In almost any market, crowds of competitors fight for business within their niche, but over the years and with few exceptions, a small number of businesses have come to dominate the industry.

These are often names we all know, logos we see every day, and brands that have become part of everyday life.

Markets love a monopoly, and while there are regulations designed to level the playing field and protect consumer choice, there are countless examples where a relative few dominate.

Think about the UK mobile network market. At first glance there appears to be legions of providers to the average Brit. Virgin Mobile, Giffgaff, Tesco Mobile, Asda Mobile, Talkmobile, Lebara, Sky Mobile, Lyca Mobile – these are just some of the contract options on offer, according to comparison website Uswitch.

Yet, the reality is different with the UK mobile network market dominated by the big four operators – Vodafone (VOD), O2, EE and Three. The earlier names simply resell access to these four networks.

You can see why one champion suits investors. Winner-take-all markets are hard to disrupt and suppress the entry of new players by locking in market share for leading players, thus securing most of the revenue, profits and cash flow from an industry.

In this feature, Shares has investigated five different sectors where a couple of competitors seem to command market leadership. We have pulled together some key company data that should shed some light on the prospects of each company and its shares, looking at each through a growth, quality and value lens. We discuss the key pros and cons and suggest which one to buy.

Is Coca-Cola (KO:NYSE) or PepsiCo (PEP:NASDAQ) the better investment, and who wins out of Nike (NKE:NYSE) and Adidas (ADS:ETR)? These questions will be answered, while we also discuss UK banking, consumer cosmetics and big oil.

Coke  VS  Pepsi

Coca-Cola is slightly bigger in value than PepsiCo ($275 billion versus $259 billion respectively), but their shares trade on similar price to earnings multiples (23.8 versus 25.1) and offer similar income credentials with a yield in the region of 2.8%.

Both are ‘Dividend Aristocrats’, meaning they have increased shareholder pay-outs every year for more than 25 years – PepsiCo for close on 50 years, nearly 60 for Coca-Cola.

Between them the two soft drink giants control nearly 70% of the US carbonated beverages industry, yet Coca-Cola’s estimated 44% share (in 2021) was nearly double PepsiCo’s 24%. In terms of perception, Coca-Cola appears to win hands down with roughly two of out of every three people who enjoy fizzy cola seeming to prefer this brand.

Both have big fund groups such as BlackRock, State Street and Fidelity on their shareholder register.

Coca-Cola is focused on drinks including Coke, Fanta and Costa coffee whereas PepsiCo is a broader food and drink business. It owns Pepsi, Mountain Dew, Lipton ice team as well as snacks including crisp brands Walkers and Doritos, as well as Quaker oats.

On the whole, there is very little to separate Coca-Cola and PepsiCo shares; both look like great buy and hold stocks for investors willing to sit tight for several years, and get paid decently for doing so through dividends, making both good options for investors wanting income now. But what if you had to pick one over the other?

Famous investor Warren Buffett backs Coca-Cola, and while it has enjoyed far better gross and operating margins in recent years, this is perhaps an area of opportunity for PepsiCo to make its business more cost efficient, which in turn would help bolster slowing earnings recently.

PepsiCo also has better returns on capital and equity, and higher free cash flow per share. This suggests to us that PepsiCo may have the greater upside potential while still being a stable, income-paying cash machine. [SF]

Winner: Pepsico

Nike  VS  Adidas

In a purely quantitative sense, Nike beats Adidas hands down. The shares have produced an impressive compound annual rate of total shareholder return of 15.7% a year over the last decade, almost double the 8.4% received by Adidas shareholders.

The main reason for Nike’s outperformance is related to the higher rates of return on equity it achieves, which are north of 40% compared with around 4% for Adidas. High profitability allows the company to spend more on marketing in absolute terms and attract the best elite athletes and sports franchises to help showcase its products.

By contrast, Adidas’ troublesome partnership with the musician formerly known as Kayne West – which it broke-off in October 2022 amid offensive remarks – forced the company to slash its dividend and is expected to result in its first loss in decades.

Analysts expect a loss of around €480 million in 2023 before bouncing back strongly in 2024 to profit of around €670 million. The setback led to CEO Kasper Rorsted stepping down in November to be replaced by Bjorn Gulden, the former head of Puma (PUM:ETR).

No doubt the near-term struggles at Adidas will be fixed allowing the company to bounce back to form. In the meantime, Nike is running hard to show its rival a clean pair of heels.

In March the Oregon-based sportswear giant said its third quarter revenues grew 14% with direct-to-consumer sales jumping 17% while inventories increased 16% compared with 43% in the prior quarter.

While it is tempting to focus entirely on competition between the two heavyweights in the sector, Berenberg argues market share is not a zero-sum game. Both firms continue to take market share from smaller players. But given the high quality of Nike’s business and strong brand we believe the shares look like a safer bet over the longer-term despite the higher valuation. [MG]

Winner: Nike

Estée Lauder  VS  L'oréal

France’s L’Oréal (OR:EPA) and its US counterpart Estée Lauder (EL:NYSE) are focused on the beauty and cosmetics market. L’Oréal is the global leader, with Estée Lauder occupying the number two position.

