Are Cola Companies Behaving Like Cigarette Companies In The U.S.?

by Trefis Team
+1.96%
Upside
41.19
Market
42.00
Trefis
KO
Coca Cola
Rate   |   votes   |   Share

The latest report by Beverage Digest, which measures the Carbonated Soft Drinks (CSD) market size in the U.S. points to declining soda consumption in the U.S., in the coming years. Total CSD consumption stood at 9.274 billion cases (192-oz each) in 2011, down 1% from the previous year. In terms of per-capita consumption, the figure decline to 714 eight-ounce servings in 2011, compared to 728 in 2010. Coca-Cola Co (NYSE:KO) and PepsiCo (NYSE:PEP) both lost market share while Dr Pepper Snapple’s (NYSE:DPS) market share remained flat. [1] With volumes of traditional CSDs declining for the seventh consecutive year, soft drink companies have been exhibiting characteristics similar to tobacco companies in the U.S.

Internationally (especially in developing countries), however, it is a different story altogether as consumption per capita is low, regulations are lax and there isn’t enough consumer awareness regarding health repercussions due to excessive soda consumption. So, there is plenty of scope to expand in terms of cola consumption.

1) Lower Volumes, Higher Retail

Tobacco companies have come to accept that the cigarette volumes are going to decline in the U.S. and hence are left with no option but to increase the prices periodically to make up for declining volumes. The major tobacco companies increased the prices of their cigarettes twice in 2011. Although cola companies cannot afford to increase the prices as aggressively as tobacco companies since colas are not nearly as addictive as cigarettes, the value of retail sales has been creeping up in spite of declining cola volumes. Total retail sales of CSDs rose 2% to $75.7 billion in 2011 from the previous year. Similarly, retail sales increased 0.4% over the previous year in 2010. The increasing retail sales can be partially attributed to aggressive promotion of energy drinks which usually have a higher retail price than traditional colas. [1]

This fact highlights how the strategies of cola companies have evolved over the years. Instead of playing the volumes game, cola companies are promoting drinks which have higher margins. The trade-off between volumes and prices is often a tricky one to solve. However, if on reducing the prices, there isn’t enough sufficient volume growth, then it makes sense for the companies to increase the prices periodically.

2) Promoting Alternatives

Cigarette companies are increasingly looking for alternatives such as smokeless tobacco products for future growth. These are usually perceived to be less harmful than smokeless tobacco products and thus attract lower excise duty. Similarly, cola companies have been aggressively promoting non-carbonated drinks such as juices, Ready-to-Drink (RTD) teas, water mixers etc. The overall LRB (Liquid Refreshment Beverage) size which combines CSDs as well Non-CSDs grew 0.8% in 2011. Coca Cola Co is investing $99 million in its Auburndale plant in 2012 to expand production of its ‘Simply’ brand of products. Similarly, PepsiCo along with Germany’s Theo Müller Gmbh are investing more than $200 million to enter the U.S. dairy market.

3) Fighting Legislation

In a recent article, we talked about how cola companies spend a great deal on lobbying to ensure any proposed soda taxes that could adversely affect their business are killed off. As per recent estimates, PepsiCo and Coca-Cola Co and the American Beverage Association have spent a staggering $70 million on lobbying.

Similarly, tobacco companies are estimated to having spend $16 million on lobbying in 2011. [2] Tobacco companies are also targets of multiple litigation simultaneously. Part of the reason why these industries attract high taxation is because the fiscal deficit of the government is in a mess and imposing taxes on these industries ensures higher revenue collection in the name of political mileage.

Cola companies won’t be hesitant to increase prices periodically (although certainly not as aggressively as cigarette companies) especially since the cost of sales continues to rise. Soft drink companies will also continue to innovate/launch new products to lure customers to increase consumption.

Understand How a Company’s Products Impact its Stock Price at Trefis

Notes:
  1. Beverage  Digest, March 20, 2012 [] []
  2. opensecrets.org []
Rate   |   votes   |   Share

Comments

Name (Required)
Email (Required, but never displayed)
Be the first to comment!