In what has to be a blow to the beverage industry, soda giants including Coca-Cola (NYSE:KO), PepsiCo (NYSE:PEP), and Cadbury Schweppes (NYSE:CSG) have agreed to substantially curb the way they do business in the schoolyard.
In a deal brokered between the pop stars and a collaboration led by the American Heart Association and the William J. Clinton Foundation, carbonated soft drinks will no longer be sold to elementary and middle schools. High schools will still get in on the sweetened fizz, but only in the form of diet sodas.
Thankfully, the beverage giants possess diversified businesses that include water and unsweetened juices -- stuff that will still pass the sniff test at schools, along with the traditional cartons of lowfat milk.
But a bigger problem is what kind of stigma this will place on the industry in the long term, especially as a new generation becomes raised on the notion that soda is bad.
It's all about the O, and O is for obesity
Although consuming grand amounts of sugary sodas has been tied to the potential of childhood diabetes, the rallying cry has mostly centered on the ghastly state of obesity in America. Soda is an easy target, and it hasn't helped the industry that it has often turned to celebrity endorsers to make the fizz more marketable to impressionable youth.
The criticism isn't new, though. Everyone assumes that the scathing Super Size Me documentary was an attack on McDonald's (NYSE:MCD). It was, but a great deal of it also took Coke to task for its syrupy concoctions and the unusually large serving sizes relative to how Mickey D's operates in other countries.
The beverage titans are already suffering from lethargic growth in global volume shipments. If they now get tripped up on their lucrative home turf, one has to wonder whether market valuations will contract further.
P is for pop
Will the pop industry be popped itself? No one needs soft drinks to subsist, no matter what you told yourself during that Jolt Cola-fueled all-nighter, when you were cramming for your college finals. The industry has moved into promising areas such as bottled water, vitamin-fortified drinkables, and other specialty drinks, but that doesn't get away from the fact that Coke and Pepsi are still spending plenty on branding their namesake refreshments.
Nor will the flagship sodas be going away everywhere. I'm guessing that my 12-year-old son's school, for example, may be one of the last to cave in. For starters, it's a private school, and even though many tuition-based institutions have already started taking down their vending machines and sprucing up their cafeteria offerings, the soda-restriction deal applies only to public schools.
My son attends a pretty prestigious all-boys' school that happens to have a rather notable alumnus in Roberto Goizueta, who happened to lead Coke to its market-pleasing resurgence in the 1980s and 1990s. His foundation bestowed the school with a sizeable grant, and his name graces the facility's high-end athletic center. Tuition at the school includes a meal plan, which naturally includes all of the Coca-Cola products that the youngsters can swig.
One would think my son's campus would be the perfect case study for the ills of soft drink consumption on today's youth, yet most of the students there appear to be in great shape. An active athletics program no doubt helps, and that's probably why many of the beverage industry's ads feature attractive young adults in motion.
In any event, how much tougher will it become to market products when kids are being told that the canned refreshments are banned because they are harmful? How many parents will follow suit because doing anything else would seem to be undercutting the curricular efforts?
It doesn't matter what side of the fence you're on in this particular case. I am not here to argue about the merits of either side. Get thee to a medical journal for the health particulars. As an investor, I just want to know what impact this move will have on the shares of the beverage companies.
Coke is an Inside Value recommendation. PepsiCo has not been singled out by any of the newsletters, though Income Investor's Mathew Emmert has mentioned it as one of his favorite long-term investments.
Q is for quit
Health trends will normally sway food and beverage giants back and forth, but this is different -- it's a regulative action. I'm not suggesting that Coke and Pepsi will become the next Altria (NYSE:MO) -- though given the tobacco giant's share gains over the long haul, that may not be a bad place to be -- but what if the dominoes fall the same way with the beverage giants?
Over the weekend, I was having a conversation with some family friends about how odd it seems to run into someone smoking in public these days. It stands out in a way it never did a few years ago. Can we ever get to the point where sipping a can of soda will generate the same double-take as someone dragging on a cigarette? And if we get that far in condemning the caffeinated pushers, can Starbucks (NASDAQ:SBUX) be too far out of the crosshairs?
Food and beverage stocks used to be called defensive stocks, because they were steady and held their value in good times and bad. The way certain specialties have been targeted lately, we may have to reassess the perceived risk in some of these consumer non-durables, which may just be more non-durable than we think.
Coca-Cola is a Motley Fool Inside Value recommendation, and Starbucks is a Motley Fool Stock Advisor pick. Take your favorite Foolish investment service for a free, 30-day spin.
Longtime Fool contributor Rick Munarriz doesn't know what he would do without his Diet Coke fix. He does not own shares in any of the companies in this story. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
