.
Depreciation
The three most common methods for calculating an asset’s life are the straight-line method of depreciation, the double-declining balance method, and the units-of-production method. Based on the financial statements of the three companies, Coca-Cola uses a straightforward method of depreciation on its tangible assets, such as PPE (The Coca-Cola Company, 2018). Keurig Dr Pepper utilizes straight-line depreciation for most of its fixed assets, while also employing a unit-of-production method for specific equipment, such as bottles (Keurig Dr Pepper Inc., 2019). Pepsi combines all three depreciation methods mentioned, based on the nature of the PPE, while also integrating the sum-of-three-years digits method and accelerated depreciation in its calculations (PepsiCo, 2016). Therefore, the preferred method is chosen for many companies based on the asset.
Inventories
The LIFO (last-in, first-out) and the FIFO (first-in, first-out) methods differ in their accounting approaches. In LIFO, the cost of goods sold is based on recent purchases, while closing stock is based on previous purchases, resulting in lower reported operating profits. According to Miller-Nobles et al. (2018), the reported returns in FIFO are likely to be higher, as the cost of goods sold replicates older prices, which tend to be lower in value.
Coca-Cola uses the FIFO method to calculate its inventories. The Coca-Cola Company (2018) states, “We determine cost based on the average cost or first-in, first-out methods.” (p. 82). Similarly, Keurig Dr Pepper uses the FIFO method to evaluate its inventories. In their first annual 10-K filing, Keurig Dr Pepper Inc. (2019) states, “Cost is measured using the standard cost method, which approximates the first-in, first-out method” (p. 72).” On the other hand, PepsiCo uses a combination of LIFO and FIFO to evaluate its inventory (PepsiCo, 2016, p. 89). Users of these financial statements should exercise caution when evaluating the methods used, as they may impact their decision-making.
Categories of Intangible Assets
Types of intangible assets include intellectual property, patents, goodwill, and copyrights, among others, and can be categorized based on their lives or as goodwill. Coca-Cola classifies intangible assets into three main categories: those with definite lives and subject to amortization, intangible assets not subject to amortization, and goodwill (The Coca-Cola Company, 2018). On the other hand, Keurig Dr Pepper classifies intangible assets into two categories: those with definite lives, subject to amortization, and those without definite lives, which are not subject to amortization (Keurig Dr Pepper Inc., 2019). PepsiCo categorizes intangible assets into either goodwill or other intangible assets and does not amortize intangible assets with an indefinite life and goodwill (PepsiCo, 2016). Pepsi only evaluates amortizable intangible assets when there is a significant internal or macroeconomic change.
Ratio Analysis
Current Ratio
- Current ratio = total current assets/total current liabilities.
- Coca-Cola = $36,545 million / $27,194 million =1.34.
- Keurig Dr Pepper = $2,159 million / $ 5,702 million = 0.38.
- PepsiCo = $23,704 million / $16,213 million = 1.46.
The current ratio of an organization measures its ability to meet its short-term financial obligations. The ratio is calculated by dividing the organization’s current assets by its current liabilities. Coca-Cola and PepsiCo have a current ratio above one, meaning they can meet their credit obligations. However, Keurig Dr Pepper has a ratio of less than 1, meaning it may face some challenges.
Quick Ratio
- Quick ratio = current assets – inventory/current liabilities.
- Coca-Cola = $36,545 million -$2,655 million / $27,194 million = 1.24.
- Keurig Dr Pepper = ($2,159 million – $626 million) / $5,702 million = 0.23.
- PepsiCo = ($23,704 million – $3,138 million) / $16,213 million = 1.22.
The quick ratio indicates a company’s ability to meet its short-term obligations using its most liquid assets. Similar to the current ratio, Coca-Cola and PepsiCo have a quick ratio above one, indicating they can meet their credit obligations promptly. However, Keurig Dr Pepper has a lower quick ratio, indicating that the company may struggle to pay off its debts.
Gross Profit Percentage
- Gross profit percentage = total revenue – net revenue * 100.
- Coca-Cola = $22,154 million /$35,410 million * 100 = 65%.
- Keurig Dr Pepper = ($3,882 million / $7,442 million) * 100 = 52%.
- PepsiCo = ($34,590 million / $62,799 million) * $100 = 55%.
This ratio calculates companies’ after subtracting the cost of goods sold. All three companies have a gross profit margin of above 50%, meaning they are profitable enough to maintain sustainability.
