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Investor focused on the technology sector.
  • As Domestic Sales Of Soda Fall, Beverage Companies Adapt To A Changing Market 0 comments
    Jan 22, 2013 3:11 AM | about stocks: PEP, KO

    Soda consumption in the US is on the decline. More than ever people are opting for healthier alternatives to soft drinks, spurred on by a government initiative to put excess sugar consumption in the public's eye. Beverage titans Coca-Cola(NYSE:KO) and PepsiCo. (NYSE:PEP) have been forced to deal with slipping soda intake in the United States for eight years, and there is no sign that the trend is going to reverse itself. As preferences for drinks have continued to shift, beverage companies are entering new markets and buying up niche brands in order to diversify themselves and keep revenues steady.

    Soda is a universal treat. Seeing somebody enjoy a nice bottle of pop is as common a sight as there can be here in America. The numbers, however, tell a different story: Americans are getting away from calorie-laden soft drinks. Beverage Digest has published data that reveals soft drink sales volumes have declined every year since 2005; present day sales are about 11% lower than they were. Soda consumption also declined twice as quickly in 2011 than in 2012. This decline in sales will be bolstered by the fact that soda companies have had to raise prices for their products in line with rising commodity costs. Soft drinks are highly price elastic; as the price goes up, people stop buying. It is evident that soda is on the way out, but what does this mean for the corporations that are selling it?

    Soft-drink sellers are very conscious of these trends. While they have spent money fighting it with their own campaigns, they are also hedging themselves by beginning to offer a larger variety of drinks. The name of the game has become diversification: Coca-Cola sells Nestea, Powerade, Zico, and Dasani, while PepsiCo has Tropicana, Aquafina, and Gatorade. Dr. Pepper Snapple Group continues to be a strong player with ready-to-drink tea offerings. As people get away from soda, they begin purchasing the alternatives, which happen to be owned by the same companies.

    Seeing the big picture eliminates any need to worry about the fate of the beverage titans. While soda sales in the US may be falling at a steady rate, Coca-Cola sold 12% more soda in India and China during 2011, as well as growing the Dasani brand heavily domestically. Coca-Cola makes about 60% of its revenue abroad; PepsiCo claims about 50%. These numbers will only get higher as time goes on, as countries with developing economies get exposed to the delicious concoctions that we have been enjoying in the States for decades. Coca-Cola has also ventured into dairy, buying up a portion of recovery shake maker Core Power. These brands are well-situated to diversify and expand, and are keeping a finger on the pulse of consumer preference at all times. The decline of soda drinking here in the United States will not hamper profits as Coca-Cola and PepsiCo continue to expand their offerings abroad and domestically.

    Disclosure: I am long KO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Themes: long-ideas Stocks: PEP, KO
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