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On the bright side for investors, Cott has plenty of free cash and distributes much of that money to shareholders.Fernando Morales/The Globe and Mail

Cott Corp.'s shareholders might want to give up on waiting for this stock to pop. The maker of private-label soft drinks, whose stock had surged from about $1 (U.S.) five years ago to well above $11 by last April, is facing two daunting challenges: a slump in demand for soft drinks, and fierce price competition from name brands that have traditionally been far more expensive.

The company looks to be considering all options, including a possible sale, but there are no obvious buyers that might rescue Cott and its stock. Beyond a miraculous change of fortunes over the long term, the best an investor might hope for is that Cott continues to generate substantial free cash flow and distributes much of that money to shareholders. "They have their work cut out to turn around the business," said Svetlana Uduslivaia, senior analyst for market researcher Euromonitor International. The private label soft drinks business, where the company excels, is "not expected to recover."

Cott has always been a solid manufacturer of beverages that sell under generic or store-brand labels. Shareholders have been burned in the past by various strategic and accounting missteps, but in 2009, the stock spiked on a cost-cutting and debt-reduction effort. Its products attracted value-conscious consumers in tough economic times. Over the past five years, it has held its ground against colossal competitors – Coca-Cola Co. and PepsiCo Inc.

That is changing now that North American consumer preferences have shifted in favour of healthier beverages. As total soft drink industry sales continue to fall by almost 4 per cent annually, all pop makers have been pinched. But unlike Cott, Coke and Pepsi have strong retail brands and the flexibility to cut prices to support sales volumes. They have been aggressively discounting, even sometimes undercutting private-label soft drinks at major chains like Target and Wal-Mart.

The industry is "further degenerating into irrational pricing," CIBC World Markets analyst Perry Caicco said in a recent note, downgrading Cott to a "sector performer" and cutting his target share price $9 from $10. "It is safe to assume that the soft drink business is not going to recover."

Analysts who cover the stock have an average price target of $9.50, according to Bloomberg. The stock closed on Thursday at $8.12, 28-per-cent lower than its 52-week high.

For Pepsi and Coke, the market is inhospitable; for Cott, it's outright hostile. There are few incentives for consumers to buy private label soft drinks unless they are markedly cheaper than national brands.

"The company is dependent on private label contracts and has zero pricing power," said Barry Schwartz, vice-president of Baskin Financial Services. "Nobody walks into a restaurant demanding a private-label soda."

Cott also makes other beverages in markets where there is still growth: energy drinks, juices, bottled water and ready-to-drink teas. But Ms. Uduslivaia points out: "These are also the categories where there is a lot of competition from other manufacturers who have a much stronger grip on the market."

Nestlé dominates the bottled water market. "Coke and Pepsi bottle water on their soft drink lines, and profitability is not great," Mr. Caicco said. "For Cott, its minimal and declining water business is done at almost no margin."

CIBC forecasts that Cott's sales volume of carbonated soft drinks in North America will decline 8.5 per cent this fiscal year and "stay negative thereafter." Amid such a bleak outlook, the company said in February it was "evaluating certain strategic alternatives," which many took to mean Cott had put itself up for sale. That's unlikely to happen, Mr. Caicco said. "This is not because Cott would not accept a bid for the company, but more likely because there are no apparent buyers."

Instead, he sees the company continuing to control costs in order to generate cash. Cott posted $100-million in free cash flow last year, and could match that figure next year, "if there is any easing in the soft drink market," he said. Combined with refinancing some debt later this year, Cott could, in fiscal 2015, "begin to return some serious cash to shareholders." While the company now pays out 30 per cent of its free cash flow to shareholders, that could increase to greater than 50 per cent, he said.

But that's just one potential bright spot for a struggling company in a declining market, and the eventual reward to shareholders is still contingent on the market improving and Cott cutting capacity, he said.