KFC Dumps Pepsi for Coke as Pepsi's Cola Share Hits 8.1%

KFC will replace Pepsi with Coca-Cola products at its 3,700 U.S. restaurants in January, ending a 40-year partnership that dates back to PepsiCo's ownership of the chicken chain. The defection is small in revenue terms but tells a larger story: Pepsi's brand power keeps eroding while Coke compounds its lead.

The numbers show how wide the gap has grown. Pepsi-Cola held 8.1% of the U.S. carbonated soft drinks market by volume last year, against 18.5% for Coke, according to trade publication Beverage Digest. In 2024, Pepsi fell to third place behind Dr. Pepper for the first time. It remains there. Sales of Diet Coke and Coke Zero run several times higher than their Pepsi counterparts.

How did Coke pull so far ahead?

Pepsi did not collapse. It got outmaneuvered. Coke rebuilt itself around brand building and innovation, shed its capital-intensive bottling business, and bet successfully on faster-growing categories like dairy-centric and protein-based drinks. PepsiCo stayed a sprawling portfolio company where soda was one priority among many, and a shrinking one at that.

The result is a strange imbalance. PepsiCo generates more than twice as much revenue as Coca-Cola. Its market valuation is only about half as big.

Wall Street analysts say PepsiCo CEOs turned away from North American soda for years because the category was seen as in secular decline. Soda sales did slump for 16 straight years. But the U.S. soft drinks industry stabilized starting in 2021, as consumers moved toward healthier, functional beverages with protein and energy additives.

CEO Ramon Laguarta has admitted the still-massive business deserves more attention. "We do not feel good about the beverage business," Laguarta told Wall Street analysts earlier this month. "So we are putting all the urgency of the business and focus on improving our performance in soft drinks."

Last quarter, PepsiCo's $28 billion North American beverage business shrank 2% by volume. The decline came even as its non-soda drinks—Gatorade, Aquafina and Ocean Spray—improved, implying deeper drops for soft drinks. PepsiCo does not break out subdivisions within its beverage segment.

Why did soda run on autopilot?

PepsiCo took in nearly $94 billion in revenue last year. Some 58% came from the Frito-Lay food and snacks division, which includes Fritos, Doritos and Quaker. North American beverages contribute 30%. The North American Frito-Lay unit has regularly posted operating profit margins twice as large as the domestic beverage business, so snacks won the investment dollars while soft drinks coasted, Beverage Digest editor and publisher Duane Stanford told Fortune.

"It worked so long as the Frito-Lay continued to be a powerful engine," Stanford said.

That engine is now sputtering. Inflation-wary consumers are balking at high chip prices, and snack sales are flat so far this year. Bloomberg reported that prices for some PepsiCo chips rose 50% since 2021; at one point a party-size bag of Tostitos cost $7.29. PepsiCo cut some snack prices this spring. Frito-Lay holds a 38% share of the $80 billion U.S. savory snacks industry.

"It's tough to forecast much sequential improvement absent a material change in the consumer macro environment," JPMorgan analyst Andrea Teixeira said.

Laguarta's earnings call comments point to a brand-building push across Pepsi, Mountain Dew and Poppi, the prebiotic soda PepsiCo bought last year for $2 billion. That likely means heavier marketing, paying retailers for more shelf space, and lowering prices as needed.

Is a breakup the answer?

Activist investors have pushed a more radical fix: split the company. In the 2010s, Nelson Peltz spent two years trying, unsuccessfully, to separate PepsiCo's food and beverage businesses. A year ago, Elliott Management called PepsiCo a "dramatic underperformer" and urged it to consider re-franchising its company-owned bottlers.

The bottling history matters here. In 2010, both Coke and PepsiCo acquired their bottlers, betting on vertical integration. Coke quickly reversed course, cutting capital costs and freeing cash for brand building—strengths that helped sway KFC. "A new partner in Coca-Cola gives us a platform to innovate, meet changing tastes and give customers more reasons to choose us," KFC U.S. president Catherine Tan-Gillespie wrote in a staff memo. Taco Bell, meanwhile, has extended its Pepsi contract for another 10 years.

Laguarta surprised analysts by mentioning re-franchising, saying it could lead to "better execution and potentially better margins." Analysts caution against treating it as a cure. "If 'accelerated' re-franchising is indeed the right path, [but] this would not be without significant disruption," Barclays's Lauren Lieberman wrote. Coke's own re-franchising took about a decade to pay off, and analysts say a full PepsiCo re-franchising could take as long or longer.

"We're open to revisiting every option," Laguarta, CEO for eight years, said on the earnings call. A PepsiCo spokesman declined further comment.

One bright spot offers a template: Gatorade. Its sales have risen this year, helped by a lower-sugar variation launched in March. Stanford believes PepsiCo can rebuild its soda business, but only after the board and CEOs stop treating soft drinks as a dim-growth product.

"Everyone counted carbonated soft drinks out and now we see that was a mistake," he said. "This is a conglomerate that knows how to execute. They just have to make the decision to do it."