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How Philadelphia Soda Tax News Affected Coca-Cola Stock

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Jun. 20 2016, Updated 5:12 p.m. ET

Impact of soda tax

Major nonalcoholic beverage stocks were adversely affected by the news that Philadelphia will impose a tax of 1.5 cents per ounce on sugary beverages. On June 17, the stock prices of Coca-Cola (KO), PepsiCo (PEP), and Dr Pepper Snapple (DPS) fell by 1.1%, 0.4%, and 1.1%, respectively. Philadelphia’s soda tax will be effective next year. However, the stock price of Monster Beverage (MNST), which is continuing to benefit from strong demand for energy drinks, was up 0.1% on June 17.

Philadelphia will spend the estimated $90 million in soda tax revenues on education, recreation centers, and city employee benefits. Aside from Philadelphia, Berkeley, California, is the only other city with a similar tax to discourage soda consumption.

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Pressure on soda companies

Soda companies are facing weakness in carbonated soft drink volumes as more and more consumers are opting for healthier beverages. According to Beverage Marketing Corporation, US carbonated soft drink volumes fell by 1.5% in 2015. In contrast, volumes of bottled water and ready-to-drink tea in the US grew by 7.9% and 6.1%, respectively, in 2015.

Aside from the shift in consumer preferences, major soda beverage companies are also facing regulatory pressures with more and more authorities contemplating the idea of imposing a soda tax. Sodas are alleged to cause several health issues like obesity, osteoporosis, and diabetes.

In March 2016, the UK government announced its plans to implement a special tax on sugar-added drinks in 2018. Mexico imposed a soda tax of one peso per liter in 2014 to control the rising obesity and diabetes rates in the country.

Coca-Cola has a high exposure to carbonated soft drinks. In 2015, Coca-Cola’s soda, or sparkling beverages, accounted for 67% of its US unit case volumes, while still beverages accounted for the remaining volumes. Outside the US, sparkling beverages accounted for 74% of Coca-Cola’s 2015 unit case volumes. Such significant exposure to sparkling beverages makes Coca-Cola more vulnerable to soda taxes. Coca-Cola is the second-largest holding of the Consumer Staples Select Sector SPDR Fund (XLP) and accounts for 9.3% of the fund.

In the next part of this series, we’ll discuss Coca-Cola’s updated guidance for its 2Q16 results.

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