On Election Day, voters in California took to the polls to make their voice heard on the political process ... and soda. That's right: Voters in Berkeley and San Francisco decided to vote in favor of an initiative to tax sugary drinks at higher rates -- one penny per ounce in Berkeley and two cents per ounce in San Francisco. And while both initiatives achieved a plurality, only the Berkeley tax will become law, by winning 75% of the vote. San Francisco's vote fell short of the two-thirds approval needed to pass.
While many outside the traditionally liberal bastions of Berkeley and San Francisco may think taxes and regulations against sugary drinks goes too far (see: Michael Bloomberg's soda ban), Coca-Cola (NYSE:KO) investors need to pay attention to these developments. And it really doesn't have to do with the taxes itself, but rather sentiment -- simply put, consumers are abandoning the product because of health concerns.
Serious concerns are hurting Coca-Cola
The campaign against the tax focused on personal choice and increased grocery prices, but considering both municipalities voted for their respective measures in pluralities, that argument fell flat. Perhaps that's because the science is in that sugary drinks can contribute to a host of medical issues, including diabetes, heart disease, and tooth decay. As such, Coca-Cola faces a huge perception issue that appears to be increasing in scope, instead of decreasing.
And a quick peek into Coca-Cola's financial results shows how devastating this trend has been for the company. Recently, the company replaced its chief marketing officer, Joseph Tripodi, after it announced that it would probably fall short of its sales targets for the second year in a row. The company also said it would probably miss the profit estimates it earlier set. And after watching overall soda sales fall in the United States for years, the company is now facing issues in foreign and developing markets.
Are energy drinks really the answer?
To turn around the company's flagging sales, Coca-Cola appears to be doubling down on energy drinks, going by its 16.7% stake in Monster Beverage (NASDAQ:MNST). The company hopes to help Monster grow into a more international brand by lending a hand in both distribution and logistics. And Monster is growing revenue at more than a double-digit clip on a year-over-year basis.
And right now, energy drinks seem to be rather immune from what's plaguing the soft drink industry, although it is entirely possible for that situation to change. Remember that Coca-Cola once used athletes and celebrities to sell its flagship soda. It still does, but now the advertisements come across as hollow, amid all the health concerns.
Rather than use mass marketing, energy drinks tend to market by product placement and sponsorship efforts designed to reach its youthful target audience. And with only a 2% share of the soft drink market, the industry can continue to grow before facing those concerns.
Can Life reverse the trend?
However, Coca-Cola may have a way to reverse its deteriorating reputation with customers: Coca-Cola Life. The green-labeled, 60-calorie, 8-ounce soda boasts no artificial sweeteners and uses a mixture of stevia and sugar to keep its calorie count low. And if the newest findings from Haynes & Co. (by way of USA Today) are of any indication, the company has a hit on its hands.
The findings found 70% of purchasers highly rated the product's taste, and 45% of respondents have replaced the majority of their normal soda purchases with Coca-Cola Life. In addition, they like the green labeling of the bottles and cans, which appear to be Coca-Cola's attempt to convey a more natural and less processed product.
Will this be a long-term solution? Probably not. But with sales flagging amid negative product perception, it can't hurt, either.