They both trade on hefty valuations to reflect the quality of their business models and strong margins, underpinned by significant brand power. Brands really matter in this market and are a key driver of purchasing decisions.

Given L’Oréal’s edge in terms of market share, its scale and greater consistency in recent years we have more confidence in it as an investment. In the words of Berenberg analyst Fulvio Cazzol: ‘L’Oréal has a strong competitive position and a track record of best-in-class execution.’

Estée Lauder operates almost exclusively at the more premium end of the market, with L’Oréal having a broader focus. In some respects, Estée Lauder’s high-end bias is an advantage as, in theory, its clientele should be less exposed to a weak economic backdrop.

However, Covid restrictions in China, which hit the travel associated with luxury spend, had a larger impact on Estée Lauder than L’Oréal for this reason. This explains the larger forecast growth for the former as it rebounds from a difficult period.

Estée Lauder derives around 80% of its sales from skincare and makeup products, whereas for L’Oréal the number is a smidge over 60%, with material exposure to haircare and fragrances.

L’Oréal demonstrated its pricing power in the first quarter of 2023 as it reported better than expected sales growth of 13%. The heavy emphasis placed on ESG (environmental, social, governance) factors should help future-proof the business given the greater importance placed on these issues by coming generations.

A robust balance sheet will enable L’Oréal to complement its organic growth with acquisitions. The company recently snapped up Australian skin care brand Aesop in a $2.5 billion deal. [TS]

Winner: L'Oréal

BP  VS  Shell

On the face of it BP (BP.) and Shell (SHEL) are very similar businesses, and they trade on similar valuations. However, choosing where to invest between the pair results in only one winner, in our view – Shell.

The company made a big move into natural gas much earlier than BP and this should leave it better positioned to manage the risks associated with the energy transition. While the world is looking to wean itself off fossil fuels, battery technology is not yet in a place where renewables can be relied upon to provide baseload energy.

In this context, natural gas, which is relatively less polluting than crude oil, looks set to play an important role in smoothing the transition as an alternative to coal and diesel and as a way of balancing supply and demand.

Shell is the market leader in LNG (liquefied natural gas), converting natural gas into a liquid form which can be easily transported around the globe. This is largely thanks to its $52 billion acquisition of BG in 2016, and its integrated gas division is the most profitable and largest driver of the group’s cash flow, which should help underpin returns to shareholders through dividends and buybacks.

The company has some attractive projects which are set to come on stream in the next few years including an expansion of its operations in Brazil and further LNG developments.

In contrast, BP’s strategy looks more muddled, having previously made itself an outlier in the sector by setting itself a hard target to cut oil and gas production by 40% by 2030, which it has now watered down to 25%.

Ambitious plans to add 500 gigawatts of renewables capacity by 2030 will require a huge increase in investment. Delivering this in a disciplined way while keeping shareholders on side could be a big ask. [TS]

Winner: Shell

Barclays  VS  Lloyds

Investors often overlook just how cyclical banking earnings are and how boom can become bust in a very short space of time. Banks are basically a big bet on the economy – they borrow money from depositors and lend it out again at a higher rate hoping to make a juicy spread between the two, while avoiding lending money to people who can’t pay it back.

When the economy is growing, they lend out more money, and when the economy is shrinking, they lend less so in an ideal world they would put aside earnings from the good times to see them through the bad times.

Lloyds (LLOY) is the simplest of the UK banks to understand as it sticks to its traditional banking knitting, restricting itself to simply deposits and loans. As well as retail and commercial lending, it has the largest mortgage book in the UK thanks to its 2007 takeover of HBOS, which included the Halifax brand.

Barclays (BARC), on the other hand, has fingers in lots of pies. Beyond plain vanilla retail loans and deposits, it also operates the Barclaycard credit card business, commercial lending, and investment banking, with all the risks and rewards that entails.

Slowdowns in the housing and mortgage markets are more relevant for Lloyds, whereas Barclays is more exposed to the ups and down of consumer spending and stock and bond markets.

Whether it is a result of their different business models or their management approaches we can’t say, but earnings for the two banks have taken quite different paths over the last 25 years. Barclays has grown its earnings per share by roughly 4% per year since the mid-1990s, whereas Lloyds has destroyed earnings by 2% per year and even that may be a generous assessment.

We’re not massive fans of investing in banks due to the sector having a history of making big mistakes and an ever-increasing amount of regulation. But if you had to pick either Lloyds or Barclays, we’d go for the latter, albeit only invest if you understand and accept the risks that come with the sector. Too many people get blindsided by the generous dividends and think it is a low-risk part of the investment world. [IC]

Winner: Barclays

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