Soft-drink makers' revenue running dry

Sales of Coke, Pepsi headed for first yearly decline in 4 decades

December 13, 2005|By BLOOMBERG NEWS

Coca-Cola Co. and PepsiCo Inc. are headed for their first annual decline in U.S. soft-drink sales in at least four decades as health-conscious consumers switch to bottled water, sports drinks and juices.

North American soft-drink sales at Coca-Cola dropped 1 percent by volume in the first nine months of the year, while PepsiCo's fell an average 1.7 percent in the past three quarters.

Coca-Cola, the world's largest soft-drink company, gets 82 percent of its revenue from carbonated beverages, and is spending an additional $400 million to win back soda drinkers and develop new products. No. 2 PepsiCo was quicker to expand into snacks and other drinks such as Gatorade and now brings in less than 20 percent of sales from sodas. Coca-Cola and PepsiCo together controlled three-quarters of the $66 billion soft-drink industry in 2004.

"Coke is finally going to have to look for other avenues for growth," said Walter Todd, who manages $1 billion including 300,000 Coca-Cola shares for Greenwood Capital Management in Greenwood, S.C.

Soft-drink sales more than doubled during the 1960s and soared 70 percent during the 1970s, before slowing to less than 1 percent gains for the past six years, according to Beverage Marketing Corp., a research firm based in New York.

PepsiCo insulated itself from the decline by expanding beyond sodas. It started selling bottled water four years before Coca-Cola and in 2001 purchased Gatorade sports drinks, whose sales soared more than 30 percent last quarter alone.

Coca-Cola Chief Executive Officer E. Neville Isdell told investors and analysts Wednesday that the company is seeing early signs of growth in the U.S. after a slump in volume. Next year, it will introduce Coca-Cola Blak, a coffee-flavored drink that will be marketed as an energy beverage and soda. Coca-Cola also will unveil a new advertising slogan, "Welcome to the Coke side of life," next year.

For more than a century, Coca-Cola's top managers have been focused almost exclusively on soft drinks rather than the noncarbonated beverages that are providing all the growth today, said Emanuel Goldman, a beverage consultant in Hillsborough, Calif., who retired as a Wall Street analyst after 28 years.

While PepsiCo sought to become a "total beverage company" in the 1990s, Coca-Cola assigned its brightest managers to its soft-drink business, Goldman said.

PepsiCo now gets 80 percent of its sales from food and non-fizzy drinks.

Long in second place in cola sales, PepsiCo is No. 1 in key non-carbonated categories. Gatorade dominates in sports drinks with an 80 percent market share, compared with 17 percent for Coca-Cola's Powerade, according to data compiled by Beverage Digest. PepsiCo's Aquafina has a 15 percent share of water sales while Coca-Cola's Dasani has a 10 percent share.

PepsiCo surpassed Coca-Cola in market value for the first time yesterday after beating its competitor in sales growth and diversification. PepsiCo's stock climbed 14 percent this year, pushing its value to $98.4 billion. Coca-Cola declined 1.2 percent and it's now worth $97.9 billion.

The shift away from soft drinks is most pronounced among young people, who are just forming their brand preferences, according to a May survey of 1,730 consumers by Morgan Stanley. Of those aged 18 to 24, 52 percent say they are drinking less or rarely consume soft drinks, while 48 percent say they are drinking more water.

Five of the 10 largest U.S. school districts have removed soft drinks from school vending machines. The American Beverage Association, an industry trade group based in Washington, extended in August a voluntary ban on sugary soft-drink sales to middle schools.

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