Coke Faces Lawsuit Over Vitaminwater Claims

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Coca-Cola (NYSE: KO) must be breathing a sigh of relief after learning that a suit brought against its Vitaminwater brand for deceptive labeling will not be subject to financial damages. Consumers in California and New York, along with attorneys for health advocacy group Center for Science in the Public Interest, filed the class action suit. The claim states that Vitaminwater deceptively advertises that consuming the beverage reduces the risks of eye disease, boosts the immune system, and promotes healthy joints. The plaintiffs argue that they were misled to believe that Vitaminwater was healthier than other beverages.

No monetary damages

The courts decided the parties to the suit couldn’t seek monetary damages, only injunctive relief where Coca-Cola would not be allowed to make certain claims about Vitaminwater. If the claim wins in court, it would still be bad news for Coca-Cola despite the good news that a company payout isn’t required. Losing the suit would make the company lose credibility among consumers who are looking for healthier options to soft drinks. Soft drinks have become a popular example of a product containing excess sugar or worse, artificial sweeteners. Health experts have attributed excess sugar as one of the causes of obesity and other health problems such as diabetes. As a result, consumers have been replacing soda with other drinks.

Dwindling soft drink sales

This year marked the eighth straight year of falling soft drink sales and posted the biggest annual drop in sales since 2009. According to Beverage Digest, part of the decline is due to consumers seeking healthier options such as bottled water. Water sales grew in 2012 over 2011.

Coca-Cola gained a global sales volume of 1% in the second quarter, which was below company expectations. The company remains confident in the results for the remainder of the year as it focuses on delivering “the brands and beverages that consumers love.” In the long-term, this will probably mean other options besides soda, especially for the U.S. consumer. In comparison, Coke’s worldwide beverage volume rose 6% in the quarter and year-to-date. This was due to solid volume and growth in certain areas such as packaged water, juices and juice drinks, and ready-to-drink tea.

Rival PepsiCo (NYSE: PEP) reported higher-than-expected second quarter earnings due to higher prices and better productivity. The company's bottom line also received help from a lower tax rate and a $137 million gain related to refranchising its Vietnamese bottling operations. PepsiCo is also dealing with weak soft drink sales, especially in North America and Europe. The company reported second quarter net income of $2.01 billion, or $1.28 per share, versus $1.49 billion, or $0.94 per share in 2012. The company stood by its earnings growth outlook for 2013 of 7%.

Dr. Pepper Snapple’s declining soda sales offset by other drinks

Part of the decline in soft drink sales is also related to the variety of new drinks available in the market such as energy drinks, bottled waters, juices, and teas. These new options have turned consumer attention away from soda. For example, Dr Pepper Snapple Group’s (NYSE: DPS) second quarter results showed a decline of 3% in soda sales with decreases in volume across most of its brands – Dr. Pepper, 7UP, Crush, Sun Drop, and Squirt. The decline was offset by mid-single digit increases in Canada Dry and Penafiel, a fruit-flavored mineral water. The company’s non-carbonated drink sales dropped 2%, affected by a 7% volume decline in Hawaiian Punch and offset by increases in Snapple (4%) and Mott’s (2%).

My foolish conclusion

If Coke is required to make changes to the health claims surrounding Vitaminwater, the product may end up being perceived as no healthier than a soft drink with a higher price tag. This could put additional scrutiny on claims regarding any future products by Coca-Cola and its rivals, even as they work on giving consumers other beverage options besides soda.

While the three soda makers have projected five-year growth rates ranging between 7% and 8%, it’s reasonable to expect soda sales to continue to fall over the long-term. Its uncertain whether the creation of a new sweetener, and the health implications surrounding it, could bring consumers back to soft drinks. PepsiCo has a better opportunity of maintaining revenues with its snack food business over the long term, something that Coca-Cola and Dr Pepper Snapple lack.

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Eileen Rojas has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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