For nearly three decades after PepsiCo set it free, KFC kept pouring Pepsi. That ends in January. KFC has signed Coca-Cola (KO) to fill the cups at thousands of its U.S. restaurants. The Journal's Heather Haddon and Laura Cooper call it a blow to PepsiCo (PEP). It also stings in the old Coke-Pepsi rivalry.
The deal isn't the whole bucket. Pepsi keeps many of KFC's markets overseas, and KFC International is the much bigger arm. Pepsi also keeps Taco Bell, where it built Mountain Dew Baja Blast and has sold billions of dollars of it since. Both of those businesses sit inside Yum Brands (YUM), and both grow faster than KFC's U.S. stores. Still, few U.S. chains sell more Pepsi than KFC does, by Beverage Digest's count. Its U.S. stores carry Pepsi, Starry, Mountain Dew and Aquafina today.
Why a soda giant sweats a chicken chain
PepsiCo's drinks business was already hurting. Chief Executive Ramon Laguarta has said the company isn't competing well in soft drinks, including Pepsi itself. Pepsi has lost ground to Dr Pepper. Mountain Dew sales have slumped as energy drinks gained. The KFC loss follows Marriott hotels and the Costco food court walking away. Subway recently signed on, so it isn't all one direction. PepsiCo owned KFC until 1997, when it spun off its restaurants, Pizza Hut and Taco Bell included. PepsiCo shares fell 0.7% on Thursday after the Journal reported the talks. Coke closed up 0.24%.
KFC has its own reasons. Drinks are a high-margin corner of fast food, so a fountain contract matters more than it looks. Chains are chasing younger customers with novelty cold drinks, the way coffee shops have for years. KFC has launched sparkling lemonades, boba refreshers and shakes at some stores. It needs the help. KFC used to be the biggest chicken chain in the country. Technomic now ranks it fifth by sales. The menu is tilting toward sandwiches, wings and tenders, away from the bone-in bucket, plus a small offshoot called Saucy by KFC.
Our read
Investments/Risk · IN04. Hold. Coca-Cola is held at weight in 26 of our 81 books, PepsiCo in 14 and Yum in 5. Nothing added, nothing trimmed. One fountain contract is unlikely to change either giant's dividend. The lesson is about the word defensive. Staples are steady because people keep buying soda. They aren't steady because the same company keeps making the sale. Pepsi lost a customer it used to own. That's share loss, slow and quiet, and a dividend can hide it for years.
Here's the connection to your own plan. If you hold PepsiCo or Coke directly for income, open your account this week and find what percent of your yearly dividends each one pays. Plenty of retirees carry a staple they bought decades ago and never re-checked. If one soda company pours more than a few percent of your income, that's a concentration, however boring the name. Your dividend fund probably owns both, so there the switch mostly moves money from one of your holdings to another. You fix the leaky faucet before the floor is wet.