Are U.S. Dieters Losing Faith in Diet Coke?

The Coca-Cola Company (NYSE:KO), which competes with PepsiCo (NYSE:PEP) and Dr Pepper Snapple Group (NYSE:DPS) in the beverage market, is the world’s largest manufacturer, distributor, and marketer of non-alcoholic beverage concentrates and syrups.

Coca-Cola’s Diet Coke has become one of the top selling CSD (carbonated soft drink) brands in the U.S. Diet Coke succeeded among health-conscious consumers due its sugar-free content and healthy appeal. We estimate that Diet Coke constitutes about 17% of Coca-Cola’s stock price.

In recent years, however, Diet Coke sales have declined while its market share growth has flattened.  Diet Coke actually lost market share in 2009. Here are the major contributing factors in Diet Coke’s decline:

Cannibalization from Coke Zero

Coca Cola has been marketing the relatively new Coke Zero as an even healthier alternative to Diet Coke, claiming that it has absolutely no calories and hence no fattening effect. Coke Zero has been gaining traction in recent years. We believe that a substantial portion of Coke Zero customers are coming from Diet Coke. In 2008, when Diet Coke sales declined by approximately 3%, Coke Zero registered a torrid 36% growth rate.

Smaller manufacturers gaining share

In 2009,  Coca-Cola and PepsiCo experienced 3.9% and 5% declines respectively, in sales volume of CSDs. By contrast, smaller players saw growth in sales volume. Specifically, Dr Pepper Snapple, Cott Corp. (NYSE:COT) and National Beverage Corp. (NAS:FIZZ) experienced CSD sales growth of 4.8%, 3% and 2.7% respectively. Hansen Natural and Big Red posted even higher sales growth, at 11% and 12% respectively. These figures show that smaller CSD companies are challenging the market leaders and gaining share.

Increasing health consciousness affecting overall consumer perception towards CSDs

Non-carbonated beverages like sports drinks, energy drinks, fruit juices, enhanced water and ready-to-drink coffee have witnessed significant sales growth of late. Diet Coke’s value proposition is based on its minimal health impact.  By contrast, these non-carbonated beverages claim to provide additional nutritional value, which differentiates them from Diet Coke and its peers.

You can adjust our forecast in the chart below to see how Diet Coke’s U.S. market share impacts Coca-Cola’s stock price.

You can see our complete $56.45 price estimate for The Coca-Cola Company’s stock here