2 Major Threats to This Beverage King

By William Bias - February 28, 2013 | Tickers: KO, DPS, PEP, SODA | 0 Comments

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Reading about Coca-Cola (NYSE: KO) you get the impression that the company stands behind a proverbial fortress and can never come to harm. One of the most recognized brand names in the world Coke is supported by a network of bottler distributorships that make this company quite formidable. However, investors in this beverage king need to pay heed to two major threats.

Health and environmental awareness

Rising awareness of the detrimental effects of carbonated soda and the packages containing them encourages a change in consumer preference. Coca-Cola grew still beverage volume, products that include bottled water, juices, and tea 10% in 2012. Its sparkling beverage volume, products that include Coca-Cola, Sprite, and Fanta, grew only 3% in 2012. In Pepsi’s (NYSE: PEP) Americas division carbonated soda volume declined 1% and non-carbonated soda grew in the “low single digits” in the fourth quarter.

Environmental and health concerns served as catalysts for SodaStream’s (NASDAQ: SODA) stellar results for 2012, with revenue growth of 51%. Fewer calories and recyclable cylinders and containers struck a chord with a populace wanting to preserve their health and the environment they live in.

In the past, part of the advantage afforded to Coca-Cola, Pepsi, and Dr Pepper (NYSE: DPS) rested in the secret recipe vault for their carbonated soda beverages. They gave those products a unique taste that no other company could provide, giving them the ability to charge a premium price customers were willing to pay. Many players compete in the easily duplicable bottled water, juice and tea markets.

Commoditized water and juice demonstrate demand sensitivity to price increases, also known as price elasticity of demand. According to Dr Pepper’s latest earnings announcement, its Mott’s Apple Juice and Hawaiian Punch experienced volume declines of 7% and 17% respectively due to price increases. In the fourth quarter of 2012, Coca-Cola experienced volume decline in its Dasani packaged water category due to preference for cheaper store brands.

In the future, as more consumers show preference for those commoditized beverages, Coca-Cola and its competitors may lose the edge afforded them from their secret recipes. Pepsi, which can lean on its snacks segment to keep it going, might be the exception.

Coca-Cola seeks to educate people on living healthy by promoting exercise and raising awareness of nutritional content in its beverages.

Intensified competition

Upon reading SodaStream’s latest earnings call transcript (log in required) you get the impression that the management of this company means business and is focused on the long term. Its management intends to make this company competitive with Coca-Cola by investing in a distribution network in order to gain pricing and logistics efficiency. SodaStream plans to increase convenience of access by installing its carbonation system into Samsung refrigerators.

Coca-Cola fights tooth and nail with its competitors in emerging markets. In 2012, Coca-Cola grew volume 4% in China. Pepsi also grew beverage volume 10% in Asia, the Middle East, and Africa. Dr Pepper grew volume in Latin America 2%. Revenue doubled for SodaStream in 2012 in the Asia Pacific realm. Wherever Coca-Cola goes its competition is close behind.

Conclusion

In summary, Coca-Cola faces a demand shift away from its unique soda brands and toward the more commoditized water, juice, and tea. Coca-Cola also faces more competition from the newcomer SodaStream. In the future, investment returns for Coca-Cola may prove less than stellar.

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