Philadelphia Takes the Fizz Out of Sodas

Per capita soda consumption in the U.S. tumbled to a 30-year low in 2015

Carbonated soft drink makers such as PepsiCo Inc. (NYSE: PEP), The Coca-Cola Co. (NYSE: KO), and Dr Pepper Snapple Group Inc. (NYSE: DPS) are faced with mounting challenges in the form of a consumer backlash for carbonated beverages. In recent years, consumers are increasingly shifting away from both sugary drinks and artificially sweetened beverages citing health concerns. Since soda drinks contain zero nutrition, excessive sugar and caffeine, thereby increasing diabetes and other related health risks. As a consequence, the per capita soda consumption in the U.S. tumbled to a 30-year low in 2015, according to Beverage Digest and as reported by Bloomberg on June 17th, 2016.

The carbonated soft drinks could indeed be stuck in a rut after data showed that soda sales declined in the 12-week period ended June 5th, 2016, as compared to year-ago period. The total carbonated soft drink volumes fell for the 11th straight year in 2015; further declining 1.2%, from 2014’s 0.9% drop. PepsiCo, Coca-Cola, and Dr Pepper Snapple all reported falling demand, because of which the annual per capita consumption of carbonated soft drinks dropped to about 650 eight-ounce servings in 2015, the lowest since 1985.

Source: Beverage Digest, Bloomberg
Source: Beverage Digest, Bloomberg
Source: Beverage Digest
Source: Beverage Digest

This trend is especially bad news for Coca-Cola, which derives almost 75% of its global sales volume from carbonated soft drinks. Coca-Cola is looking to focus on energy drinks instead and

plans to roll out Coca-Cola Life, a moderate-calorie version sweetened with stevia plant extract, across more countries, after releasing the drink in Argentina and Chile in 2015.

Health-conscious consumers shun soda

As health-conscious Americans increasingly shun soda, carbonated beverage makers are consciously making a shift away from sugary, bubbly drinks in favor of healthier beverages such as instant fruit juices, fruit blends, and flavored waters. These alternatives do not contain as many calories as soda, and also do not include ingredients like the sweetener aspartame, which is said to pose health risks, but still deemed safe by the Food and Drug Administration.

Philadelphia hits soft-drink industry with tax

Philadelphia became the first major U.S. city to pass a tax on soft drinks on Thursday, June 16th, 2016, dealing a significant blow to the soft drinks industry. In a 13-4 vote, the City Council approved a plan to add a 1.5-cents-per-ounce tax on soft drinks containing added sugar or artificial sweeteners. People who buy sugary drinks will have to pay an additional 18 cents in tax for each 12-ounce can of soda and $2.16 in tax for each 12-pack purchased.

Philadelphia will start collecting the tax from January 1st, 2017. The tax is expected to generate $91 million in the first year and $409.5 million over five years. Of that amount, $314 million would be allocated to expanding pre-kindergarten and renovating recreation centers and libraries in the inner city. However, Philadelphia residents are upset that all of the money is not being allocated to pre-K and parks and recreation facilities. Drinks that will not be taxed are those that are more than 50% juice or milk.

Taking the cue from Philadelphia, soda tax proposals are being discussed in San Francisco and four other cities, and two states, Alabama and Illinois.

Stock performance

S3PepsiCo’s stock stood at $104.44 at the close on Thursday, June 23rd, 2016, having reached an intraday high of $104.50 and a low of $103.91 during the session. The stock’s trading volume was at 3,043,700 for the day. The Company’s market cap was at $151.50 billion as of Thursday’s close.

S4Coca-Cola’s stock stood at $45.08 at the close on Thursday, June 23rd, 2016, having reached an intraday high of $45.17 and a low of $44.84 during the session. The stock’s trading volume was at 9,599,100 for the day. The Company’s market cap was at $197.29 billion as of Thursday’s close.

S5Dr Pepper Snapple’s stock stood at $92.57 at the close on Thursday, June 23rd, 2016, having reached an intraday high of $92.64 and a low of $92.08 during the session. The stock’s trading volume was at 415,900 for the day. The Company’s market cap was at $17.40 billion as of Thursday’s close.

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