Soft-Drink Profits May Fizzle Soon

A tasty $66 billion business in which many invest could suddenly find itself taking a pay cut. Mayor Michael Bloomberg of New York City has just asked the U.S. Department of Agriculture to let the city exempt soft drinks from eligible food-stamp purchases. That's certainly not good news for the soft-drink business, but it's no catastrophe, either.

The sodas we love to sip are hardly nourishing, and they contribute to costly obesity problems in the U.S. Proponents of taxing soda ask why taxpayers should subsidize products that lead to diseases, which then require more taxpayer money to treat. Right now, food stamps buy about $4 billion worth of soda annually, according to an editorial in the American Journal of Public Health. If those with food stamps nationwide are not able to use them for soda, the soft drink industry will clearly suffer. Future campaigns may target other sweetened drinks.

Such developments probably won't wipe out a full $4 billion in business, since dedicated drinkers will find other funds with which to buy sodas and sweet drinks. But not everyone has that option for a discretionary purchase.

And another thing …
In addition, various governments are proposing new sales taxes on sodas, in order to generate revenue and contribute to the public health. Last year, the U.S. Senate considered a $0.03-per-beverage sales tax on sugary drinks (including non-carbonated and "energy" drinks, but excluding diet drinks). That hasn't come to pass yet, but given that even a $0.01-per-drink tax would generate $1.5 billion in revenue, we shouldn't assume the idea is gone forever. Indeed, just this year, California considered a $0.01 tax per teaspoon of caloric sweetener (such as sugar) in drinks.

Fizzling sales
Drinkmakers and their investors should remain alert for new laws that might threaten their profits. The idea of taxes on soft drinks is anything but far-fetched; Denmark already taxes them, and in the U.S., so does Washington state.

The stakes are high. For Coca-Cola (NYSE: KO  ) , PepsiCo (NYSE: PEP  ) , and Dr Pepper Snapple (NYSE: DPS  ) , a 3% drop in revenue could cost between $150 million and $300 million. Even smaller players National Beverage (Nasdaq: FIZZ  ) and Hansen Natural (Nasdaq: HANS  ) would see revenue losses in the tens of millions of dollars.

Investors need not despair, though. The potential hurdle of taxes here at home is offset by soft-drink companies' booming possibilities abroad. If you're looking for companies that will dominate the world, try a taste-test of beverage businesses.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Longtime Fool contributor Selena Maranjian owns shares of Coca-Cola and PepsiCo. Hansen Natural is a Motley Fool Rule Breakers selection. Coca-Cola and PepsiCo are Motley Fool Income Investor choices. Motley Fool Options has recommended a diagonal call position on PepsiCo. The Fool owns shares of Coca-Cola, which is also a Motley Fool Inside Value pick. Try any of our investing newsletter services free for 30 days. The Motley Fool is Fools writing for Fools.


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