Jefferies Maintains Coca-Cola Buy Rating as KFC Switches US Beverage Supply From PepsiCo

Jefferies has maintained its Buy rating on Coca-Cola (NYSE:KO) and Hold rating on PepsiCo (NASDAQ:PEP) following KFC’s decision to replace Pepsi with Coca-Cola as its beverage supplier in the United States.

The investment bank described the change as unexpected, particularly as it follows Marriott’s decision several months earlier to move to Coca-Cola after maintaining a relationship with Pepsi for approximately 30 years.

Although Jefferies expects the direct financial impact of the KFC agreement to be relatively limited, the firm believes the decision raises broader questions about competition for restaurant and hospitality beverage contracts.

KFC Beverage Agreement Represents Limited Direct Financial Impact

Jefferies estimates that KFC accounts for approximately 1% of the US quick-service restaurant market, suggesting that the supplier change will have a relatively modest effect on the overall beverage businesses of Coca-Cola and PepsiCo.

KFC’s US system-wide sales are estimated at $4.7 billion. Assuming beverages account for between 8% and 12% of those sales, Jefferies calculates that the restaurant chain represents approximately $375 million to $560 million in beverage sales.

The figures represent estimated sales through KFC restaurants rather than the revenue Coca-Cola or PepsiCo would directly recognise from supplying beverages.

Jefferies also noted that losing a foodservice customer does not necessarily affect a beverage company’s operating leverage in the same way as losing distribution through supermarkets or other retail outlets.

Consequently, the firm does not expect the KFC agreement to produce a material change in PepsiCo’s financial forecasts.

Restaurant and Hospitality Beverage Contracts Become More Competitive

The decision by KFC follows other changes in beverage supply agreements across the restaurant and hospitality industries.

Marriott recently selected Coca-Cola after a relationship with Pepsi lasting approximately three decades, according to Jefferies.

However, PepsiCo has also secured new business, including an agreement to replace Coca-Cola as Subway’s beverage supplier.

Separately, McDonald’s selected Red Bull as its energy drink partner instead of Monster, the energy drink brand associated with Coca-Cola.

Jefferies believes these developments suggest that long-standing exclusive supply relationships are increasingly open to competition.

The changes indicate that major restaurant and hospitality operators may be more willing to reconsider established beverage partnerships, creating opportunities and risks for both companies.

Jefferies Highlights Brand Visibility as a Concern for PepsiCo

While the direct financial effect of losing KFC is expected to be limited, Jefferies identified reduced consumer exposure and market perception as potentially more significant issues for PepsiCo.

Restaurants, hotels and other foodservice locations provide beverage companies with opportunities to place their brands in front of consumers outside traditional retail channels.

Losing a major restaurant agreement can therefore affect brand visibility even when the associated sales volume represents a relatively small proportion of total business.

Jefferies said Coca-Cola has demonstrated momentum in securing away-from-home beverage opportunities and has actively pursued additional contracts.

The firm suggested that PepsiCo’s recent account losses could influence investor perceptions of its competitive position, particularly if other established supply agreements become available to rival providers.

PepsiCo Valuation Could Face Pressure Despite Limited Earnings Impact

Jefferies noted that PepsiCo currently trades at approximately 15 times its forward two-year earnings per share.

That represents a discount of around five valuation multiple points compared with the company’s five-year average, implying a historical average of approximately 20 times earnings on the same measure.

Despite the relatively low valuation, Jefferies believes the loss of KFC could create additional pressure on PepsiCo’s earnings multiple because of concerns about brand competitiveness and customer relationships.

The firm emphasised that the agreement does not materially change its financial projections for PepsiCo.

Its assessment instead focuses on whether the supplier change could contribute to a broader reassessment of the company’s position in the US foodservice market.

Coca-Cola and PepsiCo Ratings Remain Unchanged

Jefferies retained its Buy recommendation on Coca-Cola and Hold recommendation on PepsiCo following the announcement.

The firm considers the immediate financial implications of KFC’s decision to be manageable but views the shift as another indication of increasing competition for major beverage supply agreements.

For Coca-Cola, the agreement represents an additional opportunity to expand its presence in restaurants and other away-from-home locations.

For PepsiCo, the principal concern identified by Jefferies is the potential effect on brand exposure and investor sentiment rather than a substantial reduction in expected earnings.

Future changes in exclusive beverage contracts could provide further indications of how competition between the two companies is developing.

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