Can This New Soda End a Sugar Slump?

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Coca-Cola (NYSE: KO) announced its intention of rolling out a new drink named Coca-Cola Life, which will use a combination of sugar and Stevia to lower calorie count and make soda healthier.

Coke’s move follows concerns that the traditional drinks business may be fizzing out. PepsiCo (NYSE: PEP) has released Pepsi Next and Pepsi Max in an attempt to bring back customers who want health alongside their bubbly soda.

What’s wrong in the soda business

U.S. soda consumption is in what some are calling a secular decline. In 2012, Americans drank less soda than the year before, cutting back by 1.2% from the previous year. Soda consumption has dropped for eight straight years, and rests now at the lowest level since 1987, according to CNBC.

The few growth markets are difficult to tap. Bottled water and energy drinks, like those produced by publicly-traded Monster Beverage, are the fastest growing drinks in the developed world. Coca-Cola was rumored to have an interest in acquiring Monster to grab its impressive, double-digit growth, though no acquisition ever came through. As Monster grows, the synergies and cost savings from a large acquisition are slowly eroded. It now appears that Monster will remain its own brand throughout its growth phase.

That leads Coca-Cola to turn to a new market. The company believes that a Coca-Cola Life product, which will have fewer calories but offer the sweetness of Coca-Cola, will bring back customers who are running to soda alternatives. The cola will replicate a popular choice at self-service machines: a mix of diet and regular to get the taste consumers want without the calories they don’t.

It’s much better to keep your existing customers than find new markets. Industry analysts believe that once consumers make the switch from sodas to alternatives, they rarely, if ever, come back. That explains why Coca-Cola and PepsiCo have expanded into new bottled waters, fruit drinks, and non-carbonated supplement waters like Vitamin Water.

If the soda duopoly loses soda consumers, then the two major players should have an alternative to keep them customers of their brand.

Should Coca-Cola and PepsiCo fear losing customers for life?

Not exactly.

What Coca-Cola and Pepsi have is a duopoly on distribution. The two rivals have their own stable of soft drinks and bottled beverages which you can find on every supermarket shelf, in every restaurant, and in vending stores in millions of buildings around the world. They have the market in their firm grasp.

The only challenger to the duopoly in distribution is fast-growing SodaStream (NASDAQ: SODA), which sells soda-making devices and flavor cartridges to make fresh soda at your home or in the office. SodaStream still lacks the widespread distribution of Coca-Cola and Pepsi products, but it does have an added health advantage: you can make your soda as flavorful and as healthy as you want with one of its countertop devices.

SodaStream has lured some users at the margin, but it has yet to grab a hold of big restaurant chains or vending distribution, which are vital methods for staying in the customers’ mind. Plus, the company lacks the brand power inherent in the centuries-old brands of Coke and Pepsi.

For now, Coca-Cola and PepsiCo are safe. Consumers want convenience and health, not just health or not just convenience. Furthermore, the two brands have ample pricing power, which can be seen by the fact that soda prices are rising much faster than soda consumption is declining.

Whether the future drink is soda or some new crazy water cocktail, world citizens will still need 64 ounces of fluids each day. Luckily for Coca-Cola and Pepsi, the distribution systems around the world are set up to sell their stuff.

At 17 times forward earnings, investors are not overpaying for a quality, leading company like Coca-Cola. But, if snacks, not just sodas, are more your fancy, you may favor PepsiCo’s diversified model, which investors let go for a discount at 16 times forward earnings expectations.

New products will help keep these brands on the top of their game, but their distribution power cements them at the top, no matter what people drink.

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Jordan Wathen has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, PepsiCo, and SodaStream. The Motley Fool owns shares of PepsiCo and SodaStream. 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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