KFC announced Thursday that Coca-Cola (KO) will become its new U.S. beverage partner, ending a nearly 40-year relationship with PepsiCo (PEP). The deal covers all 3,600 KFC restaurants across the country, though international KFC locations will keep serving PepsiCo beverages.

The transition begins in January 2027, with Coca-Cola products expected at every U.S. KFC by spring. For Yum! Brands (YUM), which owns KFC, it's a bet that a new soda partner can help revive a brand that has lost ground at home. For PepsiCo, it's a competitive setback at an already awkward moment.

KFC Bets on Coca-Cola to Revive Growth

The beverage switch supports KFC's broader "Kentucky Fried Comeback" strategy, aimed at attracting customers and winning back market share from rivals such as Chick-fil-A and Popeyes, CNBC reported.

KFC U.S. President Catherine Tan-Gillespie said the partnership represents an important step in the chain's turnaround. She highlighted opportunities to introduce new beverages, strengthen restaurant operations and improve customer experiences.

The move comes as KFC faces intense competition in the U.S. chicken market, where rivals have gained ground through menu innovation and aggressive expansion.

PepsiCo Loses Major Restaurant Partner

PepsiCo's relationship with KFC dates back to its ownership of the restaurant chain. Although PepsiCo spun off KFC in 1997, it remained a key beverage supplier to Yum Brands.

The loss comes as PepsiCo's North American carbonated soft drink business continues to underperform the broader category.

During its recent earnings call, PepsiCo also lowered its fiscal 2026 earnings outlook amid ongoing margin pressure in North America. The company outlined additional cost-cutting measures to control expenses and support growth.

Jay Woods, chief market strategist at Freedom Capital Markets, told Reuters that losing a high-profile customer like KFC could further damage PepsiCo's image.

The setback also comes as activist investor Elliott Investment Management pressures PepsiCo to shed underperforming assets and improve its North American operations.

However, PepsiCo has renewed its beverage agreements with Taco Bell and KFC International, Reuters reported. The Taco Bell agreement runs for 10 years.

PepsiCo also secured a 10-year beverage agreement with Subway in 2024, replacing Coca-Cola at the sandwich chain's U.S. restaurants.

Coca-Cola Expands Its Fast-Food Dominance

For Coca-Cola, the agreement strengthens its position in the U.S. quick-service restaurant market.

The beverage giant already supplies major chains, including McDonald's Corporation (MCD) and Wendy's Company (WEN).

Coca-Cola has also secured partnerships with Culver's, Arby's and Panda Express in recent years, according to CNBC.

Dagmar Boggs, Coca-Cola's president of foodservice and on-premise operations in North America, said the partnership would combine KFC's food offerings with Coca-Cola's beverage portfolio and innovation capabilities.

The companies didn't disclose the financial terms of the agreement.

Price Action

Yum Brands shares were unchanged at $150.83, Coca-Cola shares were up 0.80% at $92.74 and PepsiCo shares were up 0.51% at $129.03 during premarket trading on Friday, according to market data.