At first glance, Thursday’s release of the FDA’s newly posted dietary guidelines seemed to deal a major blow to soft drink companies like PepsiCo (PEP) and Coca-Cola (KO). The agency recommended sizable cuts in the daily recommended allowance of sugar as a means of curbing the nation’s obesity problem, which effectively puts Coke and Pepsi right in the middle of the crosshairs.
With a bit more realistic thought, however, owners of Coca-Cola stock and Pepsi stock need not run for the hills just yet. The guidelines aren’t a law, and as history has demonstrated, just because something has been deemed “bad for you” (or in this case, “even worse for you than first thought”), it doesn’t means consumers aren’t going to do it.
Yes, Sugar Makes You Fat
The results are in: The FDA wants you to consume fewer calories than it used to suggest was reasonable, and has made it clear one of the best ways to do so is by cutting back on or cutting out soda (which is packed with sugar, and therefore packed with calories).
The new guidelines replace the previous version of recommended daily allowances, and will remain in place for a period of five years. The basis for the new dietary suggestions was ongoing studies of the connection between diet and health. Not surprisingly, studies have determined too much sugar is one of the core causes of obesity and other health problems, like diabetes, plaguing the nation.
The new guidelines underscore stronger legal efforts to reduce consumers’ sugar intake … efforts like special taxation on soda and an outright ban on oversized cups. All told, 39 states impose some sort of additional tax on some soda sales, and while New York’s effort to outlaw extra-large cups was ultimately overturned by a judge, it’s an idea that has never really gone away.
The goal of the new guidelines is commendable, and necessary. Two-thirds of adults in the U.S. are overweight, and half of the overweight population (one-third of all adults) is considered obese. Meanwhile, though, diabetes growth — which is often prompted by obesity — in the United States is leveling off, it’s leveling off at an alarmingly high rate of 9.3% of the population.
Where the premise of the guidelines is flawed though — and the reason PEP and KO investors can breathe easy — is the assumption that any consumers are actually going to change their behavior based on the revised standards.
Nobody (Really) Cares
With all due respect to the FDA, the vast majority of consumers were already well aware of the downside of too much soda intake. If they were going to do anything about it, they would have done so by now.
As evidence of the short-term-pleasure-at-the-risk-of-long-term-illness mindset, one only has to look at how ineffective smoking-cessation efforts have been … a habit that’s been made clearly and undeniably deadly for years.
Yes, the percentage of the U.S. population that regularly smokes has fallen from 25% in 1990 to just under 17% as of 2014.
That’s progress, though not as much as one might suspect considering smokers run three times the normal risk of premature death, and not much progress in light of the fact that smoking ultimately causes almost 500,000 deaths per year in the United States. Arguably, recreational smoking shouldn’t exist at all, particularly following the introduction of effective cessation tools. Many consumers continued to smoke because they simply didn’t care to about the risks.
And no, contrary to the legal arguments that try to put the blame squarely on the shoulders of big tobacco, there’s no plausible way smokers couldn’t have understand the dangers of the habit.
If the FDA can’t significantly put a serious stop to smoking — which almost assuredly leads to premature death — is a slightly more restricted suggested diet going to make a dent in obesity? Not likely.
Bottom Line for Pepsi and Coca-Cola Stock
None of this is to say Coca-Cola and Pepsi stock won’t exhibit some sort of impact in the wake of the new guidelines. Indeed, they already have. It was a knee-jerk, emotionally charged response on Thursday, though. Once it becomes old news, the adverse impact will subside.
It’s also noteworthy that soda consumption has already been waning.
Over the past two decades, sales of soda in the U.S. have fallen by a fourth, largely because consumers are becoming more health-conscious. The FDA’s role in that awakening, however, was likely minimal … at best. Most stopped drinking soda simply because they knew it wasn’t the healthiest of choices. They didn’t need the FDA to tell them that.
And that’s perhaps the most confounding aspect of the new guidelines that take dead aim at sugary drinks. People ARE drinking less soda, and people ARE drinking more water. They’re getting (to be blunt) fatter anyway, leaving one to at least wonder if soda isn’t the actual problem, but rather, what’s in the foods we eat. If that’s the case, consumers will tacitly know it before the FDA ever acknowledges it, and respond accordingly.
In other words, the FDA’s new guidelines don’t actually present any real, new, long-term headwinds for PEP and KO.
For better or worse, the guidelines will be out of sight and out of mind in a few days.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
