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Pepsi Challenge1.doc Pepsi Challenge1.doc Document Transcript

  • Joy Tang joyt@mit.edu 14.33 short paper Using Stock Return to Estimate the Response of Pepsi Challenge Advertisement on Firm Value This paper use stock return data as firm value data around Pepsi Challenge campaign advertising series that consumers are asked to take a sip each from unlabeled glasses of Coke and Pepsi during 1975 – 1976. (1) Time-series information of stock returns is used to construct estimates of Pepsi Challenge effects on firm value of both Coke and Pepsi. The behavior of the stock returns during the advertising campaign is normal compare with in long run, and the campaign is not statistically significant effective. Coke and Pepsi appear no substitutionary characteristics according to the stock return regressions. Along with the rapid developing commercialism, many companies especially in food industry are investing more and more on advertising to reach a bigger market, increase sales and firm value. Coke and Pepsi, the two giants in soft drink industry have created many commercial success in the history throughout American history. Some advertising campaigns are effective while some others are not. A good advertising campaign will drive the growth of firm value, which can also be observed through growth in stock return. Many investors are also trying to catch certain advertising event to predict stock return growth, since the stock return are event driven. Thus, it is always interesting to start from analyzing a historical company event's effect on its stock return with statistical tools to
  • generalize event driven behavior of stocks. I. Data Sample and Selection The purpose of the paper is to look at specifically the Pepsi Challenge advertising campaign's potential impact on stock returns of Pepsi and also its biggest rival Coke. The advertising series started in May.1975 ended around late 1976 across many states in US. Thus, I gathered the daily stock return data from the beginning of 1974 to the end of 1979. I excluded the stick return data later than 1979, because Pepsi and Coke have been constantly creating advertising series every now and then, and the stock returns of dates later than 1979 contains many other event driven fluctuations which will interfere the analysis on the specific Pepsi Challenge impact on stock returns. To avoid causations of general stock market movement, I use the value weighted market return as the risk free return of stock market, and most of the analysis are based on the abnormal stock return of Pepsi and Coke which equals to the difference between Pepsi or Coke returns and the value weighted market return. The challenge of the paper lies in the calculation of market share changes of Pepsi and Coke, since I cannot find the market share data during this period. Also, there could be other events affecting Pepsi or Coke's stock returns that are unobservable. It is also hard to conclude the Pepsi challenge impact on Coke's firm value since Coke had also done responsive advertisement during that period to maintain its market share. Thus in through the data, I observe the Pepsi challenge has positive impact on Coke's stock return. Normally Pepsi and Coke are substitutionary brand, however since they are in the same soft drink industry, it is also possible that any advertisement from one firm will uplift the general popularity of similar products. One big assumption in this paper is that Pepsi and Coke haven't change its Equity and Loan financial structure during this advertising period thus it is reasonable to use stock returns as the growth of firm value.
  • I created a dummy variable that indicate the period that the advertisement is conducted. I use “1” to represent that the date of the stock return is opposed to the Pepsi Challenge Campaign, and “0” for not under the Pepsi Challenge impact. Thus the dummy variable is “1” for dates from May.1975 to end of 1976, and “0” for dates from 1974 to April.1975 and 1976 to 1979. II. Results Through the statistics used in this paper, it shows the Pepsi Challenge campaign didn't create a big positive impact on Pepsi's firm value, or relative returns of Pepsi's to Coke's firm Value. The results are slightly inclined on that the Pepsi Challenge has potential positive impact on Pepsi's firm value but it is not statistically significant. This result might be unpleasant for people who have strong faith in advertising power, however it is reasonable. First of all, it is the low product differentiation between the soft drink products of Pepsi and Coke. That raising the awareness of one brand can result in increasing sales for both brands. Second, Pepsi and Coke are the two biggest soft drink companies with similar sizes that almost dominated the market. The competition is intensified between Pepsi and Coke, any public advertising from one side will arouse the competitive response from the other side in a short time period. Thus neither Pepsi or Coke have absolute advantage is creating higher relative return through advertising. From Table 1, one can tell the mean of Pepsi's abnormal stock return during Pepsi Challenge is almost the same as the mean during entire sample period, which means the Pepsi Challenge didn't add statistically significant values to Pepsi. Similarly, although the mean of Coke's abnormal return is about 15% lower during the Pepsi Challenge, the campaign didn't create a statistically significant
  • shock to Coke's firm value looking at the 95% confidence interval . This can be explained by Coke's responsive advertising strategy, or the ineffectiveness of Pepsi Challenge advertisement. The mean of the relative return between Pepsi and Coke is 15% higher during the Pepsi Challenge, however taking into account of the 95% confident interval where the lower bound is significantly negative; it is still risky to say Pepsi Challenge is helping Pepsi more than Coke during that advertising period. Table 1 Average of daily data Entire sample period During Pepsi Challenge 1974 - 1979 May.1975 – 1976 (no. of obs: 1516) (no. of obs: 422) Abnormal Return Pepsi's abnormal Mean Std. Err. [95% Conf. Intv] Mean Std. Err. [95% Conf. Intv] return .000119 .000341 [-.0005494 .000788] .000119 .000509 [-.000881 .001119] Coke's abnormal Mean Std. Err. [95% Conf. Intv] Mean Std. Err. [95% Conf. Intv] return -.000293 .000339 [-.0009575 .000372] -.000355 .000555 [-.001446 .000736] Relative Return Pepsi's return Mean Std. Err. [95% Conf. Intv] Mean Std. Err. [95% Conf. Intv] minus Coke's .0004122 .000442 [-.000455 .0012796] .0004737 .000657 [ -.000818 .001766] return Note: Abnormal Return = Stock Return – Value Weighted Market Return Std. Err = Standard Error 95% Conf. Intv = 95% confidence Interval Another approach is to look at the correlations results in Table 2. If Pepsi Challenge helped Pepsi to gain extra profit, then the correlations between Pepsi's return and Market return should be smaller during the Pepsi Challenge campaign period, since the Pepsi's return should be more affected by the this advertising event other than following the general market movement. From Table 2, one can tell the correlation of Pepsi's returns on market returns is around 5% lower (from 1.115 to 1.054), however it is still unclear whether this 5% drop is significant according to the 95% confidence interval.
