Bloomberg Goes After Big Sodas In NY, Consumers And Soft Drink Co’s. To Fight Back

If New York’s mayor Michael Bloomberg had his way, restaurant chains would no longer be able to serve soft drinks over 16 ounces. However, this is not the first time the soft drink companies are faced with such proposals, and we expect them to fight back.

Soft drink companies, including Coca-Cola Co (NYSE:KO), along with restaurant chains like McDonald’s Corporation (NYSE:MCD) have publicly criticized the proposal claiming that it takes New Yorkers away of their freedom. Moreover, they claim that soft drinks are not solely responsible for rising obesity levels in the city, and neither would such a move help reduce obesity rates. On the brighter side, the proposed limit will not apply to diet sodas, fruit juices, dairy-based drinks or alcoholic beverages. ^[1]

We estimate a $76 price for Coca-Cola, which is slightly above the current market price.

See our full analysis for Coca-Cola

Harsh Regulatory Environment

Domestically and internationally, soft drink and fast food companies are facing a harsh regulatory environment. France approved the soda tax last year (effective January 1, 2012) which will impose a tariff of about 1 Euro per container, in an effort to reduce obesity levels. In 2011, Hungary passed a legislation which imposed a fat tax on items with high fat, salt and sugar contents. Recently, the Canadian Beverage Association made it mandatory for the soft drinks companies to clearly spell out how many calories are present in the beverage on the front of the packaging (i.e. following on the U.S.’s ‘Clear on Calories’ guidelines).

Taxing the soft drink companies is an easy source of revenue at a time when the budget deficits of most governments are crumbling. The governments argue that obesity related diseases amount to a huge economic burden on the government-funded healthcare and, hence, they have every right to tax the soda companies or pass legislation which can reduce soda consumption.

On the other hand, soft drink makers claim they are made the scapegoats of rising obesity rates in developed countries. Soft drink consumption is already on a decline in the U.S. The total consumption stood at 9.27 billion cases  in 2011, down 1% from 2010. ^[2]

Soft Drink Companies Fight Back

Soft drink manufacturers are introducing new variants of their products with lower calorie content. Dr Pepper Snapple launched a mid-calorie variant of its flagship drink Dr Pepper TEN in the last quarter of 2011, which contains only 10 calories. Similarly, PepsiCo launched Pepsi Next this year which has had good initial response, according to the company. Even Coca-Cola is currently testing mid-calorie variants of Sprite and Fanta in the U.S. The company also launched stevia versions of its beverages Sprite and Nestea in France this year. Stevia is a natural, low calorie sweetener made from the stevia plant, a herb native to parts of South America.

And it’s just not through new products/variants that soft drink companies plan to address these issues. The companies spend a great deal on lobbying to ensure legislation aimed at reducing soft drink consumption are never passed in the first place. According to one estimate, PepsiCo and Coca-Cola Co and the American Beverage Association have spent as much as $70 million on lobbying since 2009. ^[3] For instance, Hawaii lawmakers killed a proposed soda tax that would have burdened the consumers with an additional 17 cents on a single-serve bottle earlier in the year. Similar attempts to enact such levies have failed in 30 other states. ^[3]

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

1. Revealed: The shocking amount of sugar in fizzy drinks as New York restaurants face $200 FINE for selling super-size sodas, dailymail.co.uk, May31, 2012 [↩]
2. Beverage Digest 2011 [↩]
3. Anti-Obesity Soda Tax Fails as Lobbyists Spend Millions: Retail, Businessweek.com, March 13, 2012 [↩] [↩]