Coca-Cola (NYSE:KO), once regarded as a company almost immune to downturns, has been dealing with slowing sales over the last few years. As a result, its share price has languished, while the overall market has been on an impressive rally. Largely, its weak sales can be traced back to consumer health worries over diet sodas, which has also affected major competitor PepsiCo (NYSE:PEP). As the such, the company is looking for ways to boost its sagging top line, and rumors are once again circulating that Coca-Cola might acquire Monster Beverage (NASDAQ:MNST). How could this benefit the struggling soda giant?
The numbers don't lie. Americans are drinking less and less soda, and especially less diet soda. Concerns over the health effects of artificial sweeteners have pushed consumers away from this segment, while the link between sugar-sweetened sodas and obesity has led people to healthier alternatives, such as ready-to-drink teas and fruit juices. This trend has been going on for nearly a decade, and is clearly showing in the financial statements.
Looking at sales figures, the U.S. carbonated soft drink market seems to be falling apart. In fact, the decline is accelerating. In 2011 and 2012, the overall market declined by around 1% per year. In 2013, volume declined by 3%.
By company, Coca-Cola's volumes were down some 2.2%, with diet soda sales down even more. PepsiCo saw volumes decline by a hefty 4.4%. Still, Coca-Cola seems to be sticking to its guns, arguing that it remains one of the world's strongest brands. So, rather than move away from its traditional business, the company must find ways to revive it. One way could be a bigger move into energy drinks.
Monster to the rescue?
Rumors that Coca Cola might be interested in acquiring Monster Beverage, one of the largest energy drink makers, have been flying around for some time now. Indeed, the company seems like an attractive target, growing sales faster than any other major U.S. beverage company with projected sales growth of 12% this year. Coca-Cola initially indicated its interest in Monster back in 2012, but the deal reportedly fell apart as Coca-Cola was unwilling to meet the asking price.
Coca-Cola and Monster are already doing business together. The soda giant is distributing roughly half of Monster's drinks to retailers, and the business is projected to be good for about 13% of the company's U.S. profit by 2015 .
Analysts estimate that even at a hefty premium, Monster's business could provide a serious boost to Coca-Cola's bottom line, and give it a huge presence in the energy drink business. Additionally, the threat of losing Monster to another company like PepsiCo could force Coca-Cola to make a move. Still, the energy drink business remains a risky proposition, with regulatory and health concerns surrounding the category.
Meanwhile, PepsiCo is also scrambling for ways to revitalize its business. Responding to consumer backlash over health concerns about high-fructose corn syrup, the company has announced a range of beverages, 'Made with real sugar '. The company is also experimenting with newer sweeteners such as Senomyx' Sweetmix. Not a sweetener as such, the chemical is more of a flavor enhancer, which allows producers to use less sugar. However, the company's snack division is still performing well, meaning it has less reason to pursue expensive acquisitions in the soda space.
The bottom line
With major U.S. soft drink producers such as Coca-Cola and PepsiCo seeing less volume, they are scrambling for ways to boost sales and restore profitability. PepsiCo is experimenting with new ways to sweeten its drinks, even planning a return to using actual sugar.
Still, speculation is building that Coca-Cola is looking to acquire Monster. The two companies already do business together, and such an acquisition would give Coca-Cola a strong foothold in the energy drink business and provide a much needed boost to its bottom line.
Boost your 2014 returns with The Motley Fool's top stock
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.
Daniel James has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, Monster Beverage, and PepsiCo. The Motley Fool owns shares of Coca-Cola, Monster Beverage, and PepsiCo and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. 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.