DJ Beverage Cos Cope With Lost Generation Of Cola
It might not be wise to pin hopes for a recovery in carbonated soft-drink sales on teens. - Copyright (c) 2006 Dow Jones & Company, Inc.
Health concerns and parental restrictions are steering teenagers to other beverages, according to a survey conducted by Morgan Stanley (MS) analyst Bill Pecoriello. His research shows the image of colas, and even diet colas, continues to deteriorate at a rapid pace.
These findings further reinforce Pecoriello's view that yearly carbonated soft drink sales volume will decline 1.5%, which is more than twice the rate of decline last year.
According to the survey, 13- to 17-year olds are drinking fewer fizzy drinks than the overall population. Instead, the group favors non-carbonated beverages such as sports drinks, bottled teas and energy drinks.
"While teens are less health conscious than adults, it is still relatively high and growing," Pecoriello said, in the report. "Once the teens become adults, we believe that they will become more health conscious and thus are unlikely to start increasing their (carbonated
The Pepsi Generation
These trends bode well for PepsiCo Inc. (PEP), which sells Gatorade and Aquafina waters. Pecoriello expects its stable of non-carbonated drinks will continue to help the Purchase, N.Y., company grow at a rate above the industry's average in the coming years.
The news isn't as favorable for Coca-Cola Co. (KO), which lacks strong non-carbonated brands.
According to Pecoriello, many of the product introductions that have added flavors to existing brands have appealed to consumers who are already heavy soda drinkers, rather than attracting new consumers to the category. However, there is some risk that soda trademarks have already been overextended, he said.
The lack of interest from teenagers also could hurt Coke in the highly profitable fountain-beverage category, which is its stronghold.
McDonald's Corp. (MCD), for example, wants to offer its customers more choices and is testing some beverages that compete with Coke in a few Texas locations.
"This could have longer-term profit implications for Coke, which derives 30% of its U.S. volume from the fountain channel," Pecoriello said.
Coke's own bottlers also are considering branching outside the Coke family. For example, Coca-Cola Bottling Co. Consolidated (COKE) is distributing Cinnabon Coffee. The Charlotte, N.C., bottler has additional Coke products in the works and expects to build a $100-million non-Coke business, Pecoriello said.
The analyst expects Coca-Cola Enterprises Inc. (CCE), Coke's largest bottler, to follow a similar path toward expanding its footprint in non-carbonated drinks.
Coke faces limitations in its ability to introduce coffee and tea products outside of its joint venture with Nestle S.A. (NESN.VX), Pecoriello said. This has complicated things for Coke. Take its introduction of Godiva Belgian Blends as an example. Since the Godiva drink is being launched outside of the joint venture, it is not being called a coffee.
The Godiva drinks will begin selling nationally next month.
As for the Nestea brand, it has been losing steady market share in the fast-growing bottled-tea category. The brand has been slow to launch green teas and white teas that are fueling the growth of its competitors.
Pecoriello surveyed 1,550 consumers aged 13 to 65 years old.
The analyst doesn't own shares of the stocks he covers. However, Morgan Stanley has done investment banking business with Pepsi and Pepsi Bottling Group Inc. (PBG) within the past year.