The fizz has gone out of the soft-drink business, forcing producers to search for alternative sources of revenue – but even some of those are showing limited growth potential.
From Coca-Cola Co. to PepsiCo Inc. to private-label Cott Corp., soda makers are struggling with declining North American demand for their core carbonated drinks and counting more on other products to diversify and draw back customers.
But the companies continue to report disappointing results. On Tuesday, Coca-Cola said its fourth quarter profit fell as global sales volumes rose less than expected and slipped in its flagship North American market. Its shares dropped 3.75 per cent to $37.47 (U.S.).
In North America, 2013 “was a challenging year and I’m not satisfied with our overall performance,” said Muhtar Kent, chief executive officer at Coca-Cola.
In a troubled sector, soft-drink makers are grappling with their products being heavily discounted on store shelves as retailers try to lure consumers who have turned to healthier or trendier alternatives such as water, tea and energy drinks. The companies’ prospects don’t look much brighter in the near term as their key products fail to resonate with younger consumers.
“The soft drink industry is in perilous decline,” CIBC World Markets analyst Perry Caicco said in a report last week.
“It is safe to assume that the soft drink business is not going to recover.”
Industry sales volumes continue to drop at a rate of 3 to 4 per cent annually as the companies mark down prices, often pricing branded items below traditionally cheaper private-label items, which are made by Cott, he said.
And while price-slashing isn’t the perfect solution, refraining from doing so may cause volumes to plunge even more, he said.
A big beneficiary of the precipitous decline in soft drink sales are bottled water makers, which are dominated by giant Nestlé SA.
Coca-Cola bottles water in its soft-drink plants, but generates slim profits from the effort. Cott has a small water business but enjoys almost no profit margin from it.
“I expect the North American beverage landscape, especially carbonated soft drinks, to remain challenging in 2014,” Jerry Fowden, chief executive of Cott, said last week.
Mr. Fowden pointed to continuing pressure on sales and profit margins from excess industry capacity and a rise in product discounting. In Canada, for example, 2-litre bottles of soft drinks have been touted for as low as 75 cents (Canadian) or $1 each, from the regular $1.90 or more, for up to 10 weeks at a time, he said.
Cott recently hired investment bank Credit Suisse to assess its strategic alternatives, which often means a company is looking for a buyer.
But industry analysts say there may not be a suitor in the wings in an increasingly tough sector.
Coca-Cola, the world’s largest beverage maker, said global sales volumes rose 1 per cent, helped by results in some overseas markets such as Asia. In North America, sales volumes fell 1 per cent, with non-carbonated drinks such as Powerade performing well, but soda declining 3 per cent.
Last week, Pepsi said its soft-drink volumes fell in the “mid-single digits.”
Still, the companies are racing to improve productivity and find new alternatives.
This month, Coca-Cola said it was buying an interest in Green Mountain Coffee Roasters Inc. and launching a machine that will let consumers make cold carbonated drinks at home, including Coke.
In its fourth quarter ended Dec. 31, Coca-Cola’s profit fell to $1.71-billion (U.S.) or 38 cents a share from $1.87-billion or 41 cents a share.
Not including one-time items such as the restructuring of its bottling operations overseas, its latest profit was 46 cents a share.
Revenue slipped 3.6 per cent to $11.04-billion, short of the $11.31-billion that analysts at Thomson Reuters had expected.
And Coca-Cola said Tuesday it is bolstering its cost-cutting program to generate another $1-billion in savings by 2016. Pepsi said last week it is extending its cost-shearing initiative over five years, including chopping jobs.
Other observers are more bullish about the prospects of soft-drink companies being able to eventually turn around their North American operations by offering more popular, non-carbonated products.
John Sicher, publisher of industry publication Beverage Digest, said Coca-Cola and Pepsi are investigating using new natural sweeteners to assuage consumers’ concerns about artificial sweeteners and high-calorie sugar.
As well, the companies are looking at improving their e-commerce performance, he said.
They are in talks with Amazon.com Inc. to have it carry their products at more competitive prices than currently sold on the site by some third-party vendors, he said.