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Coke's Moat Has More Fizz Than Pepsi's

Coke offers a better margin of safety, better international opportunities, and exemplary stewardship compared with its chief competitor.

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Adam Fleck: We assign both Coke and Pepsi wide economic moats, which may come as a bit of a surprise to some people given that Coke has better beverage market share, higher profit margins, and ultimately better returns on invested capital.

However, the wide moat rating we assign Pepsi is primarily due to the company's food business. Snack foods like Lays Potato Chips, Quaker Foods, and Doritos drive about half of Pepsi's revenue and are actually more profitable than the beverage arm [of Pepsi] and other food manufacturers. We attribute this outperformance to Frito-Lay's dominance in the market. We peg Frito-Lay's market share at about 25% globally versus only single-digit shares for other competitors. This allows Pepsi to really control the aisle both in the at-home grocery store segment and in media consumption areas like convenience stores and gas stations. This builds the brand and ultimately drives better pricing power for Pepsi and backs up our wide economic moat.

Adam Fleck does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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