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The Coca-Cola Co. (NYSE: KO) has been facing an unavoidable problem for almost a decade: Americans are drinking less soda.
According to Beverage Digest, soda sales in the U.S. dropped 3% in 2013, which was worse than the 1.2% drop it experienced in 2012. The publication noted that soda sales have fallen for nine consecutive years.
Sales are down again in 2014. Citi Research reported that U.S. store sales of soda had dropped 1.9% in the first 12 weeks of the year.
Those numbers hit even closer to home this week when Coca-Cola reported that its total soda sales were down globally for the first time in 15 years in the first quarter. Global sales had been buoying Coca-Cola’s revenue, but even international sales dipped this quarter.
But while slowing soda sales also affect other beverage companies like PepsiCo Inc. (NYSE: PEP) and Dr. Pepper Snapple Group Inc. (NYSE: DPS), Coca-Cola’s response is not giving investors confidence in KO’s future…
Coca-Cola Sticks Up for Soda
Rather than focusing on the other beverages in its product portfolio, Coca-Cola is throwing its full support (and marketing budget) behind its sugary namesake.
“Coca-Cola remains magical. We need to work even harder to enhance the romance of the brand in every corner of the world,” Coca-Cola Chief Executive Officer Muhtar Kent told investors in February.
Romance aside, Coke’s sales are slipping. In 2013, Coca-Cola sales were down 0.5%. And while Coke remains the top-selling U.S. soda, the brand has sold less of its namesake every year for 13 straight years.
To offset these falling sales totals, Coca-Cola is doing more advertising around the full-calorie soft drink. According to The Wall Street Journal, Coke will increase its global advertising spending by $1 billion through the next three years. That’s up from the $3.3 billion it spent last year.
But while Coca-Cola increases ad spending, it’s facing yet another troubling statistic…
Diet Coke’s sales decreased 6.8% in 2013.
Diet Coke contains the artificial sweetener aspartame, which has a negative stigma among many American consumers. The Food and Drug Administration has completed hundreds of aspartame studies and never deemed the sweetener unsafe, but there is still a concern among American consumers that aspartame may cause certain cancers and related health issues.
Despite its reputation, Coca-Cola has decided to defend aspartame. It’s even creating another artificially sweetened beverage, “Coca-Cola Life.” That drink will include an artificial sweetener derived from stevia plant extract.
The soda issues have contributed to the uninspiring performance in KO stock. In the last 12 months, it’s dipped nearly 6.5% compared to gains of 14% for the S&P 500 and 8% for the Dow Jones Industrial Average. In the past two years, the stock is up a measly 7%.
What’s most frustrating for investors is that Coca-Cola hasn’t tapped into this similar, stronger market to offset soda sales losses…
How Coca-Cola Can Solve Its Soda Sales Problem
While soda figures are down in the United States, not all beverage sales are tanking.
In 2013, sports drink sales gained 0.6% while energy drinks jumped 5.5% and ready-to-drink coffee products were up 6.2%.
With so much of Coca-Cola’s revenue tied to a sliding soda market, the company could offset those losses by adding growing beverage brands, like Monster Beverage Corp. (Nasdaq: MNST).
Coca-Cola generates a large portion of its revenue from distributing Monster’s products to retailers across the United States. Stifel Nicolaus Analyst Mark Swartzberg has estimated that the Monster relationship could account for 13% of Coca-Cola’s North American revenue and 3% of its global revenue by 2015.
If Coca-Cola acquired Monster, it would add a valuable and growing product to its beverage portfolio. It wouldn’t be cheap – Monster has a market value just shy of $11 billion – but according to Yahoo! Finance, Coca-Cola currently has a cash hoard of more than $20 billion.
Currently, 60% of Coca-Cola’s U.S. revenue is generated from soda. That’s a dangerous percentage given the way soda sales are trending. By comparison, PepsiCo generates just 25% of its revenue from soda.
For KO investors, the Monster acquisition may be a pipe dream. While Coke made a $4.1 billion purchase of Glaceau (known for Vitaminwater) in 2007, it’s spent just $28.7 billion on acquisitions since 1995. That’s far below the $45.4 billion that Pepsi has spent in the same time.
Additionally, Coca-Cola boasts 11 non-soda brands that each brought in more than $1 billion in revenue in 2013, but it’s still throwing the lion’s share of its advertising behind Coke. The natural question remains: Why is Coca-Cola spending billions more advertising Coke when these brands are operating in a growing market?
A major acquisition like that of Monster Beverage could be the momentum swing for KO. Otherwise, shareholders will get tired of watching soda sales continue their steady decline.
Are you a KO shareholder? What do you think of Coca-Cola’s strategy moving forward? Let us know on Twitter @moneymorning using $KO or #Coke.
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- The Wall Street Journal:
The Diet Soda Business Is in Freefall
Is Monster a Fix For Coca-Cola’s Diet Coke Withdrawal
- The Wall Street Journal:
Coke Sticks to Its Strategy While Soda Sales Slide
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