It’s no secret that American consumers are making healthier choices for themselves now more than they have in the recent past. And nowhere is that more evident than in the beverages they choose to consume.
It’s only been very recently, however, that this migration away from sugar-laden sodas and towards low-calorie and no-calorie drinks has reached a proverbial tipping point … a scenario where investors will want to make some deliberate, thoughtful decisions on how to play the trend. The key to making the most of the paradigm shift, however, is getting a grip on the details.
This, Not That
The demise of soda and subsequent rise of coffee, bottled tea and water isn’t a mere premise that lacks proof; the data verifies that carbonated beverages are on the way out. Perhaps none of the data speaks louder than the fact that the average American “only” drinks 42 gallons of soda per year now, down (every year, in fact) from 2005’s average of a little more than 50 gallons of fizzy drink consumption.
Meanwhile, water has finally lapped soda as the country’s drink of choice, being guzzled at an average rate of 58 gallons per year, per person. That’s well up from the typical 42 gallons per U.S. resident in 1998.
One would think, given their dominance in the soda world, that names like Coca-Cola (KO), PepsiCo (PEP) and Dr Pepper Snapple (DPS) would be able to muscle their way to dominance in the water, tea, and healthy-drink arena as well. And to give credit where it’s due, the big three powerhouses in the carbonated beverage market have — largely through acquisitions — pushed their way to the head of the class in most non-carbonated beverage categories.
Their respective market share is diminished in these categories, however, and these companies are finding it’s not as easy to win market share in a much more competitive and much more fragmented (but faster growing) coffee, tea and water arena.
On the Winning End of the Spectrum
So if Coke and Pepsi aren’t doing as well in the water world as they are in the soda world, who’s stealing that business? Well, that largely depends on the drink in question.
There’s little doubt as to the disruptor in the coffee segment of ready-to-drink beverages. It’s Starbucks (SBUX); the company has grown from an outfit that sold $5.3 billion worth of java in 2004 to an organization that’s on pace to generate $14.0 billion in sales this year … not because it offers value, but because it has created very compelling in-store experience.
Don’t look for the trend to slow down anytime soon. While there’s seemingly a Starbucks on every single street corner, the single-serve brewers made by Green Mountain Coffee Roasters (GMCR) — the Keurig brand — have opened up new opportunities even for Starbucks. The company has not only licensed cups for use in Keurigs, but also unveiled its own at-home brewing device. All told, the total $10.7 billion that consumers spent on coffee in 2012 is projected to reach $12.7 billion by 2017, with Green Mountain and Starbucks leading the way.
The dark horse in the group could also be worth a shot … Dunkin Brands (DNKN), which has quietly become a favorite for many coffee lovers. The only liability to investors is — and ironically, given the health movement — that Dunkin Donuts also relies on doughnut sales, which are becoming increasingly off-limits to the diet-conscious.
On the bottled water front, Nestle (NSRGY) might not be the biggest name, but it’s the name that gives Coca-Cola, PepsiCo and Dr Pepper the most headaches, even though each of those three companies has well established bottled water brands under their wings (Dasani, Aquafina and Deja Blue, respectively). Simply put, Nestle is wresting market share away from the majors.
In 2012, Nestle was the United States’ fourth-biggest bottled liquid refreshment beverage player, with 10.2% of that market. That was up from 2011’s 9.9% market share, making it the only company to make market share progress in that particular segment of the beverage industry.
Tea Time
As for tea, this is the arena that may be toughest to pinpoint a winner within. Arizona and Lipton — owned by Unilever (UN) — dominate the bottled tea market, while Lipton pretty much owns the loose-leaf and bagged tea market. Both are holding their market share, too. Snapple is running a respectable third in the bottled tea market, and the Dr Pepper company managed to up its total Snapple sales by about 7% in 2012. It just doesn’t make a big enough dent in Lipton’s or Arizona’s stronghold on this market, though.
Where the tea market really gets tricky is in the amount of the market’s revenue that stems from the tea leaf and tea bag sales. They make up nearly half of tea’s total annual revenue, opening even more doors for fringe companies to step in.
Whatever the case, the tea segment lacks a publicly traded pure play … which is unfortunate, since it’s the segment that could very well offer the most growth going forward.
United States tea sales grew from about $10.5 billion in 2007 to $15.7 billion last year, and the total is expected to reach $18 billion by 2015. Yet, tea consumption is less than most any other beverage category. That’s a lot of ground to make up, but with high costs, caffeine and often-unhealthy additions like sugar or artificial sweeteners making java less and less profitable, consumers are finding tea a very compelling alternative.
That’s great for the likes of Unilever — and for Starbucks, too, following its acquisition of Teavana. However, astute investors should keep their eyes peeled for a newcomer that could end up becoming an acquisition target.
Bottom Line
While soda will likely never go away, the alternatives to soda are now more than big enough that investors must rethink not just America’s drinking habits, but the world’s. It’s no longer a “soda and everything else” market. That paradigm shift is starting to make a major impact — for better or worse — on company’s bottom lines.
Ignore the trend at your own peril.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
