Consumption of carbonated drinks for the likes of The Coca-Cola Company (NYSE:KO) and Dr Pepper Snapple Group Inc. (NYSE:DPS) in North America has been declining constantly in the last few years due to costumers switching to healthier and safer options, such as juices and other non-carbonated drinks. The main markets, such as Europe and North America, have exhibited considerable decline in revenues. Dr. Pepper did not report any growth in sales of its carbonated drinks during the fourth quarter of 2012. Net profits grew by a mere 2%, as the top line and bottom line did not see any marked improvement in volumes. Sales of carbonated drinks in North America contribute to roughly 70% of total revenue for The Coca-Cola Company (NYSE:KO), Dr. Pepper, and PepsiCo, Inc. (NYSE:PEP). Hence, it’s noteworthy that the industry wide revenue generated through carbonated drinks declined by approximately 2% in the US during 2011. The complete product portfolio of Dr. Pepper is not as diverse and large enough as its other two competitors, thus the non-carbonated offerings struggle to make up for declining sales in the carbonated segment. This was exhibited in Dr. Pepper’s 2012 performance as the total volume in the fourth quarter of 2012 dipped. Dr. Pepper is trying to make up for decline in its unit sales by raising its selling price.
Sales of Carbonated Drinks to Decline Further
Moving forward, the sales of carbonated drinks in North America are expected to decline further. This is does not look very promising for Dr. Pepper as we move deeper into 2013. The company will have to make investments in order diversify its product portfolio to create more revenue streams. The company will have to innovate and make sure to enter into the non-carbonated segment aggressively if it has to compete with giants like Coca Cola and PepsiCo, Inc. (NYSE:PEP)
Competitors
Coca-Cola is one of the largest soft drinks company in the world. It has a market cap of $167 billion and offers a wide range of carbonated and non-carbonated drinks. It generated total revenue and gross profit of $48 billion and $29 billion, respectively, in 2012. The highest contributor to total revenue is the flagship cola drink, followed by Diet Coke and other non-carbonated drinks. PepsiCo is another giant that competes heavily in the soft drink industry. It has a market cap of $114 billion and along with soft drinks it also offers a wide range of snacks and dairy products. It generated a total revenue and EBITDA of $68 billion and $13 billion, respectively, in 2012. Sales of dairy products and snacks contribute approximately 50% to the total revenue, followed by the carbonated soft drinks.
Commodity Prices Easing
Commodity prices in North America have been constantly declining over the last six months, thus the cost structure of several beverage companies is expected to decrease. Coca-Cola’s corrected guidance for 2012 saw its incremental cost forecast reduce to $225 million from $300 million in the third quarter, suggesting an industry wide easing of costs during 2013.
Dr. Pepper’s Current Scenario
Dr. Pepper primarily operates in North America with more than 90% of its revenue generated from US and Canada. Dr. Pepper reported a collective revenue and EBITDA of $6 billion and $1.3 billion, respectively, in 2012. The current stock price is trading at $ 42.76, 92% of its 52 week high. The company has a market cap of $8.9 billion. Going forward we do expect Dr. Pepper to invest in innovation as it will need to increase its product portfolio to compete with the likes Coca-Cola and PepsiCo. The revenue must grow from non-carbonated drinks in order to make up for the industry wide slump in the sales of carbonated drinks. The increasing awareness of health related problems in North America is resulting in declining sales. People now understand the consequences of excessive consumption of carbonated and are now resorting to non-carbonated options, such as juices and energy drinks. The overall industry sales for carbonated drinks have been witnessing constant declines for the past five or six years and the trend is only expected to continue. However, one silver lining for Dr. Pepper is the potential to increase sales by adding the Latin American markets. Coca-Cola reported robust sales from the other emerging nations and that seems to be driving its revenues. Going forward Dr. Pepper has to plan an aggressive expansion plan into the emerging markets as the soft drink industry now seems to relying on these markets for survival.
The article Carbonated Drink Is Not a Healthy Investment originally appeared on Fool.com and is written by Sujata Dutta.
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