How Pepsi fell behind in the cola wars—and then lost KFC

PepsiCo, the parent company of Pepsi and KFC, has seen a decline in its soft drink market share over recent years, ultimately leading to the decision to replace Pepsi-Cola with Coca-Cola products at KFC restaurants. The two companies have been partners for four decades, dating back to PepsiCo's acquisition of KFC in 1997. While KFC is a minor portion of Pepsi's overall sales, its defection indicates a larger issue with Pepsi's brand power.

For decades, the cola wars between Coca-Cola and Pepsi were a significant part of popular culture, featuring memorable ads and "Pepsi Challenge" taste tests. However, Pepsi's share of the U.S. carbonated soft drinks market has dropped from 8.1% in 2023 to third place behind Dr. Pepper in 2024. This decline is attributed to PepsiCo's lack of focus on its soda business and the broader soda industry's downturn.

PepsiCo's CEO, Ramon Laguarta, acknowledged that the company's soda business needed more attention and has been working to improve its performance. Despite generating more than twice as much revenue as Coca-Cola, PepsiCo's market valuation is only around half as big. The success of Coca-Cola can be attributed to its focus on brand building, innovation, and a shift away from capital-intensive bottling to faster-growing categories like dairy and protein-based drinks.

The decline in PepsiCo's North American beverage business is even more pronounced, with a 2% volume decrease last quarter. The company's snack business, Frito-Lay, earns larger profit margins than its beverage division, resulting in less investment in soft drinks. With consumer inflation causing price sensitivity, PepsiCo faces pressure to improve its soft drink sales through brand promotion, more shelf space, and price adjustments.

However, a complete breakup of the company into separate food and beverage entities has been proposed by activist investors in the past.