Soda Stocks Could Lose Their Fizz in Challenging Market

by Jonathan Berr | December 12, 2013 9:58 am

Soda Stocks Could Lose Their Fizz in Challenging Market

Coca-Cola (KO[1]) might have bested PepsiCo (PEP[2]) in the cola wars long ago, but both soda stocks could be the losers over the long run as the tide continues to turn against soda, and investors should take note.

Soda 185 Soda Stocks Could Lose Their Fizz in Challenging Market[3]
Source: Flickr[4]

The war against soda is intensifying to such an extent that even sales of diet soda are suffering. As the Wall Street Journal [5]recently noted, Americans — whose consumption of carbonated beverages recently a near three-decade low — are scaling back their purchases of diet sodas as well. Data from Nielsen shows that sales of zero- and low-calorie soda fell 6.8% in real dollar terms, far worse than the 2.2% decline in full-calorie sodas. Even more surprising was the news that diet soda sales had contracted at a higher rate for the past 3 years.

Part of the problem is that soda has been deemed — unfairly in my view — public enemy number one in the battle against obesity by New York Mayor Mike Bloomberg and public health activists such as the Center for Science in the Public Interest. I never quite understood how soda could be villain here given the ample evidence that people are consuming far fewer carbonated beverages than they have in years past.

Bloomberg’s plan to prohibit the sale of super-sized sodas was bad policy and even worse law that was wisely overturned by a court before it had a chance to hurt soda stocks. It would have placed an onerous burden on small businesses and would have absolved people for taking responsibility for their own obesity — a condition I am all too familiar with.

But the Journal story highlights a growing problem facing soda stocks like Coca-Cola, PepsiCo and Dr Pepper Snapple (DPS[6]): How do you market soda? Unlike milk, which has calcium that’s good for bone health, soda has no real nutritional value. Though some diet or zero-calorie beverages are fortified with vitamins and are more healthy than regular sodas, they are hardly health foods.

A recent study by scientists from Purdue University[7] found that diet soda is just as bad for your health as the regular stuff — and it may be causing people to gain additional weight because the artificial sweeteners trick the body into wanting more “real sugar.”

“Honestly, I thought that diet soda would be marginally better compared to regular soda in terms of health,” said Susan Swithers, the report’s author, in an interview with CNN[8]. “But in reality it has a counterintuitive effect.”

Other studies that are hotly contested by the American Beverage Association have linked the artificial sweetener aspertaime, which is used in diet soda, with cancer and decreased kidney function. Coca-Cola is betting that Stevia[9], a plant-based sweetener will help jumpstart its low-calorie sales, but that hasn’t happened. In fact, sales of new low-calorie sodas such as Pepsi Next have been dismal.

No wonder billionaire Nelson Pelz wants PepsiCo. to spin off its fast-growing snacks business … although his idea to combine it with Mondelez International (MDLZ[10]) seems daft, especially since the maker of Oreo cookies and Cadbury chocolates reported a dismal third quarter and slashed its guidance[11]. PepsiCo’s Frito-Lay snack business was a bright spot, reporting gains in both sales and profit[12] as soda volumes in the U.S. fell.

Interest from Pelz has boosted PepsiCo’s shares by more than 20% this year, outpacing rival stoda stocks Coca-Cola and Dr Pepper Snapple, which are up roughly 9 percent. Wall Street thinks Indra Nooyi’s company has got more gas in its tank, however. The average 52-week price target is $91.33 — about 10% above its average 52-week price target of $91.33. It seems inevitable that Nooyi will succumb to pressure and spin off PepsiCo’s food businesses … it’s just a question of when. The other big soda stocks aren’t worth the bother.

Double-digit gains by teas such as Honest Tea and Fuse enabled Atlanta-based Coca-Cola, which gets about 70% of its global revenue from soda, to report quarterly profit that was in-line with expectations. Sales were light, however — sales of Coke’s five largest soft drinks, which include its namesake brand, increased by 2%, hardly a barn-burner of a quarter. As for Dr Pepper Snapple, it expects sales to be flat for the year as  CEO Larry Jones[13] warned of an “extremely challenging environment.”

Soda’s popularity is plummeting. And unless soda stocks like Coca-Cola, PepsiCo or Dr Pepper Snapple come up with a new beverage that knocks the world’s socks off, future generations will have come up with new non-carbonated refreshments to enjoy.

As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities, but he is fan of Coke Zero.

Endnotes:
  1. KO: http://studio-5.financialcontent.com/investplace/quote?Symbol=KO
  2. PEP: http://studio-5.financialcontent.com/investplace/quote?Symbol=PEP
  3. [Image]: http://investorplace.com/wp-content/uploads/2011/09/Soda_185.jpg
  4. Flickr: http://www.flickr.com/photos/like_the_grand_canyon/5594554706/sizes/m/in/photostream/
  5. Wall Street Journal : http://online.wsj.com/news/articles/SB10001424052702304579404579236630401881844
  6. DPS: http://studio-5.financialcontent.com/investplace/quote?Symbol=DPS
  7. Purdue University: http://www.huffingtonpost.com/2013/07/11/diet-soda-health-risks_n_3581842.html
  8. in an interview with CNN: http://thechart.blogs.cnn.com/2013/07/10/diet-soda-may-do-more-harm-than-good/
  9. betting that Stevia: http://money.msn.com/now/post--coke-bets-on-stevia-to-sweeten-sales
  10. MDLZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=MDLZ
  11. slashed its guidance: http://finance.yahoo.com/news/line-earnings-mondelez-sales-view-160002235.html
  12. sales and profit: http://www.pepsico.com/INVESTORS
  13. CEO Larry Jones: http://online.wsj.com/news/articles/SB10001424052702303615304579153530508297334

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