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Roadblocks for Nonalcoholic Beverage Companies’ Future Growth

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Apr. 8 2016, Updated 1:04 a.m. ET

Stock price changes

On a year-to-date basis, Coca-Cola (KO) and PepsiCo (PEP) have appreciated 8% and 2.2%, respectively, as of March 28. Dr Pepper Snapple (DPS) and Monster Beverage (MNST) have fallen 3% and 7.7%, respectively, since the start of 2016.

Since 2010, Coca-Cola, PepsiCo, Dr Pepper Snapple, and Monster Beverage’s stock prices have appreciated by ~61%, 65%, 207%, and 578%, respectively. Monster Beverage’s stock price benefitted significantly in August 2014 in reaction to a strategic deal between the company and Coca-Cola that closed in June 2015. Monster Beverage and Coca-Cola together constitute 10.8% of the Consumer Staples Select Sector SPDR Fund (XLP).

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Soda tax

The major threat for soda companies is increased regulation in several countries to discourage rising obesity and other harmful effects of soda beverages. Effective January 2014, Mexico levied a soda tax of one peso per liter in an attempt to discourage the country’s alarming obesity rate. A new study has found soda drink purchases in Mexico fell 12% from the end of December 2014.

On March 16, 2016, the United Kingdom’s finance minister, George Osborne, stated that the country will levy a soda tax effective 2018. Health organizations around the world are increasing pressure on governments to curb soda beverage consumption. Since soda volumes are already struggling, imposing a soda tax will likely hurt nonalcoholic beverage companies’ sales.

Environmental concerns

The use of plastics for ready-to-drink beverages faces heavy criticism from environmentalists. Several national parks in the United States—including the Grand Canyon, Canyonlands, Zion, and Bryce Canyon—have banned bottled water sales. Many bottled water manufacturers have opposed this move.

Bottled water makers also face criticism for their use of California’s water resources. The state has been hit by severe drought. However, according to the International Bottled Water Association or IBWA, bottled water accounts for less than 0.01% of all water used in the United States annually and only 0.02% of water used in California every year.

Aside from these above risk factors, higher input prices could also hurt nonalcoholic beverage sales. For instance, the rise in orange prices has hurt orange juice sales.

Series conclusion

Overall, growth in the US nonalcoholic beverage industry will be governed by the shift in consumer choices for healthier beverages. Coca-Cola expects the global nonalcoholic ready-to-drink market to grow at a compound annual growth rate of 5% in the 2016–2020 period to $250 billion. Beverage companies will have to focus on expanding their presence in still beverage categories like ready-to-drink tea and bottled water to capture future growth opportunities.

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