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Soda Sales are Falling, Should Coke Be Worried?

By Daniel B. Kline - Feb 20, 2014 at 2:44PM

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Coca-Cola has struggled to find a way to keep Americans drinking soda and sales of its carbonated beverages have fallen.

Have a Powerade and a smile just doesn't sound right, but Coca-Cola's (KO 0.27%) future might well lie in drinks other than its signature beverage.

Coca-Cola still dominates the bottled drink market in the United States, but Americans are losing their taste for the carbonated beverages that the company made its name on. Coke reported lower earnings in the fourth quarter of 2013 despite a 1% increase in global volume. In North America, however, the results were different as overall volume fell 1% -- though noncarbonated drinks such as Powerade performed well -- but soda sales fell by 3%.

Pepsico (PEP 0.24%), Coca-Cola's closest rival, reported last week that its soda volume fell in the "mid-single digits," according to the Associated Press.

Soda may not be good for you

Coke and Pespi have to battle an increase in competition on store shelves and the ingrained idea that soda is not a healthy choice. This decline in soda consumption is not new. Sales have been falling with Coke, Pepsi, and their offshoots fighting for attention with energy drinks -- a category that barely existed before the 2000s -- and a variety of healthy (or perceived to be healthy) water brands.

Soda, of course, also packs a lot of calories and even diet brands have been questioned as Americans have grown concerned about artificial sweeteners.

Coca-Cola CEO Muhtar Kent acknowledged these concerns in a call with reporters, as reported by the Associated Press. During the call, Kent claimed the lower soda sales in North America were "largely due to softer Diet Coke volumes."

And though he did not name anyone or any company specifically, Kent said Coca-Cola was working with "credible third parties" to address any "misperceptions" about soda.

Wait, is Diet Coke bad for me?

Katherine Zeratsky, a registered dietitian who has worked for the Mayo Clinic since 1999, does not think that diet soda, in moderation, is bad for you.

"Drinking a reasonable amount of diet soda a day, such as a can or two, isn't likely to hurt you," she wrote on "The artificial sweeteners and other chemicals currently used in diet soda are safe for most people, and there's no credible evidence that these ingredients cause cancer."

Not being bad for you, however, is not the same as being good for you, Zeratsky stressed.

"Diet soda isn't a health drink or a silver bullet for weight loss. Although switching from regular soda to diet soda may save you calories in the short term, it's not yet clear if it's effective for preventing obesity and related health problems," she wrote. "Healthier low-calorie choices abound, including water, skim milk, and unsweetened tea or coffee."

How big is the soda market?

In July 2012, a Gallup poll showed that 48% of Americans report drinking at least one glass of soda per day. Among those who drink any soda, the average daily amount is 2.6 glasses, with 28% drinking one glass a day, on average, and 20% drinking two or more glasses.

Coca-Cola made around $2 billion in the fourth quarter of 2013, a slight decrease over the previous year. In North America, despite the decline in soda sales, the company made a before-tax profit of $555 million, down slightly from $558 in the same quarter of 2012.

Coke is it

Coca-Cola owns a wide array of beverage brands including Powerade, Dasani, SmartWater, Fuze, Honest Tea, and NOS Energy Drink. The company has shown that though it can survive a decline in soda sales, its iconic brand remains critical for the company.

During the call, the AP reported that Kent "expressed confidence that soda in North America can still grow and just needs improved marketing, innovation, and on-the-ground sales execution."

To accomplish that, Kent plans to spend more money on advertising and perhaps introduce new Coke-branded soda products in the United States. One possible new product is Coca-Cola Life, a drink sweetened with sugar and stevia, which was sold in Argentina in 2013.

Analysts see good things ahead for Coca-Cola

RBC Capital Markets analyst Nik Modi told Reuters he was positive on the company's prospects for 2014. Modi said he expects Coca-Cola sales volumes to improve as the company pumps more money into marketing in the United States than Pepsi.

Janney Capital Markets analyst Jonathan Feeney told Reuters he expected growth in 2014 to be driven by reinvestments, pricing actions, and new products such as Coca-Cola Life.

Live on the Coke side of life

While Coca-Cola may slow or even reverse declining soda sales in the short term, ultimately, soda is not a growth business. Even the company's new venture with Green Mountain Coffee Roasters (GMCR.DL) to launch a line of single-serve cold beverage makers for household use is unlikely to increase how much soda Americans drink in any appreciable way.

But soda -- Coca-Cola specifically -- has proven resilient to efforts by the health industry to scare people away from drinking it. Soda is, for many, an acceptable indulgence and Coke is king of all soft drink brands. Yes, it makes sense for Coca-Cola to continue to grow its portfolio and to find a way to sell consumers any liquid that can be bottled, but while Coke may not be the monster it once was, you still "can't beat the real thing."

Daniel Kline has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, Green Mountain Coffee Roasters, and PepsiCo. The Motley Fool owns shares of Coca-Cola and PepsiCo. 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.

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