by James Brumley | July 17, 2013 10:49 am
You can look at the data from a dozen different angles, but you’re forced to make the same conclusion no matter how it’s viewed … consumers are drinking less and less soda, and that trend is slowly chipping away at names like Coca-Cola (KO), PepsiCo (PEP), or Dr Pepper Snapple Group (DPS).
The migration from sugar-laden soft drinks to healthier, non-carbonated beverages isn’t exactly breaking news, to consumers or to investors. The latest batch of statistics, however, is turning up the heat on the underlying concern. Indeed, the trends are now so well developed that they’re measurably impacting stock prices. Ignoring the details isn’t an option any longer.
Forget the fact that Coca-Cola posted a modest year-over-year rise in its bottom line for the second quarter. For that matter, don’t even worry about the fact that the beverage giant’s top line fell a tad in Q2. What’s most interesting — and alarming — is how Coke lost ground last quarter.
The good news is, Coke did pretty well in overseas markets, where refrigerated beverages are just now becoming commonplace in some locales, and where colas aren’t old hat. Coke’s sales (by volume) in Eastern Asia were up 2%, and sales in the Middle East and Russia were up 9% in the second quarter.
The bad news is, Coca-Cola’s North American sales volume fell 4% on a year-over-year basis. It was the fourth time in the past five quarters North American volumes had fallen for the world’s most prolific soft-drink name.
Most consumers know, or can guess, why. Sales of healthier drinks — including plain old water — are on the rise in the U.S, crimping sales of soda. That trend has been in place for eight years, in fact. In 2005, the average U.S. consumer drank an average of more than 50 gallons of soda per year. Last year, that figure had fallen to 42.4 gallons, and that downtrend is expected to extend through this year as well.
The inverse of that trend underscores the fading demand for soda. Beverage Digest reported that in 2012, Americans drank an average of 58 gallons of water, which is well above the 36 gallons of water we drank on average 15 years earlier.
While some consumers are choosing bottles of other Coke- and Pepsi-owned brands like Dasani and Aquafina, respectively, these consumers are just as apt to pick up a product from another producer altogether.
See, Coca-Cola and PepsiCo don’t have quite the same foothold in the non-carbonated beverage arena that they enjoy in the carbonated beverage world. Coke controls 42% of the United States’ carbonated soft-drink market, but has only garnered 34% of the United States non-carbonated drink market. PepsiCo’s market share of 28.1% of the soft-drink market slumps to 26.3% of the non-carbonated market. Dr Pepper’s already-meager market share of 16.8% of the fizzy-drink world is a distant third, but falls to only 11% of the non-carbonated beverage market in the U.S.
Even the “other” category of the non-carbonated drink world still is a threat to more prolific players, making up more than 15% of that bottled water, tea, and juice market.
To give credit where it’s due, the three top names in the soda world are still technically the top dogs in the water and juice and tea markets, but the water and healthier beverage market is far more fragmented, and includes more nagging competitors than the likes of Pepsi and Coke are used to dealing with. And, it’s worth noting how Pepsi and Dr Pepper both lost market share in the United States non-carbonated drink market last year, while Coke added none.
Nestle (NSRGY) and the “other” category both added water and non-soda drinks market share last year, however, confirming that traditional fizzy drink names aren’t fully offsetting lost sales of carbonated drinks with sales of healthier (and increasingly popular) non-carbonated drinks.
Just for the sake of clarity, the advent of water and healthier drinks is largely a U.S. phenomenon. While domestic consumers are shying away from carbonated colas, foreign consumers still are falling in love with them. That difference throws investors another curveball to deal with, since PepsiCo, Coca-Cola and Dr Pepper Snapple not only drive different proportions of their revenue via overseas markets, but also drive different proportions of their revenue through carbonated and non-carbonated beverages.
Dr Pepper Snapple, ironically, could be most at risk given the paradigm shift in consumer behaviors. Though non-carbonated Snapple seems like a dominant name in that segment of the beverage market, nearly two-two thirds of the company’s revenue is created by soda sales, and 90% of its revenue comes from U.S. consumers. With United States beverage drinkers increasingly steering clear of soda, Dr Pepper Snapple has little else it can turn to.
Best-positioned in this tough race is PepsiCo. Only about one-fourth of its United States sales stem from soft drinks; it’s still got a huge snack food operation. Half of its sales stem from overseas, though only a third of that revenue is from soda. Point being, while the company might be partially missing the boat on emerging-market soda sales, it’s not making up for it in other ways, with other products.
As for Coca-Cola: From an investor’s point of view, it’s a better bet than Dr Pepper, but riskier than PepsiCo. About two-thirds of Coke’s revenue comes from overseas markets, playing right into where the growth is. But, being the biggest U.S. soda name — and with 60% of its U.S. revenue spurred by soda sales — a big chunk of its bread-and-butter business is still under fire.
Just something to think about for long-term investors looking to pick one of the three.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
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