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The Coca-Cola Company (KO), PepsiCo, Inc. (PEP), Dr Pepper Snapple Group Inc. (DPS): Is Warren Buffett Wrong?

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Warren Buffett is undoubtedly one of the best investors to ever grace the markets, but even he sometimes makes mistakes. Buffett has stated on multiple occasions that he will never — ever — sell a single share of The Coca-Cola Company (NYSE:KO). Clearly, the Oracle of Omaha believes in the durability of one of the world’s most recognizable brands.

Warren Buffett

However, though Buffett appears confident about the company’s long-term future, the picture is not as clear for us mortals. Sales volumes of soft drinks have been declining for over a decade in the United States — a key market for The Coca-Cola Company (NYSE:KO), PepsiCo, Inc. (NYSE:PEP), and Dr Pepper Snapple Group Inc. (NYSE:DPS).

Sugary soft drinks are being blamed for contributing to numerous health problems, including high blood pressure and obesity. Also, numerous studies have shown a link between soft drink consumption and heart disease, a worrying correlation that is leading more consumers to reach for water, coffee, or healthier beverages in lieu of soft drinks.

The public’s growing concern with the ill-effects of soft-drink consumption has led to a secular decline in soft-drink consumption among American consumers. Per-capita consumption of The Coca-Cola Company (NYSE:KO)’s beverages in the U.S. was lower in 2011 than it was in 2001 — a worrying trend for a region that represents 22% of case volume .

PepsiCo, Inc. (NYSE:PEP) and Dr. Pepper have experienced similar declines as well. Dr Pepper Snapple Group Inc. (NYSE:DPS) president and CEO Larry Young blamed his company’s recent 3% volume decline on “some of the coldest and wettest weather in recent years,” but weather is hardly to blame for the long-term negative trend in U.S. soft-drink sales. The real problems are increasing consumer awareness about health risks associated with the beverages and mounting attacks from state and local governments in the form of container-size constraints and excise taxes.

For instance, New York City tried to prohibit the sale of soft drinks in containers over 16 ounces. In addition, several state legislatures have debated putting a tax on sugary drinks, including a recent effort in Texas to levy a penny-per-ounce tax on the beverages. Although neither of these efforts proved to be successful — the New York law was struck down by the courts and lobbying efforts have kept state legislatures from passing onerous taxes — pressure from governments continues to mount.

What the industry must do

PepsiCo’s Frito-Lay division — the world’s largest salty-snacks business — offers the company diversification into an area in which it has a competitive advantage. Dr Pepper and The Coca-Cola Company (NYSE:KO), on the other hand, are more or less committed to the sugary beverages market. Both companies would benefit from diversifying into adjacent categories beyond sports drinks and fruit juices.

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