Magic Markets #297: Pepsico, Yum! Brands and the Cola Wars

Welcome to episode 297 of Magic Markets.

And if you are in the car and you're hungry, then this might be a dangerous one for you because we're going to be talking about Yum Brands, which is the owner of KFC.

That's the brand we'll all know in South Africa and a couple of other things as well.

And PepsiCo.

And the reason we'll be doing this is because PepsiCo spun out Yum in 1997.

So they have this very, very long history together.

But now KFC, which is part of Yum, is replacing PepsiCo with Coca-Cola across all their US restaurants, which is perhaps a bigger deal than you might think.

And the international KFC stuff will continue to serve PepsiCo.

I must be honest, I haven't been to a South African KFC in a very long time, other than to buy some pops for a belligerent preschooler.

So I'm not sure what drinks you get here.

But on the plus side in the US, PepsiCo then went and secured an 11-year contract extension with Taco Bell, also part of Yum.

So the point is that these two companies do lots of business together.

Coca-Cola's managed to get a foot in the door here.

And Mo, I guess let's get straight into it.

And maybe you can explain to us whether losing KFC in the US is actually material for PepsiCo, or is it perhaps more symbolic than it is a financial disaster?

Yeah, Ghost, I mean, this was certainly a very interesting story last week.

And I think at an earnings level, it's probably not material.

I'll go through some of the numbers of why I say that.

But as you say, you know, the signaling or symbolism, as you call it, that's definitely material.

Certainly given the long history, how Yum was actually spun out of PepsiCo, I think that symbolism actually matters.

Now, if we look at what's actually happening here, the deal covers around 3,700 U.S. restaurants, but the financial terms haven't yet been disclosed.

And the international KFC and Taco Bell renewals will also soften some of that economic blow.

This is very much a U.S. situation.

And one U.S. fountain contract isn't going to break up a group that generated nearly $94 billion in revenue last year.

But it is strategically awkward because there's always been this market chatter about PepsiCo needing to spin off their soda business.