An Increasingly Taxing Environment for Big Soda

In this Industry Focus: Consumer Goods segment, Motley Fool analysts Asit Sharma and Vincent Shen give investors a quick overview of the enormous market for sweetened carbonated beverages. And with soda's massive popularity, they discuss the growing headwinds the industry faces as municipalities move to tax the flagship brands of Coca-Cola (KO -0.24%)and PepsiCo (PEP -0.68%).

A full transcript follows the video. 

This podcast was recorded on July 19, 2016. 

Vincent Shen: On tap for this episode we have -- what I like to think of -- an industry in transition. On the one hand this has really surprised me how high this number is, I would bet every person listening to this show, probably nearly everyone or most people in the country for that matter has at one point enjoyed this product. For 2015 per capital consumption in the U.S. came in at more than 41 gallons for the year or over 14 ounces per day, that's everyday, 365 days.  

On the flip side those numbers represent the lowest for the industry in terms of consumption since 1985 and they also marked the eleventh straight year of sales declines. For the listeners, if you haven't guessed it already, we're actually talking about soda. Also might call it pop or coke depending on which region of the country you're from -- ultimately, carbonated soft drinks, if you want to go with the more technical term.  

The industry has given us some of the most iconic companies and brands I think in the business world. Multiple generations of really weaving this product into our everyday lives, but some health risks have obviously made soda not quite so popular among many consumers. Some people see that as a real long-term challenge. Today Asit, I just want to talk about the industry. What's been going on there recently, the past few years, some of the challenges they face in addition to the health concerns? If you want to just dive right into it.  

Asit Sharma: Sure. Well, let's start with the health concerns, because that's driving the rest of the business for both Coke and Pepsi, the main two companies that we'll talk about today. As you mentioned, what caught my eye earlier this year was Beverage Digest had their -- they do a study every year and they reported that soda volumes, as you mentioned, have declined for 11 straight years. They hit that 30-year low in 2015.  

Well, many of our listeners hold Coke and Pepsi, and those stocks have done relatively well over the last 10, 11-year time frame, so obviously both companies have combated this trend. How they're doing it, they take different approaches. Really fast forward to what the issues on the table are for them today, what we're seeing in 2016, the biggest one out there is taxation.  

Those of you that live in New York remember Michael Bloomberg tried to have big sodas or giant sized servings taxed in New York City. That didn't quite go through, but it started a movement, and he's participated. He's funded some groups which have now lobbied for in various municipalities these soda taxes. Last month, we saw Philadelphia pass a pretty big tax. It's 1.5 cents per ounce on regular and diet sodas in June.

What that means is for a 16-ounce Coke which sells, let's say for $1.15, you're seeing a 22% surcharge on that drink. That's an enormous tax. It's an enormous hurdle for a company to overcome. One of the things we'll be talking about today is how strategically, as this multi-national conglomerate, whether you're Coke -- who's all beverages -- or PepsiCo -- snacks and beverages -- how you combat what is potentially a wave of taxation.  

I'll just mention really quickly Denver, Colorado, San Francisco are also entertaining about measures similar to the one that passed in Philadelphia. These aren't small cities. In addition, the entire country of South Africa is now looking at a soda tax which is a pretty vibrant emerging market for both of these companies.