Beverage Giants: Adapting To Social Trends Is Key
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Every so often a stock comes along that explodes onto the market and then quickly fades away. In the soft drink world these days, it looks like this has happened, and unless the company can learn to keep up with social and market changes, I feel like it might start losing its value very soon. In this article, I will examine how the same trends are affecting this shaky stock’s three main competitors and why I expect them to do better in the long run.
With consumers tending towards healthier foods and drink, it is worth examining how this has affected companies in the soft drink industry, especially the big names like Pepsico (NYSE: PEP) and Coca-Cola Company (NYSE: KO). As for energy drinks, some of the most common search terms on the topic include “energy drink health risks” and “energy drink side effects.” To me, this says that companies like Monster Beverage (NASDAQ: MNST) could be looking at trouble in the near future.
For Pepsi and Coca-Cola, a portion of the soft drink market could be turning back in their favor as reports emerge that sugary foods are worse for kids than sugary soft drinks. In the past, both Pepsi and Coca-Cola have countered the concern over sugar content by producing diet or sugar-free options. However, I expect some people to be turning back to the regular version of their drinks, because other studies have shown that the supposedly healthier variety of soft drink can actually lead to serious health risks, including Type 2 diabetes, heart attacks, and high blood pressure. Perhaps in response to these results, Coca-Cola has created a heart logo on its diet Coke cans and bottles with the slogan “Heart Health Goes Better with Diet Coke” in order to attract customers who might be worried about the health ramifications of consuming the company’s drinks.
Still, the company sells products in 200 different countries, so news of health risks linked to soft drinks might not reach some areas. Four of Coca-Cola’s brands remain in the top five beverages in terms of revenue, and it markets over 450 brands in total. Annual net operating revenue for 2011 was $46.54 billion, and the company recently moved up two spots to number 4 on Fortune magazine's Top 50 list of most admired companies, in spite of the social costs many associate with it. With so much working in its favor, it is hard for me to imagine that anything could touch this corporate giant. Even the light shed on unflattering relations between corporations and private security firms might not have much effect on profits; Coca-Cola’s footing is just that strong, in my opinion.
Last fall, Coca-Cola began a global marketing campaign for NESTEA which linked the product to personal exploration and adventure, a hot topic in marketing these days. Pepsi also seems to know how to expand its market by responding directly to consumer concerns. Its new product Pepsi Next will contain half the calories of regular Pepsi but taste different from the diet version. This drink has been created to satisfy those who prefer the test of regular Pepsi but are concerned about weight gain or other aspects of their health.
I think this is a smart move for the company to remain competitive. However, in some markets, Pepsi seems to be taking absurd risks in its marketing strategies. Unlike Coca-Cola’s NESTEA ads which speak to current social trends, Pepsi commercials in India have swung away from cricket to center on football. I find it difficult to understand the logic behind this deviation from consumer culture, but it could be a gamble based on solid trend research. I believe that Pepsi has the know-how to anticipate where trends will go, and even to influence consumer habits, so this could be a very legitimate way to gain attention by focusing on something unusual.
Both Pepsi and Coca-Cola remain strong, in my opinion, and I expect them to remain viable well into the future as they both expand their product bases and adapt to consumer preferences. But smaller companies like Dr Pepper Snapple (NYSE: DPS) are also being affected by social trends. This stock is also doing well, and share price has remained quite stable over the past two years, which indicates to me that the company knows how to handle its finances.
In my mind, stability shows that investors have the same confidence in Dr Pepper Snapple as they did two years ago, which makes me think that there have been no major mishaps or reasons for distrust. Moreover, there has been a significant increase in stock value, but it has been so gradual as to pass under the radar of many analysts. The company’s products remain popular enough for universities to continue their exclusive vending contracts with Dr. Pepper Snapple, and 2011 fourth quarter profits increased a full 48%, in spite of predictions being lower than that. Sales were down, but the company raised prices to compensate for this state of affairs, and also for the rising costs of packaging materials.
Pepsi, Coca-Cola, and Dr Pepper Snapple are all back on an upswing, but Monster’s seems like it never stopped going up in the first place. Shares have gone up about $50 since the 2008 crash, and the trend has been mostly consistent.
However, news of localized energy drinks branded as healthier alternatives to big names like Monster makes me wonder how much longer Monster can keep up its growth. I believe that the new drinks play on the social trend I mentioned earlier, that is, a desire for healthier products, as well as the growing focus on buying local. Unless Monster can adapt quickly to a changing market, like Pepsi and Coca-Cola, I am not sure it will be able to compete effectively against newcomers who seem to understand better what consumers are looking for.
A sign to me that the company is slipping comes from its Q4 report, which revealed that earnings per share did not meet Monster’s predictions, although GAAP earnings per share did increase over the 2010 fourth quarter. The only edge Monster seems to have, in my view, is the fact that it does not resort to mainstream advertising, so potential consumers consider it more genuine and authentic. These are also traits highly valued by current culture, so the company clearly hasn’t completely missed the boat.
Still, I think that Monster’s heyday is over. For investors, I think now is a good time to sell off your shares for maximum profits before its bubble collapses in on itself. As for Pepsi, Coca-Cola, and Dr. Pepper Snapple, I expect these stocks to stay valuable for a while to come.
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