Are cola companies the new cigarette companies?

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Photo - Francesca Jane Allen

According to a recent report by Beverage Digest, which measured the Carbonated Soft Drinks (CSD) market size in the US, there might be a decline in soft drink consumption in times ahead. The study said that CSD consumption was 9.274 billion cases (192 ounce each) in 2011. It also noted a 1% decline in consumption from 2010 with consumption in per capita dropping to 714 eight-ounce servings in 2011 compared to 728 in 2010.

The report suggests that both Pepsi Cola and Coca-Cola have lost market share and that of Dr. Pepper Snapple’s market share remained flat. Shares have been declining in the US from seven consecutive years and it looks like soft drink companies are in the same catch 22 situation tobacco companies have been during the recent years.

However, the situation is completely opposite in developing countries where consumption of soft drinks is low in terms of per capita, regulations are slipshod and awareness about the excesses of soda consumption among consumers is virtually non-existent. Hence, soda companies are making hay while the sun is shining.

Following are the 3 reasons why cola companies are mimicking their cigarette counterparts in the US:

Lower Volumes, Higher Retail

Tobacco companies have raised the prices nearly twice over the last few years in order to meet the declining volumes of cigarette sales in the US. Cola companies, on the other hand, cannot increase the prices like tobacco brands as carbonated soft drinks are not as addictive as cigarettes. Retail sales still increased by 2% to $75.7 billion in 2011 from 2010. The increase in sales is mainly because of aggressive promotions of soft drinks with high retail price than those by ordinary colas. The trade off between the volume and prices is tricky but by reducing price, volume growth is not possible and therefore an increase in the price periodically.

Promoting Alternatives

The cigarette companies are looking for new alternatives to support their business. They are introducing products like smokeless tobacco and others for future growth. By being less harmful than mainstream tobacco products they attract lower taxes. Similarly, cola companies are busy promoting non-carbonated drinks like juices, ready to drink teas, water mixers etc to support their declining business. The overall growth in liquid refreshment beverages increased by 0.8% in 2011. Coca Cola Co is also investing $99 million in its Auburndale plant in 2012 to expand its production of ‘Simply’ brand of products.

Similarly, PepsiCo along with Germany’s Theo Müller Gmbh is investing more than $200 million to enter the US dairy market.

Fighting Legislation

Recent studies show cola companies are investing in lobbying to ensure that proposed soda taxes do not affect their business. PepsiCo, Coca-Cola Co and the American Beverage Association have spent a staggering $70 million on lobbying.

Likewise, tobacco companies have spent an estimated $16 million on lobbying during last year, targeting multiple litigation simultaneously. Some analysts believe both tobacco and carbonated drink industries attract high taxation because of the poor fiscal state of the government and imposing taxes on these industries ensures higher revenue collection and earns political respect.

Cola companies, in the meanwhile, resort to increase the prices periodically, though not as aggressively as cigarette companies, due to the fact that cost of sales is on the rise. Soft drink companies are also looking into ways to innovate and launch new products to bring more customers and ensure revenue generation.

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