  • Similarly, the correlation of Coke's returns on market returns is about 2% higher which means Coke's return is slightly more dependent on the market during Pepsi Challenge but not statistically significant. Table 2 Correlations Pepsi's return on R-squared = 0.3376 Market return Adj R-squared = 0.3372 ------------------------------------------------------------------------------ (Entire sample period) r_pep | Coef. Std. Err. t P>|t| [95% Conf. Interval] -------------+---------------------------------------------------------------- vr | 1.115106 .0401423 27.78 0.000 1.036366 1.193846 _cons | .0000981 .0003402 0.29 0.773 -.0005691 .0007654 ------------------------------------------------------------------------------ Pepsi's return on R-squared = 0.3569 Market return Adj R-squared = 0.3554 ------------------------------------------------------------------------------ (During Pepsi Challenge) r_pep | Coef. Std. Err. t P>|t| [95% Conf. Interval] -------------+---------------------------------------------------------------- vr | 1.054439 .0690601 15.27 0.000 .9186926 1.190186 _cons | .0000892 .0005104 0.17 0.861 -.000914 .0010924 ------------------------------------------------------------------------------ Coke's return on R-squared = 0.4258 Market Return Adj R-squared = 0.4255 ------------------------------------------------------------------------------ (Entire sample period) r_ko | Coef. Std. Err. t P>|t| [95% Conf. Interval] -------------+---------------------------------------------------------------- vr | 1.313112 .0391864 33.51 0.000 1.236247 1.389977 _cons | -.0003504 .0003321 -1.06 0.291 -.0010018 .0003009 ------------------------------------------------------------------------------ Coke's return on R-squared = 0.4389 Market Return Adj R-squared = 0.4376 ------------------------------------------------------------------------------ (During Pepsi Challenge) r_ko | Coef. Std. Err. t P>|t| [95% Conf. Interval] -------------+---------------------------------------------------------------- vr | 1.334322 .0736157 18.13 0.000 1.189621 1.479023 _cons | -.0005362 .000544 -0.99 0.325 -.0016056 .0005332 ------------------------------------------------------------------------------ Pepsi's abnormal return R-squared = 0.0236 on Adj R-squared = 0.0229 ------------------------------------------------------------------------------ Coke's abnormal return r_ko1 | Coef. Std. Err. t P>|t| [95% Conf. Interval] (Entire sample period) -------------+---------------------------------------------------------------- r_pep1 | .1525365 .0252399 6.04 0.000 .1030276 .2020453 _cons | -.0003111 .0003349 -0.93 0.353 -.0009681 .0003458 ------------------------------------------------------------------------------
  • Pepsi's abnormal return R-squared = 0.0569 on Adj R-squared = 0.054 ------------------------------------------------------------------------------ Coke's abnormal return r_ko1 | Coef. Std. Err. t P>|t| [95% Conf. Interval] (During Pepsi Challenge) -------------+---------------------------------------------------------------- r_pep1 | .2603548 .0516982 5.04 0.000 .1587354 .3619742 _cons | -.0003859 .0005397 -0.72 0.475 -.0014468 .000675 ------------------------------------------------------------------------------ It is interesting to see Pepsi's and Coke's stock abnormal return has positive correlation through the entire sample period, normally one would expect they have negative correlation since their products are very similar and substitutionary. Moreover, the main concept of Pepsi Challenge advertising series is to convince consumers that Pepsi-cola tastes better than Coke-cola. As contrary to the advertising purpose, the correlation of Pepsi's and Coke's abnormal return is significantly higher than the entire sample period. This could possibly explain by the fast responsive culture of advertising competition between these two firms. When the two firms are not too aggressively focusing on competing through advertisements, their returns are more likely to be affected by other random factors from the market, internal firm operations changes, or financial structure adjustments. As a conclusion, the similarity between Pepsi's and Coke's on products types and firm sizes, also along with the intense competition on advertising decided that Pepsi Challenge advertisement was not a very effective strategy for Pepsi to over perform Coke on market shares. Competition can be less intensify if one of the company can innovate new products to create more product differentiation.
  • Reference: 1. Pepsi Extends Challenges to Coke. New York Times; Jul.13th.1976; pp66