Business

07.31.13

Are Americans Done With Coca-Cola, Pepsi, and Dr Pepper?

After the three major U.S.-based soda makers reported weak North America numbers in the second quarter, it begs the question, have we hit peak soda?

The soda market in the U.S. has tasted a little flat of late.

Since the beginning of the 21st century, Americans gawking at their perpetually expanding waistlines have gradually cut into the strength of the soda industry. And now, with second-quarter earnings for Coca-Cola, PepsiCo and Dr Pepper Snapple Group continuing the trend, it appears the U.S. hit peak soda at the end of the last decade.

While PepsiCo reported an increase in operating profit in its American beverage unit, revenue fell 2 percent and volume dropped 3.5 percent. For North America alone, the volume drop was said to be in the mid–single digits.

This comes as investor Nelson Peltz has pushed for Pepsi to spin off its beverage unit entirely given what he sees are irreversible trends in how younger Americans consume (or don’t consume) soda.

Coca-Cola, too, faces tough headwinds. It said it sold 4 percent less soda in the second quarter compared with the year before. And Dr Pepper Snapple Group, the third-largest soda company in the U.S., reported a drop in revenue and volume as well.

While the companies have claimed that a wet and cold spring caused the dip, it has been a years-long trend. According to the Associated Press, in 1998, American on average drank 54 gallons of soda a year. But by the end of 2012, the total stood at just 44 gallons, a decline of 18.5 percent. Per capita soda consumption in 2012, according to the trade publication Beverage Digest, fell to its lowest level since 1987, as total consumption dropped 1.2 percent in the year.

What gives? For years, the health police have been pointing to sugary soda as the culprit for America’s collective obesity. Through education, advocacy, and the occasional attempted ban, the authorities are pushing consumers away from Coke and Pepsi. While Mayor Bloomberg’s attack on the Big Gulp has become a trope on the right-wing speaking circuit, it is part of an emerging pattern. Politicians and government officials nationwide have considered or proposed (without success, it should be noted) soda taxes as a way to curb health-care costs while bolstering beleaguered budgets. And diet drinks, which were developed by the soda companies in part to pick up the slack created by the abandonment of sugary sodas, have come under scrutiny for other potential health risks.

Meanwhile, a great deal of the innovation in the beverage industry in the last several years has centered around noncarbonated drinks, like Snapple, flavored water, and Gatorade. Other companies, like Sodastream, are pushing products that enable people to make artisanal soda at home. And in the age of austerity and perennially pinched budgets, many Americans are opting for an ancient, flat, and largely free-form of beverage refreshment: water. As USA Today shrewdly noted: “Analysts expect water to hold on to its top spot for years to come.”

The great American soda brands may have hit their peak demand at home. But all is not lost for Coke and Pepsi. One of the recurring features of the current global economy is that when people around the world start to get higher incomes, they start to consume like Americans. They visit Disney, go to Starbucks and McDonald’s, buy Buicks, and shop at Ralph Lauren. And they start to overthrow their traditional drinks for fizzy sugared and flavored water packed into bottles and cans. The American soda market may be in decline, but in the developing world, sales are just beginning to bubble.