Is Coca-Cola the New Philip Morris?

The war against Coca-Cola (NYSE: KO  ) , PepsiCo (NYSE: PEP  ) , and other soft drink companies is starting to look a lot like the war against Philip Morris (now Altria Group (NYSE: MO  ) ) and Big Tobacco.

Study after study comes out warning about the health risks posed by soft drinks, but Big Soda is fighting back. The American Heart Association published an abstract of a study that links sugar-sweetened beverages to 180,000 deaths worldwide each year. The American Beverage Association fiercely contested the study, arguing that the abstract "is not peer-reviewed nor published in any way where its methodology can be fully evaluated. [It] is more about sensationalism than science."

Coca-Cola and PepsiCo face Philip Morris-like tax
No matter which side is correct -- and both sides are probably overstating their respective cases -- public sentiment is clearly turning against Coca-Cola and PepsiCo. According to a 2011 article in Time magazine, "nearly 20 states and cities are now considering soda taxes, and a long list of international health organizations have called for reduced soda consumption."

A recent proposal for a soda tax in San Francisco seems eerily similar to taxes levied against Philip Morris. The proposal calls for an $0.02 per ounce tax on sugary beverages -- essentially an $0.24 tax on the typical 12-ounce soda can. The tax would reduce soda consumption and fund public awareness campaigns to encourage healthier behavior.

The tobacco tax works in the same way, with proceeds from the tax going to fund anti-smoking campaigns and other government programs. It seems as though all levels of government have become addicted to raising excise taxes. According to Philip Morris, 55% of the sales price of a pack of Marlboro cigarettes goes into the pockets of federal, state, and local governments. A decade or two from now, the same tax may be due on a can of Coca-Cola.

Philip Morris diversified like PepsiCo, then undiversified like Coca-Cola
Amid a growing list of states adding excise taxes on tobacco, Philip Morris began to diversify its operations through a string of acquisitions. In the 1980s, it acquired two companies that eventually became Kraft Foods. Altria, Philip Morris USA's parent company, has since spun off the Kraft Foods unit and again almost completely relies on the tobacco industry.

PepsiCo is in a position similar to that of Philip Morris in the 80's and 90's. The company has the second-largest share of the much-maligned soft drink market, behind only Coca-Cola. However, PepsiCo also owns Frito-Lay, the largest salty snacks company in the world. According to Morningstar, Frito Lay has a 40% share of the global salty snacks market; it is essentially the Coca-Cola of snack foods. This provides PepsiCo with a wide-moat company that makes it less dependent on the uncertain soft drink industry -- not unlike Philip Morris's diversification with Kraft.

Coca-Cola, on the other hand, is completely at the mercy of sugary beverages. Even so, international unit case volume represented 81% of Coca-Cola's total unit case volume in 2012. The company's geographic diversification buys it some time because rhetoric against soft drinks is most heated in the United States. However, if the current direction of worldwide public opinion persists, Coca-Cola's core offering will soon be slapped with burdensome excise taxes.

Not all is lost, however, even if Coca-Cola refuses to expedite the diversification of its offering into healthier beverages. After spinning off its food division, Altria again relies on a hated product -- tobacco -- and it is as profitable as ever. Despite the harsh laws and regulation in the industry, Altria's market position enables it to earn a high-30s operating margin and a mid-to-high-teens return on invested capital, according to Morningstar data. The same could be true for Coca-Cola; the world market leader is in a much better position to handle burdensome taxation than its smaller competitors, possibly leading to increased market share and maintaining its profitability.

Bottom line
Changes are coming in the soft drink industry and they look a lot like the changes made to the tobacco industry many decades ago. The changes will hurt the soft drink industry overall -- and Coca-Cola would be wise to continue diversifying its line-up of drinks into healthier options -- but Altria's success in a heavily taxed industry suggests that Coca-Cola may not be in a such terrible position after all.

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Read/Post Comments (4) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 01, 2013, at 9:59 PM, krako99 wrote:

    Let those who think that soda is good for you drink more of it. We need more 500 lbs diabetics in this world.

  • Report this Comment On December 02, 2013, at 4:49 PM, maureenaba wrote:

    You cannot compare sugar-sweetened beverages to tobacco - the two aren't even in the same universe.

    All sugar-sweetened beverages on the market today are 100% safe for consumption. And with respect to the abstract cited in this article, the real causes of death were chronic diseases (such as cardiovascular disease, cancer, and diabetes) none of which are uniquely caused by soda or any other sweetened beverage.

    And if you plan on writing about "soda taxes" in the future, please let us know- we'd love to talk. These taxes continue to be rejected by voters by wide margins across the country (cities of Richmond and El Monte California in 2012, Telluride Colorado in 2013) and are gaining zero traction in polls (http://health.usnews.com/health-news/news/articles/2013/04/2.... And studies (like this one from Oxford: http://ajae.oxfordjournals.org) show they aren't even effective.

    The fact is that the public policy debate is moving on to real solutions to obesity, which is rising even as regular soda sales have declined by 12.5% since 2000. If we want to get serious about addressing obesity, we need to educate individuals on the importance of balancing calories through moderation and physical activity- not control what they eat through laws and regulation.

    -Maureen Beach, American Beverage Association

  • Report this Comment On December 02, 2013, at 8:49 PM, duuude1 wrote:

    Hi Maureen,

    Thank you for identifying yourself as a representative of ABA. You show more honesty and disclosure than most people and professions - so I applaud you for that.

    Nonetheless I need to debate you on some of your points.

    1. sugar and nicotine are both highly addictive organic compounds, both are delivered in a consumable format (to be drunk or smoked). Both have diverse and measureable physiological and psychological effects on the individual consuming them.

    2. both sugar-sweetened drinks and cigarettes can be consumed without fear of immediate harm - and in that narrow framework both can be considered 100% safe. But both items, when consumed regularly, can promote long-term changes in physiology leading to disease.

    So when you say "...the real causes of death were chronic diseases (such as cardiovascular disease, cancer, and diabetes) none of which are uniquely caused by soda or any other sweetened beverage"

    that is like saying "the real cause of death was a lead projectile passing through the brain, none of which was caused by the gunman or any other assassin pulling the trigger".

    I agree with you that laws and regulation are not optimal for controlling behavior. But when the behavior of neither individuals (seeking sweets) or corporations (seeking profits) will self-moderate, leading to large scale disasters like we just saw with home buyers and investment banks and mortgage originators - none of whom saw fit to self-regulate and jumped on the housing bandwagon all the way to hell - well I sure won't argue with some taxes and regulation until people can show they can control themselves.

    If the beverage association members, all grownups and educated and wealthy and able to plan long-term for the healthy benefits of their customers - can manage their products in a healthy way - and NOT make the cheap excuse of "we're just making what customers want" - then I'll back you and oppose taxes and regulation. Show me your grown-up chops.

    Best,

    Duuude1

  • Report this Comment On December 04, 2013, at 3:36 PM, keaters wrote:

    Europe has higher cigarette taxes than North America and also a higher percentage of smokers, so the tax to reduce consumption argument doesn't really hold water.

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