Dispelling the US diet soda dirge: Moody’s says Coke best-placed to profit

Whereas a September 2012 Australian launch uses stevia in Pepsi NEXT to effect a 30% sugar cut, the US version replaces 60% with aspartame and Ace-K

Moody’s Investor Service believes Coke is better placed than PepsiCo and Dr Pepper Snapple to ride out the US diet soda storm, due to its strong position in international markets where the category is growing.

Analysts Linda Montag, senior VP, and Peter Abdill, MD, corporate finance, refer, in their new research report ‘Diet Sodas Lose Their Fizz’ to statistics showing worrying 2014 declines for diet/low calorie sodas in the US.

These show Pepsi NEXT (sweetened with sugar, aspartame and acesulfame potassium) in freefall, with a shocking decline of 40%+ (Beverage Digest figures), followed by Dr Pepper TEN (circa. 18%).

Caffeine Free Diet Pepsi and Caffeine Free Diet Coke were brought up the rear for the blues and the reds (with almost double-digit falls, based on Euromonitor stats) while Diet Coke, Diet Pepsi and Diet Dr Pepper all suffered mid to high single-digit declines (Euromonitor).

Pepsi NEXT in freefall, but what of Coca-Cola Life?

In recent years this diet dirge has accelerated share declines for carbonated soft drinks (CSDs) in the US soft drinks market – from 46% in 2011 to 44.1% in 2012 and 42.7% in 2013.

Montag and Abdill say that Dr Pepper and Coke are the most exposed to diets as a percentage of revenues, with PepsiCo more protected due to its large global food business – though its exposure is larger than Pepper’s in dollar terms.

Chewing over the 50-calorie launch of Coca-Cola life, the analysts express doubt as to whether mid-calorie, naturally sweetened sodas will bring back lapsed consumers.

“However, these products may be an important step towards the ultimate goal of creating a naturally sweetened zero-calorie soft drink,” they write.

“Such a soda is likely at least a few years away, but would go a long way towards stemming the category’s decline,” Montag and Abdill add.

Diet cola declines yet to hit Europe

The analysts expect US CSD and especially diet CSD volumes to continue to decline through 2014 and 2015.

So how can the soft drinks giants offset sales losses over this period?

Well, Moody’s’ analysts note that the diet cola weakness in Canada and the US has not spread to Europe, where diet cola volume has grown 3.5% annually over the last 5 years, albeit weakly in 2013 – though they chalk slow volume growth of 0.6% down to bad weather and continued economic weakness.

Such markets can still grow, they argue, before pointing to a “considerable runway” in emerging markets such as Latin America (where diet cola only makes up 7% of total cola volumes) Eastern Europe (another growth market where diets are only 4% of volumes) and the Middle East (6% of volumes). 

Clearly, such markets are under-penetrated relative to the US, and Montag and Abdill note: “As consumers move into the middle class in many developing countries, they will be able to afford more branded packaged beverages.”

A concomitant increase in nutritional awareness could also drive increased diet cola sales, they write, adding that they believe Coke is best-placed among the ‘big three’ to benefit, given its large international presence and market share leadership in CSDs across most international markets.

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