US Soda Sales: Should Coca-Cola and PepsiCo Be Worried?

The American non-alcoholic beverage industry has been in a maturity phase for quite a few years. Unit volume sales of carbonated drinks have been falling for some of the largest market players, like The Coca-Cola Company (KO) and PepsiCo, Inc. (PEP). Revenue growth in the industry looks even more challenging given the impact of foreign currency fluctuations seen in recent quarters.

In a staunch reiteration of those problems, Beverage Digest, a well-known industry publication, released its latest data for US beverage sales in 2013, and the numbers paint a bleak picture. Soda sales volumes in the US fell 3% year-over-year (YoY) to 8.9 billion cases (1 case = 192 fluid ounces), according to the report published yesterday. Sales revenues dropped 1% to $76.3 billion in the same period.

The decline in sales of carbonated beverages has shown an accelerating trend in the past three years. In 2011, unit volume sales fell 1%, while 2012 saw the challenged soda market shed another 1.2% in volumes. The latest figures have made a number of analysts question the growth prospects of the industry.

While emerging market sales and newer beverage categories like sports drinks and bottled water are still showing robust volume increases, the slowdown is nonetheless alarming. This is because almost half of the domestic beverage sales of the largest industry players still come from their flagship carbonated brands like Coke and Pepsi. This year’s numbers are so far no different, as revenues from soda sales in the first quarter are estimated to post declines of almost 2% YoY.

Last year’s sales drop marked the ninth consecutive year of declining volumes in the carbonated soda market, as consumers shifted toward healthier functional beverage like juices and low-calorie energy drinks. Annual sales volumes in the US are now at similar levels to those seen in 1995.

Shares of PepsiCo are currently down 0.2% in pre-market hours, while Coca-Cola shares moved 0.3% lower in pre-market trading after they closed down 0.8% yesterday on the latest news.

Are Diet Sodas Fizzing Out?

While the ongoing challenges in the beverage market have been well-documented, yesterday’s numbers reveal a trend that would likely put industry analysts in a quandary. Sales of diet sodas, which have traditionally outpaced sales growth of sugary carbonated beverages, fell by a much greater percentage. Diet Coke sales posted a decline of 6.8% compared to the year-earlier period, while American consumers bought 6.9% less Diet Pepsi last year than in 2012. On the other hand, full-calorie Pepsi drinks’ sales fell 3.6%, while Coke volumes dropped 0.5%.

On a total unit volume basis, Coke and Diet Coke remained the top-selling beverage brands in the US, ahead of Pepsi and Mountain Dew. Last year, nine of the top 10 soda brands in the US witnessed a drop in sales, with only Sprite showing gains (of 0.1%) in the period. Diet Coke and Diet Pepsi led the declines with the heaviest volume drops, followed by Coca-Cola’s Fanta brand, which saw its sales decrease 4% YoY. Some of the better performing brands of last year include Coke Zero and Dr. Pepper. Their volumes declined 0.1% and 0.3%, respectively.

During the year, PepsiCo’s share in the domestic carbonated drinks market fell four percentage points (ppts) to 27.7%, while Coca-Cola saw its market share gain 4ppts to come in at 42.4% for the year. Dr. Pepper Snapple Inc.’s (DPS) share increased just 1ppt to 16.9%. Coca-Cola is much more exposed to the beverage industry compared to PepsiCo, which has a growing snack foods business to counter the slowdown in soda sales.

In recent years, the two rivals have ramped up investments in newer beverage categories like bottled water to offset the revenue decline from slumps in their traditionally stable carbonated soft drinks businesses. This strategy may be paying off, seen in the fact that energy drinks’ sales in the US were up 5.5% in 2013, while bottled water sales jumped 4.7% during the same period. The sales of sports drinks, another emerging category, rose 0.6% last year, while ready-to-drink coffee sales jumped 6.2% last year. Analysts believe that the industry’s major players will focus on the emerging categories to drive sales.

Last year’s soda volume drop contributed considerably toward the overall decline in US non-alcoholic beverage volume sales, which fell 0.1% in 2013 to around 30.2 billion gallons. The slowdown in overall sales in the beverage market was somewhat offset by higher volumes of the newer categories of drinks. With soda sales seeing a sharp downturn, one thing remains clear: the company with the most innovative and successful investments in upcoming healthier beverage space will emerge as the winner.

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