The consumption of fizzy soft drinks, falling in America since 2005, declined in 2012 to its lowest level in 18 years. According to an annual report by Beverage Digest, a respected trade publication, the falling consumption of fizzy soft drinks had a negative impact on soft drink sales. The Coca-Cola Company (NYSE:KO)’s sales tumbled by 1%; PepsiCo, Inc. (NYSE:PEP) slipped 2.5%; while Dr Pepper Snapple Group Inc. (NYSE:DPS) dropped 0.5%. The situation would have been worse if it weren’t for energy drinks such as Monster and Red Bull.
The soda industry is losing the fizz
A permanent decline in U.S. soda revenues represents a huge problem. Soda represents nearly 25% of the U.S. beverage market. Its sale has strengthened profit margins for many years. What are the other underlying factors beneath this market movement? Analysts say some of the loss is coming as consumers look for healthier options. For example, migration to bottled water has become stronger since 2011. The quantity of water sold by Nestle Pure Life brand increased by 2.3%. Aquafina, a PepsiCo, Inc. (NYSE:PEP) product, increased sales by 1% over the past year. Additionally, analysts say baby boomers are aging along with their preference for the drinks they take.
However, the change hasn’t deterred the biggest drink makers. Coke, with a market share of 17%, remains the market leader. Diet Coke is second with 9.4%, while Pepsi-Cola is No. 3 with an 8.9% market share. Dr. Pepper is the fifth largest seller, having 6.5% of the market.
Quenching their market thirst
Responding to the fall in the consumption of fizzy soft drinks, the companies have all expanded their products to include sports drinks and fruit juices. Generally, they are working to develop healthy and pleasant sweeteners that mimic the taste of the original sodas. In addition, Coke acquired coconut water brand Zico in 2012 and purchased a stake in the maker of Core Power, a workout recovery shake. It also began television ads to counter concerns about obesity and moves by officials to restrict sales. The ads argue that soda shouldn’t be singled out for weight gain. It has also started testing low-calorie versions of Sprite and Fanta in some markets in the US .
Vying for the soda market
PepsiCo, Inc. (NYSE:PEP) is experimenting with sweeteners and says it is 90% close to a breakthrough. Not long ago, it changed the formula of its zero-calorie Diet Pepsi to strengthen its shelf life. Dr Pepper Snapple Group Inc. (NYSE:DPS) has launched versions of some sodas this year, following the roll out of a low-calorie version of Dr Pepper last year. So which of the companies should investors put their money in?
Who is bigger and better with what?
Pepsi has the biggest revenue, meaning its experimentation with sweeteners and other initiatives to cope with the fall in soda revenues is succeeding. It has also been helped by an increase in its brand investment, innovation, and aggressive marketplace execution. If this continues, Pepsi will gain more market share to the detriment of its rivals. Coke and Dr. Pepper have also been aggressive, but their pace has not been enough, which explains why they lag behind.
That’s 2-0-0 with Pepsi having the greatest EPS, indicating that it has translated its large revenue to considerable payment to shareholders. It has been able to achieve this through a combination of share repurchases and dividends. Coke used to have a bigger EPS, but Pepsi’s performance means it will attract more investment in future. Coke has higher revenues than Dr. Pepper, but it pays less earnings, coming last in this category. This could hamper investment in the company in the near future, as shareholders doubt its ability to compete with its rivals.