PepsiCo’s Soda Slump Deepens as KFC Switches to Coca-Cola

PepsiCo’s $28 billion North American beverage business is under fresh pressure after KFC said it will replace Pepsi drinks with Coca-Cola products at its 3,700 U.S. restaurants starting in January.

The switch ends a partnership of about 40 years that dates to when PepsiCo bought the fried chicken chain, Fortune reported. PepsiCo spun KFC off in 1997, and the chain is a tiny sliver of its sales.

Still, the loss comes as the beverage unit is struggling. Its North American volume fell 2% last quarter, even as non-soda brands such as Gatorade, Aquafina and Ocean Spray improved.

“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 memo to staff.

PepsiCo did score a win days later. Taco Bell, KFC’s sister chain under Yum! Brands, extended its deal with PepsiCo through 2036, CNN reported.

Taco Bell is the bigger prize, with $17 billion in U.S. system-wide sales last year compared with roughly $5 billion for KFC. Its Mountain Dew Baja Blast has become a $1 billion brand.

The bigger problem is market share. Pepsi-Cola held 8.1% of U.S. carbonated soft drink volume last year, compared with 18.5% for Coke, according to trade publication Beverage Digest. Pepsi fell to third place behind Dr Pepper in 2024.

CEO Signals Bigger Changes

PepsiCo CEO Ramon Laguarta was blunt on the company’s Oct. 8 earnings call. “We do not feel good about the beverage business,” he said.

“We are competing well in some platforms like hydration, like energy. We are not competing well in soft drinks, so we are putting all the urgency of the business and the focus in improving our performance in soft drinks,” Laguarta added.

Overall, PepsiCo’s third-quarter net revenue rose 5.6% and organic revenue rose 3.1%, the company said.

Laguarta also opened the door to structural changes, including expanding the refranchising of company-owned bottling operations in parts of the country where PepsiCo has strong partners.

Such moves could “drive better execution and potentially better margin for the company,” he said. “We’re open to revisiting every option.”

Coca-Cola shed most of its capital-intensive bottling business years ago, which freed it to invest in brand building, Fortune noted. Analysts warn a full PepsiCo refranchising could take a decade or more.

“If ‘accelerated’ re-franchising is indeed the right path, [but] this would not be without significant disruption,” Barclays analyst Lauren Lieberman wrote in a note.

PepsiCo, which took in nearly $94 billion in revenue last year, gets about 58% of sales from its food and snack division, including Frito-Lay and Quaker. That business is also under pressure, with sales flat this year as consumers balk at high prices.

“It’s tough to forecast much sequential improvement absent a material change in the consumer macro environment,” JPMorgan analyst Andrea Teixeira said of the snack business.

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