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Arch rivals: Coca-Cola vs. Pepsi

In the Great American Cola Wars, Coke is targeting international growth, while  Pepsi is growing its snack business.  And both are going head-to-head in the rapidly expanding bottled-water business. By CNBC's Tom Costello.
A man climbs on a Coke billboard to attract customers at the first China International Beverage Festival in Beijing earlier this year. Guang Niu / Reuters file
/ Source: CNBC

With the North American soft drink market saturated, both Coke and Pepsi are focusing now on other areas to grow their businesses. Coke is targeting international growth; Pepsi is growing its snack business. And both are going head-to-head in the rapidly expanding bottled-water business.

Their commercials are among the most innovative on television: Star power is often the common denominator.

But when it comes to the soft drink wars, it is still very much a country divided between two familiar colors: Red and blue.

"In the U.S., it's a closer race between Coke and Pepsi,” said Bonnie Herzog, an industry analyst with Smith Barney. “When you look outside the U.S., I think Coke has the lead."

Indeed, 75 percent of Coke's profits now come from the foreign markets it dominates. While back home, the slugfest has gone on for decades.

** ADVANCE FOR RELEASE SUNDAY JUNE 8, 2003 ** Cashier Joseph Bell, left, scans customer Ronald Johnson's food order, right, which included two packs of Aquafina water at the Giant Food Store in Washington, Tuesday, June 3, 2003. Manufactures sold more than $7.7 billion worth bottled water last year , up 12.3 percent from 2001, according to the Beverage Marketing Corporation. At center, employee Katrice Brunson. (AP Photo/Gerald Herbert)Gerald Herbert / AP

"I think it makes us all better,” said Pepsi’s vice president of marketing, Katie Lacey. “It's one thing about working in a very competitive category. You absolutely are on your toes. We don't let it dictate how we act or think every day. We're focused on how we're going to grow our brands."

With public opinion split, there's another problem for both Coke and Pepsi. Volumes of carbonated soft drinks in North America are growing at less than 1 percent a year.  Meanwhile, sports drinks like Gatoraid are growing at 15 percent a year.  And bottled water is expanding by 26 permanent annually.

In a saturated soft drink market, water is where the growth and money are, according to Herzog. For now, Pepsi's Aquafina is beating Coke's Dasani in the water wars.

It's just the latest front in a battle between hundreds of Coke and Pepsi brands: Diet Coke vs. Diet Pepsi; Sprite vs, Mountain Dew; Nestea vs. Lipton, Tropicana vs. Minutemaid. And the list goes on.

But for Pepsi - it's not all about drinks. Some 60 percent of its profits come from its snack business. From Fritos to Lays to Cracker Jacks and Tostitos, Pepsi has a virtual monopoly, with no competition from Coke.

"They're going after the younger consumer who purchases a single-serve product, at a convenience store like 7-11,” said Todd Stender, who follows the companies at Crowell Weedon & Co. ”And that's really where the profits are."

Coke, meanwhile, just scored a big coup by winning the soft-drink business at Subway, a fast-food chain now bigger than McDonald's, that had previously served only Pepsi. 

In the home office, analysts like both management teams.  Both companies expense stock options, and both project revenue growth in the mid-to-high single digits.