Leaders in Carbonated Beverage Industry Have Gone Flat

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Drink Up
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Carbonated beverages don't appear to be as popular as they used to be. Sales have been sluggish at Coca-Cola (KO) and PepsiCo (PEP), and even SodaStream (SODA) -- the one company that was growing briskly arming the world with pop -- has seen better days.

All three companies recently reported quarterly results, and the numbers aren't very encouraging:
  • Coca-Cola has seen worldwide volume of its sparkling beverages inch just 1 percent higher through the first six months of the year. Its Coke brand has been stagnant, with Sprite and Fanta picking up some of the slack.
  • PepsiCo isn't faring any better. Its carbonated soft drink volume in North America declined 2 percent in its latest quarter, offset by marginal upticks internationally.
  • SodaStream was the latest to report, chiming in on Wednesday morning with a 7 percent increase in sales. That may not seem so bad in light of the performance at Coca-Cola and PepsiCo, but the maker of the namesake beverage system that turns still water into flavored soda was growing a lot faster in the past.
Canned Laughter

Leave a carbonated beverage out for too long, and it loses its fizz. The same thing has happened to the industry.

Just a couple of months ago, SodaStream was targeting 15 percent in revenue growth for all of 2014. On Wednesday, it warned that it's now looking at just 5 percent in growth this year.

It's easy to see why SodaStream is concerned. It sold 16 percent fewer starter systems during the last three months than it did during the same quarter a year earlier. Unit volume for CO2 tanks and flavor syrups were up 17 percent and 9 percent, respectively, but we have a problem here. If folks aren't buying the new soda makers now, they won't be buying the carbonators and syrups later.

Despite the refreshing and sometimes addictive nature of soft drinks, it isn't a surprise to see them coming under fire. New York's ban on large-sized beverages was overturned, but consumers are more aware of the dangers of sugary drinks. The calories and carbs in non-diet flavors are adding up, and concerns about the long-term health risks on some of the sweeteners used in diet sodas continue to linger. And iced coffees, energy drinks, teas and flavored waters are giving consumers new ways to quench their thirst.

Bottling Diversification

Coca-Cola and PepsiCo have spent years fortifying their operations for this moment, by acquiring or building out new lines.

PepsiCo is almost as well known for its Frito-Lay salty snacks as it is its signature sodas. PepsiCo also owns Gatorade, Quaker oatmeal and Tropicana fruit juices. Coca-Cola's push has centered largely around non-carbonated beverages. That paid off in its most recent quarter with teas, packaged water and sports drinks all growing faster than its flagship colas.

SodaStream isn't as fortunate. The company is tethered to the rise and fall of carbonated beverages given the nature of its soda maker. However, its weakness has been limited to its stateside exposure. The Israeli company leans on the Americas for about a third of its business. Sales in the Americas plunged 14 percent during the second quarter, but that was more than offset by double-digit percentage gains everywhere else including its more established European market.

None of this means that the trend is irreversible. Folks can one day flock back to carbonated beverages to begin delivering meaningful growth again. New flavors, packaging, and nutritional profiles can help. However, if soda sales have gone flat in this improving global economy it's not a good sign that the industry will turn itself around anytime soon.

Motley Fool contributor Rick Munarriz owns shares of SodaStream. The Motley Fool recommends Coca-Cola, PepsiCo and SodaStream. The Motley Fool owns shares of PepsiCo and SodaStream and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our newsletter services free for 30 days.

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