For Soda Makers, Sales of Soft Drinks Continue to Lose Their Fizz

Once upon a time, sales of diet soft drinks made up for the dwindling sales of their regular calorie counterparts. As consumer waistlines expanded, the search for a low-calorie alternative became all the rage. Consumers became accustomed to artificial sweeteners as a replacement for sugar.

The tide has turned, and consumers are now also avoiding diet soda -- even more than their regular-calorie versions -- due to health concerns. Diet sodas, which represent one-third of U.S. soda sales, have declined for three consecutive years as companies like Coca-Cola (NYSE: KO  ) , PepsiCo (NYSE: PEP  ) , and Dr Pepper Snapple Group  (NYSE: DPS  )  scramble to deal with the continued drop in sales volumes. The overall demand for carbonated soft drinks has dropped for nine consecutive years.

According to The Wall Street Journal, trends suggest that 2014 is not expected to be any different. The Journal cited data collected by Citi Research showing sales of soda at U.S. stores were down 1.9% for the first 12 weeks of the year. Last year marked the first downturn in sales dollars in 15 years -- U.S. retail sales of soft drinks decreased 1% to $76.3 billion -- a sign that declining volumes could not be offset by higher prices.

Consumers have turned away from artificial sweeteners despite available proof from government studies that they are safe. They've done this because of health concerns and the possibility that these chemicals can negatively impact the metabolism.

Can energy drinks and coffee lead future growth?
Industry watcher Beverage Marketing showed that certain products are showing good growth potential. For example, in the U.S., caffeine-laced energy drinks rose 5.5% in 2013, and ready-to-drink coffee increased 6.2% in the same period. Sales also rose, albeit more modestly, in fruit drinks -- 1.9% -- and sports drinks – 0.6%.

For Coca-Cola, 2013 full-year results showed reported operating income down 5% to $10.2 billion; the fourth quarter's operating income dropped 4% to $2.1 billion. Full-year earnings per share fell 3% to $1.90, and in the fourth quarter EPS dropped 7% to $0.38. The company is in the midst of its 2020 Vision, which involves greater investments in its brands that are expected to generate $1 billion in future growth and greater productivity.

Coca-Cola reported worldwide volume growth for 2013 of 2%; but its still-beverage lines may hold the key to future growth, with worldwide volume up 5% for the year and up 6% for the fourth quarter. Growth occurred across various categories, such as energy and sports drinks, ready-to-drink teas, juices and juice drinks, and bottled water.

Rival PepsiCo is better suited to weather decreasing soda sales due to its snack food business. The company's reported net revenue for fiscal 2013 grew 1% to $20 billion, and it reported EPS of $4.32. Similar to Coca-Cola, PepsiCo is spending $5 billion in annual productivity initiatives through 2019 that are expected to yield $1 billion in savings.

During the year, PepsiCo initiated a review of its North American Beverage business and decided to retain NAB, partly due to its position in the attractive non-carbonated and flavored carbonated segments. For the year, the volume growth for snacks was 3% and growth for beverages was 2%. While beverages still make up the majority of PepsiCo's business, its growing snack food business takes up 38% of the business. Management has mentioned that relationships established through the beverage business have enabled them to expand the sales of the company's snack and food business. For example, PepsiCo's partnership with Subway and Buffalo Wild Wings has increased the company's culinary options at these establishments.

Slow growth can also be found at this smaller soda maker
Dr Pepper Snapple Group's management noted at a recent consumer conference that they were seeing improvements in disposable incomes, expected to improve sales, but the health concerns associated with soft drinks continue to create headwinds. With almost 80% of its business in carbonated soft drinks, the company is testing low-calorie, naturally sweetened versions of 7UP, Canada Dry, and Dr Pepper.

For fiscal 2013, Snapple non-carbonated drinks and Mott's juice drinks had combined growth of 5%, while core products like Dr Pepper and 7UP experienced declines.

Dr Pepper Snapple reported its 2014 guidance of flat to plus 1% revenue growth. Full-year core EPS is expected to be between $3.38 and $3.46. The company is working on innovative products across its portfolio, products like its line of 10-calorie drinks that cater to customers looking for a low-calorie and low-carb drink.

My Foolish conclusion
Soft-drink makers have their work cut out for them. PepsiCo seems to be the best buy of the three companies I mentioned because of its strong snack food business that seems likely to continue to grow. Coca-Cola and Dr Pepper Snapple Group may show future growth if they continue to focus their attention on offering products outside the carbonated-drink segment to consumers. For the foreseeable future, the fizzy soft-drink segment will probably continue its downward slide.

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Related Tickers

8/28/2015 4:01 PM
DPS $77.11 Up +0.05 +0.06%
Dr Pepper Snapple… CAPS Rating: ****
KO $39.45 Up +0.18 +0.46%
Coca-Cola CAPS Rating: ****
PEP $93.53 Down -0.07 -0.07%
PepsiCo CAPS Rating: *****