A global leader in the beverage industry, The Coca-Cola Company (NYSE:KO) has seen its shares decline by nearly 10% since the end of last year. This decrease reflects how Coca-Cola’s business has been impacted by headwinds in the core carbonated soft drinks (CSD) segment. CSDs contribute over two-thirds to the company’s top line, with around 20% of the CSD sales coming from the U.S. alone by our estimates. We expect sales of the traditional colas in the domestic market to increase by 17% by the end of this decade. Despite factoring in inflation, this might seem like an overly optimistic estimate seeing how the cola segment and the overall CSD market in the U.S. declined for the ninth consecutive year in 2013. Sugary drinks are considered one of the main culprits for obesity in the country, where more than one in three people are obese.  In a bid to combat health problems, states such as California and Illinois now look to impose taxes on CSDs.
However, CSDs still account for 44% of the U.S. liquid refreshment beverage (LRB) market by our estimates, with 160 liters per person consumed in 2013. Even though sugary drinks continue to lose consumers to other beverage segments such as energy drinks, carbonated water and natural juice drinks, successful diet variants and new consumption platforms owing to the Keurig deal could spur sales of CSDs in the coming years. We estimate a $41.2 price for Coca-Cola, which is around 10% above the current market price.
Coca-Cola And Keurig Could Revolutionize Soda Consumption
Coca-Cola bought around 16.7 million shares of Green Mountain Coffee Roasters (NASDAQ:GMCR) for ~$75 apiece, thereby buying a 10% stake in the company for $1.25 billion.  Green Mountain owns Keurig, which has already revolutionized the coffee industry by introducing single-serve pods compatible with their brewers. Partnering with Keurig, Coca-Cola is now pioneering the move to introduce single-serve pods for cold beverages, which will be compatible with the Keurig Cold system. This move might not bring consumers back to CSDs, but could raise sales for Coca-Cola’s fizzy drinks by increasing the consumption rate of its avid customers. Keurig Cold systems along with packaged flavors are expected to be on sale by the beginning of Green Mountain’s fiscal 2015, which starts later this year. The reasons why we expect Coca-Cola to gain from this deal are discussed below:
- Convenience Associated With Keurig Systems
- Coca-Cola Earnings Review: Carbonates Drag Down Results Yet Again
- Coca-Cola Earnings Preview: Macroeconomic Headwinds And Structural Changes To Impact Results
- Why Do Sodas Form 73% Of The Net Volume For Coca-Cola But Just Over 60% Its Value?
- How The Stronger Dollar Eroded Coca-Cola’s 2015 Results
- Where Will Coca-Cola’s Revenue And Gross Profit Growth Come From Over The Next Three Years?
- Contribution Of U.S. Soda Sales In Coca-Cola’s Overall Revenue Could Decline To Less Than 15% By 2020
Coca-Cola will hope to increase consumption of its trademark sugary drinks due to the ease of preparing these popular and valued drinks by just pushing a button. Keurig Cold systems are at-home preparation machines that will use Coca-Cola’s flavor packs. These compact flavor sachets will be easier to purchase as compared to bottles and cans. This might result in a larger quantity purchase by consumers and thus increase sales of CSDs.
- Booming SodaStream Business Might Be A Benchmark
Coca-Cola and Green Mountain will now be a direct competitor of SodaStream, which manufactures home beverage carbonation systems along with carbon dioxide refills and flavors added to carbonated water. SodaStream’s revenues increased by nearly 30% in 2013 to $562 million, with consumables (including flavor pods) contributing over $300 million by our estimates.   The company’s top line has more than doubled since 2010, with 30% of the sales coming from the U.S. in 2012. According to our estimates, SodaStream sold nearly 1.15 million soda makers in the U.S. in 2012 alone. This establishes how consumers in the domestic market are keen on buying convenient at-home preparation systems.
- Consumers Might Prefer Coca-Cola To Lesser Known Soda Mixes
Unlike the SodaStream systems that use carbon dioxide cylinders and allow customization of fizzy drinks, Keurig Cold systems will use precisely formulated single-serve pods to prepare the familiar tasting and valued Coca-Cola soft drinks. Keurig systems aim to relegate refilling of carbon dioxide cylinders, and also provide a quicker, cleaner and precise creation process.
SodaStream doesn’t have a strong CSD partner, even though it has popular beverage partners such as Kool-Aid, Crystal Light, Welch, Ocean Spray and Country Time Lemonade. The company’s cola flavored sachets just say “soda mix” on the side, and could be less preferred to the valued soda offerings of the beverage giant Coca-Cola. Therefore, Coca-Cola might be able to nab some market share from SodaStream. ((“SodaStream’s new mainstream rivals: Coke and Green Mountain“, February 2014, businessweek.com))
Stevia-Sweetened Coca-Cola Life Could Revive Ailing Diet Soda Sales
Despite weak economic conditions in Argentina, the company’s flagship diet cola drink Coca-Cola Life caused a 7% rise in beverage volumes in the country. Sold in green colored labels, Coca-Cola Life uses stevia, which is considered safer as compared to the artificial sweetener aspartame, used in most diet sodas. The company plans to introduce this drink in the domestic market this year to spur sales of CSDs, which saw a 1.42% decline in volumes in convenience stores last year. ((“CSD sales down 1.4% in c-stores in 2013“, February 2014, cspnet.com))
Coca-Cola’s chief competitors PepsiCo (NYSE:PEP) and Dr Pepper Snapple (NYSE:DPS) plan to introduce their own stevia-sweetened cola drinks this year. While PepsiCo has filed a patent application for the commercial use of Reb D in its sodas, Dr. Pepper plans to launch naturally sweetened 60 calorie versions of some of its brands this year. PepsiCo was the first to bring in a stevia drink when it launched Pepsi Next in Australia in 2012. However, this drink has received only mild success in the country and is yet to be launched in the U.S. The Pepsi Next version launched in the U.S. contains three artificial sweeteners, including aspartame. Stevia has not been commercialized in the country as yet, and could be introduced with Coke Life this year. Diet sodas were the worst performing category of the U.S. LRB market last year with retail sales falling by 6.8% through November.  Coca-Cola might be able to bring the momentum in Argentina back to the domestic market and help uplift sales of diet drinks.Notes: