Coca-Cola’s All-Natural Brands Simply And Vitaminwater Could Face Headwinds Going Forward

Although volumes in the U.S. liquid refreshment beverage market (LRB) remained flat in 2013, The Coca-Cola Company (NYSE:KO) saw 2% volume growth in the country, which constituted 42% of its net revenues last year. This growth mainly reflected the strong showing of Coca-Cola’s still beverage category in the domestic market, with unit sales for this segment rising 9%, while carbonated soft drink (CSD) volumes fell 1%. ^[1] As sodas continue to bear the brunt of growing health concerns, Coca-Cola might depend on its non-sparkling segment to fuel growth in its U.S. business. In the first quarter as well, North America CSD volumes declined 1% while still volumes rose 3% for the company. ^[2] The U.S. still beverage segment constituted just over 6% of net unit sales for Coca-Cola last year. The non-sparkling segment comprises bottled water, juices, energy drinks, sports drinks, and ready-to-drink (RTD) teas. In particular, organic or all-natural brands could spearhead volume growth in beverages for Coca-Cola amid health worries. However, volumes of the juice brand Simply and the bottled water brand Vitaminwater could possibly decline in the coming years, despite being marketed as all-natural, as reasoned in this article.

We estimate a $40.99 price for Coca-Cola, which is roughly in line with the current market price.

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Simply Orange Escapes The Declining Trend In Juices

Coca-Cola’s Simply brand of juice and juice drinks grew 7% in North America last year (94% U.S., 6% Canada), despite the 1.9% decline in the overall fruit beverage segment in the domestic market. ^[3] Even though the high amounts of sugars and calories have dissuaded consumers from juice consumption, especially orange juices, the Simply brand enjoys strong sales as it is marketed as healthier, all-natural, and contains no added sugar or preservatives. In fact, Simply Orange overtook PepsiCo’s Tropicana and even the popular Minute Maid juice brand owned by Coca-Cola to become the leading orange juice drink in the U.S. last year, with retail sales topping $1 billion in the fiscal year ended August. ^[4] The orange juice market generated revenues of $3.45 billion in the U.S. in 2013, with Simply Orange holding 21% market share. However, sales for the juice brand could also follow the declining trends in the overall juice segment, going forward. This comes as orange prices are expected to continue rising in the coming years, and reach as much as $11.38 per box by the end of the decade, almost 19% more than the current market price. ^[5] Fruit-drink manufacturers could pass this rise in costs to consumers, which could see orange juice become more expensive, possibly hindering demand for Simply and the overall juice market.

In addition, Simply also faces a law suit alleging that the juice drink is not 100% natural due to processing. Although Coca-Cola has maintained that its manufacturing practices comply with those laid out by the Food and Drug Administration (FDA), bad publicity could alert consumers against the possible unhealthy consumption of Simply. According to our estimates, fruit beverage volumes could fall by 13% to 1.85 billion gallons by 2018 from 2.133 billion gallons last year. Although Simply volumes grew by a double-digit percentage in North America in the first quarter, health worries and rising orange prices could hamper growth for the juice brand and consequently Coca-Cola, going forward.

New Vitaminwater Faces Consumer Criticism In The U.S.

Bottled water volumes in the U.S. reached 10.12 billion gallons last year, up 4.7% year-over-year, comprising 33.5% of the overall beverage market by our estimates. Last month, Coca-Cola introduced a lower calorie version of its still water brand Glaceau Vitaminwater, which contains a stevia-sugar mix instead of the previously used fructose-sugar combination. This move came as Coca-Cola looks to reduce sugar and calorie content in Vitaminwater, which was hit with a law suit in 2009 for allegedly presenting itself as a healthy drink than it really was. However, following the launch of the lower calorie Vitaminwater, avid consumers took to social media sites and other public forums to complain about the ill-taste of their favored water brand. ^[6]

Within a couple of months of its launch, the stevia-sweetened Vitaminwater has faced widespread criticism, with customers pushing for the return of the old fructose-flavored Vitaminwater. Glaceau Vitaminwater’s market share in the U.S. still bottled water category fell from 9.6% in 2012 to 6.8% in 2013, with dollar sales of $630 million last year. ^{[7] [8]} With falling demand for the revamped Vitaminwater, sales for the water brand could further decline in the U.S. According to our estimates, bottled water volumes could constitute almost 38% of the domestic LRB market by 2018, and overtake the CSD category as the largest beverage segment before the end of this decade. This is mainly because as consumers shift away from sugary sodas, the healthier bottled water segment, especially sparkling water and spritzers, could grab additional market share. However, with negative perception of the new Vitaminwater, Coca-Cola could lose further share in the bottled water market as well as in the overall industry, going forward.

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1. Coca-Cola 10-k [↩]
2. Coca-Cola 10-q [↩]
3. The U.S. liquid refreshment beverage market remained flat in 2013, beveragemarketing.com [↩]
4. Coke’s simply orange escapes US orange juice squeeze, beveragedaily.com [↩]
5. How America fell out of love with orange juice, qz.com [↩]
6. Vitaminwater fans hate the new vitaminwater, June 2014, businessweek.com [↩]
7. Market share of bottled still water brands in the US, statista.com [↩]
8. Sales of still water brands in the U.S., statista.com [↩]