Will Water Wash Away The Coca-Cola Company (KO)’s Potential?

The newsletter Beverage Digest recently released its annual report of market share positioning among the global beverage companies in the United States. Its findings show the continued decline of carbonated sodas and a sustained increase in healthier beverages such as bottled water and energy drinks. This begs the question: Will beverage giant The Coca-Cola Company (NYSE:KO) lose its dominance in the beverage industry due to a rise in consumption of commoditized beverages such as bottled water?

In the past, beverage giants Coca-Cola, PepsiCo, Inc. (NYSE:PEP), and Dr Pepper Snapple Group Inc. (NYSE:DPS) maintained an edge by keeping the recipes of their respective sodas secret. Health concerns brought on by increasing obesity and its associated costs on the health care system spurred a shift in consumer preference toward healthier and more easily copied beverages such as water, energy drinks, juices and tea. The beverage giants will need to utilize more creativity in packaging design, creating new flavors for energy drinks, and finding new markets for juices and tea.

Among Beverage Digest’s “Top 10 Liquid Refreshment Beverage (LRB) Megabrands 2012” list, nearly all of the beverages that lost volume and market share resided in the carbonated soda beverage category with the exception of Dr. Pepper. The top three megabrands Coke, Pepsi, and Mountain Dew experienced a volume decline of 1%, 3%, and 0.1% respectively with the 4^th largest megabrand, Dr Pepper Snapple Group Inc. (NYSE:DPS) experiencing an uptick in volume of 0.2% in 2012.

The products with the highest gain in volume on the list consisted exclusively of water. The Coca-Cola Company (NYSE:KO)’s Dasani, Nestle’s Pure Life, and PepsiCo, Inc. (NYSE:PEP)’s Aquafina bottled water brands increased volume 9%, 2% and 1%, respectively. Nestle’s Waters division resides in the No. 4 spot in terms of market share ranked by company behind Coca-Cola, Pepsi, and Dr. Pepper.

Companies making energy drinks show the largest volume and market share gains in Beverage Digest’s “Companies Ranked by Carbonated Soda Drinks (CSD) Volume 2012” list. Monster Beverage Corp (NASDAQ:MNST), Red Bull and Rock Star gained 19%, 17%, and 8%, respectively, in volume last year. In response to heightened demand in energy drinks, companies like Pepsi are introducing energy drinks of its own like the Mountain Dew Amp. Fast-paced society and little time to sit down and eat encourages people to buy these drinks for a boost in energy to get them through the day.

According to The Coca-Cola Company (NYSE:KO)’s latest earnings report, packaged water grew by the lowest amount expanding global volume by a mere 1%. Consumers give preference to cheaper private labeled bottled water.

The silver lining for Coca-Cola lies in expansion into emerging economies and products such as juice and tea. Coca-Cola managed to increase its global sparkling volume 3% in its most recent quarter due to robust growth in countries such as Thailand, India, and Russia. In The Coca-Cola Company (NYSE:KO)’s non-sparkling category, tea volume grew in the double digits with juice and energy drinks growing 9%.