Through TheFly's Eyes: Soft Drink Sector
from Theflyonthewall.com







Are changes at Coca Cola (KO), $42.30, long overdue? Morgan Stanley analyst William Pecoriello says Coca Cola faces two major investment decisions: 1) decide whether to own more bottling assets and 2) accelerate diversification beyond carbonated soft drinks. Regardless of whether Coca Cola had rested on its market share, or on its extensive, global sales & distribution network, Coca Cola slipped during the 1990s, and failed to see the emerging non-carbonated soft drink trend. That oversight created a large opportunity for nimbler Pepsico (PEP), $58.60. During the decade, Pepsico registered stronger international sales growth, and was not afraid to venture into the non-carbonated line: the company’s Aquafina won market share, and is now a staple brand in the U.S. bottled water segment. Always viewed as nimbler than Coca Cola, Pepsico now has the reputation of being more “in touch” with younger consumers, and an organization more-likely to spot a trend, or a hip, new sensation that could mature into a trend. Moreover, while market researchers are quick to point out that only a tiny fraction of fads mature into a trend, Pepsico’s younger generation sensors are viewed as giving it a competitive advantage versus Coca Cola regarding trend recognition – a significant edge.

Meanwhile, Cadbury Schweppes (CSG), $40.50, which posted a 46% increase in full-year profit in 2005, rounds-out a “Soft Drink Big 3” that controls 90% of the U.S. beverage market. One would think that with the overarching presences of Pepsico and Coca Cola, there wouldn’t be room for a third significant player, but that is not the case. Cadbury has successfully defended its overall market share for its well-established brands: 7UP, A&W Root Beer, Canada Dry, Dr. Pepper, and Hawaiian Punch.

Finally the soft drink sector has shown that while the Big 3 have the capitalization to research, roll-out and promote brands, an underdog success story is possible in the sector: upstart Glaceau, a private company, is making inroads with noncarbonated drinks such as VitaminWater, as the carbonated share of the soft drink sector dropped to 73% in 2005 from 83% in 1999.

Sector Outlook: When the non-carbonated segment burst upon the scene in the decade many now call the “Roaring 90s,” some doubted the alternative soft drink’s durability. In the first five years of this decade, non-carbonated has demonstrated that it is a trend, not a fad, and that non-carbonated is likely to grab additional market share from the carbonated stalwarts as the decade progresses. Given the sector’s evolution, Pepsico is best-positioned to deliver the products consumers like, and the returns investors want. Even so, there’s a Wall Street adage that argues: “No one ever went broke holding Coke.” Coca Cola is a pace (and possibly a product) behind the times, but that’s not enough to abandon the venerable giant. Look for Pepsico and Coca Cola’s duel to continue as the decade progresses.