Inventory Turnover
- Inventory turnover = cost of goods sold / average inventory.
- Coca-Cola = $13, 256 million / (($2,675 million + $2,655 million)/2) = 4.98.
- Keurig Dr Pepper = $3,560 million / (($626 million + $384 million)/2) = 7.05.
- PepsiCo = $28,209 million / (($3,138 million + $2,829 million)/2) = 9.45.
The inventory turnover ratio indicates the number of times a company can sell its stock within a year. PepsiCo has the highest inventory turnover ratio, indicating that it is utilizing its stock effectively, while Coca-Cola has a turnover ratio of 4.98.
Accounts Receivable Turnover Ratio
- Accounts receivable turnover = net credit sales/average accounts receivable.
- Coca-Cola = ($35,410 million – $13,256 million) / ($2,066.5 million +$3,667 million)/2 = 7.72.
- Keurig Dr Pepper = $ 7,442 million/ ($1,150 million + $483 million)/2 = 9.10.
- PepsiCo = $62,799 million/ ($5,218 million + $5,322 million)/2 = 11.91.
This ratio calculates the number of days or times it takes a company’s employees to pay their debt obligations. When the accounts receivable turnover ratio is high, the company pays its debt quickly. According to the ratio analysis, PepsiCo has the fastest-paying creditors, while Coca-Cola has the worst.
Asset Turnover Ratio
- Asset turnover ratio = Net sales/ total assets
- Coca-Cola = $35,410 million /$ 87,357 million = 0.41
- Keurig Dr Pepper = $7,442 million / $48,918 million = 0.15
- PepsiCo = $62,799 million / $79,035 million = 0.79
The asset turnover ratio measures the ability of a company to generate revenues from the PPE and other assets it owns. PepsiCo has the best asset turnover ratio, while Keurig Dr Pepper has the worst. Therefore, PepsiCo is the most effective user of the resources at its disposal. The results from this analysis may be erroneous since the financial statements are not from the same year.
Moreover, the accounting methods used by companies differ. For instance, when calculating the accounts receivable turnover ratio, there were no net credit sales nor average accounts receivable, and therefore, approximations had to be made. According to the analysis, Pepsi is managing its liquidity more effectively than the two other companies, as evidenced by its better current ratio, quick ratio, and accounts receivable turnover ratio.
Final Recommendation
Based on the analysis, the best advice for potential investors is to invest in Coca-Cola for risk-averse investors and in PepsiCo for risk-tolerant investors. For Coca-Cola, the company’s strength is evident in its ability to generate sustainable profits over the medium and long term, thanks to its strong brand name and environmental sustainability measures. For Pepsi, the potential for exponential growth exists because of its ability to utilize the resources at its disposal. It is not recommended for people to invest in Keurig Dr Pepper, not just because it is a relatively new company, but also because it will likely struggle to cover its long-term obligations.
This paper advises investors to consider investing in Coca-Cola or Pepsi based on their risk tolerance, and to avoid Keurig Dr Pepper, as it may struggle to meet its debt obligations. The overview of Coca-Cola reveals that it is the world’s largest beverage producer, with strategic partnerships and sustainability measures that will help it maintain its position as a leader in the foreseeable future. Conversely, PepsiCo, which generates smaller annual revenues than Coca-Cola, is highly liquid.
References
Guo, X., & Wen, M. (2021). Research on competitive strategy of Coca-Cola Company. In 2021 3rd International Conference on Economic Management and Cultural Industry (ICEMCI 2021) (pp. 2879-2885). Atlantis Press. Web.
Keurig Dr Pepper Inc. (2019). Form 10-K for the fiscal year ended December 31, 2018. Web.
Miller-Nobles, T. L., Mattison, B. L., & Matsumura, E. M. (2018). Horngren’s accounting (12th ed.). Pearson.
PepsiCo. (2016). 2016 Annual report. Web.
Santoso, A. E., Gustiana, N., & Muda, I. (2021). Comparison between IFRS vs GAAP to presentation of account receivables. Turkish Online Journal of Qualitative Inquiry, 12(9), pp. 7216-7226.
The Coca-Cola Company. (2018). Annual filings (Form 10-K). Web.
Varadarajan, R. (2023). Resource advantage theory, resource based theory, and theory of multimarket competition: Does multimarket rivalry restrain firms from leveraging resource Advantages?Journal of Business Research, 160, 113713. Web.