Smaller soda containers mean bigger profits
As consumers increasingly heed warnings of public health activists linking carbonated beverages with health issues like obesity, per-capita soda consumption among Americans has plunged to levels not seen since Ronald Reagan was president. The major soda companies, though, are making the best of the situation.
Coca-Cola (KO) and PepsiCo (PEP), the two biggest, have found a new way to profit: offering smaller bottle and can sizes and raising prices. Dr Pepper Snapple (DPS), the No. 3 player whose brands include 7Up and Canada Dry Ginger Ale, is following suit.
Consumers can now buy 7.5 ounce cans of Coke, Pepsi and Dr Pepper as opposed to the standard 12-ounce size. The companies also now offer 1.25-liter bottles in addition to the traditional 2-liter size.
During the first five months of 2015, Atlanta-based Coca-Cola said sales of smaller containers rose 17 percent. PepsiCo also is making more by downsizing portions. Spokeswoman Gina Anderson declined to provide specific numbers, but she told CBS MoneyWatch that PepsiCo's results were comparable to Coke's.
Dr Pepper has also seen growth in smaller portion sizes in areas where its products are carried by Coke and Pepsi bottlers, and it expects to reap continued growth when it expands those offerings over the next year.
"Consumers have really flocked to these smaller portions because not only are you spending less ... but it's less soda," said Adam Fleck, an analyst with Morningstar, who follows the industry. He added that consumers "really like it" because they see smaller containers as a healthier option. For the companies, he said, "It does help on the price side because you are charging more per ounce as a result."
Though overall demand for soda continues to be lackluster, the "core soda drinker" has been willing to pay the higher prices for the carbonated beverage of choice, Fleck said. That trend is reflected in the results of the soda companies.
Earlier this year, Coca-Cola reported its first quarterly sales gain since 2012. Like rival PepsiCo, the company is also benefiting from sales of noncarbonated drinks like juices and sports drinks. Although Coca-Cola's overall sales lagged Wall Street's expectations in the latest quarter, volumes for Coke and Coke Zero rose in the quarter, while Diet Coke fell as demand for diet sodas plummets across the industry.
PepsiCo depends less on carbonated beverages than Coca-Cola, thanks to its Frito Lay snack and Quaker Foods businesses. The company managed to beat Wall Street analysts' expectations in its latest quarter, and it raised its outlook for the second time in three months as it benefited from price increases.
Plano, Texas-based Dr Pepper also reported better-than-expected results in its latest quarter, thanks to strong demand for key products such as Dr Pepper and Diet Dr Pepper. Shares of Dr Pepper have surged nearly 24 percent since the start of the year, topping Coca-Cola's, which have been flat, and PepsiCo's, which posted a 6 percent rise. That's because Dr Pepper hasn't been hurt by foreign currency fluctuations that have stung its larger rivals.
To revive soda demand, the industry also is investing in new technologies. Coca-Cola owns a 16 percent stake in Keurig Green Mountain (GMCR), which recently began selling a do-it-yourself soda-making machine called Keurig Kold. PepsiCo has partnered with Keurig rival SodaStream (SODA).
Soda's many health critics continue to discourage people from consuming carbonated beverages. The Center for Science in the Public Interest considers soda to be "liquid candy." Other critics have raised concerns about diet soda, arguing that it does little to promote weight loss and might lead to weight gain.
The New York Times recently joined those advocating for the imposition of a soda tax, which the industry has vehemently opposed. Berkeley, California, is so far the only municipality in the U.S. to institute such a surcharge.