a. What are the likely reasons that the cost of goods sold to sales percentage for Coca-Cola is lower than that for PepsiCo?

Generally when a company has higher COGS compared to another, the first place that one should look is the SG&A to determine if there is a different method of allocating costs between the two companies. Such was the case in the P&G, Colgate and Unilever case that we investigated, whereas Unilever relies more heavily on COGS, while P&G and Colgate rely more on SG&A. Upon comparison between Pepsi and Coca-Cola in this aspect, it is surprising to evidence that while the COGS are disproportionately higher for Pepsi, their SG&A are very similar. This would mean that their cost distribution is similar, and yet for Pepsi there should be something additional that is raising their COGS considerably.

To this end, I have two theories, which are not mutually exclusive:

(i) Competitors but different segments: Although both companies are presumably competitors, it is evident that Coca-Cola engages almost exclusively in beverages, where Pepsi also engages in the manufacture and distribution of packaged foods. Therefore, their peer comparison must be done under the optic that PepsiCo has an additional commercial activity to that of Coca-Cola. This is evidenced in their annual report by which almost half of their activity is in Food. Therefore, it would we safe to state that the COGS that are greater in comparison to Coca-Cola might come from the added expenses that imply the combination of ingredients, cooking, packaging and distribution of food products. Notwithstanding, this in itself isn't enough and therefore we recur to our second theory.

(ii) North American COGS hinder Pepsi? or is PepsiCo's Other Countries profit Margin underperforming?: Most of Pepsico's sales is concentrated in North America, almost twice as much as in other countries. Such is not the case in Coca-Cola where the Sales mix is completely opposite to that of PepsiCo.

Based on this, we could conclude that there could be higher COGS being generated to satisfy the American Market. Since beverage and food industries are rarely offshored but rather processed in the same country that the sale is conducted, we could conclude that the cost to produce those goods in North America (US and Canada) are considerably higher than what Coca-Cola experiences in other countries. This sales mix, as well as the theory that there are additional costs being generated in North America, would lead one to conclude that it would have a negative impact on Pepsi's COGS and a positive one on Cocacola's COGS. Nevertheless, let's take a look at Profitability in North America:

PepsiCo is actually out-performing Coca-Cola not only on Profit Margin but also on Asset Turnover. This would lead us to believe that Pepsi has a COGS issue, but clearly not in the North American Segment. Accordingly, when we analyze the other countries, which are half of the sales that PepsiCo performs, we evidence that it is underperforming in comparison to Coca-Cola.

So even though PepsiCo also has participation in other markets that are not North American, it can be evidenced that Coca-Cola's profit margin is almost 3 times above PepsiCo's. Since COGS, SG&A and Taxes affect Profit Margin mainly, and based in the premise that SG&A are relatively similar in both companies, and taxes are excluded from the segmented information, it would be safe to conclude that in the segment that is causing PepsiCo's underperformance in COGS is based on the cost distribution and efficiency in the Other Countries segment.

This number can be further corroborated when we analyze the ROA. Even though there is a marginally higher asset turnover for PepsiCo compared to Coca-Cola, the latter blows the former out of the water in the Profit Margin for ROA. When the numbers are consolidated, and bearing in mind the premise that PepsiCo's North American Market is competitive, we can conclude that the impact is generated in the Other Countries segment, mainly in the profit margin through increased COGS.