High prices and unpredictable weather leads to slow sales for soft drink sector

Food & Drink Weekly, Sept 13, 2004

High prices and poor weather for outdoor activities during the summer of 2004 has contributed to slow sales for the soft drink industry. Bill Pecoriello of Morgan Stanley also predicts that troubles will persist into 2005. Pecoriello reduced his sales volume projections for the U.S. soft drink industry for the third time since June.

The weather hasn't helped, either, from Florida's recent hurricanes to cool weather in spots. "Given the weather, the retail environment, upward pricing and no new blockbuster products, it was a pretty dismal summer for carbonated soft drink growth," said John Sicher, editor and publisher of Beverage Digest.

By now, it's clear that the U.S. soft drink industry has its share of challenges. Sales of soft drinks have been on a slow slide, thanks in part to worries about obesity and increasing interest in other drinks, such as bottled water and sports drinks. But the problems of summer 2004 haven't had much to do with these long-term issues.

Price is the main driver. In the recent past, the nation's big bottlers have been raising wholesale prices. Until this summer, many retailers passed along some, but not all, of these higher costs to consumers, Pecoriello said. "We are seeing retailers not only pass on the 2-3 percent price increases that the bottlers have been taking, but taking pricing ahead of that level in order to improve their own margins," Pecoriello said. Marc Cohen of Goldman Sachs noted in a report that the Coke and Pepsi bottling systems have reduced their use of specials, like selling 12-packs at discounts of two for $5 or three for $9. While Cohen sees the trend toward higher prices as healthy for the industry, the downside comes in volume.

According to Beverage Digest, Coke's sales volume in U.S. supermarkets fell 5.8 percent year-to-date through Aug. 8, while prices rose 4.1 percent. Sales volume of private label drinks--brands like Wal- Mart's Sam's Choice--climbed 6 percent, as their prices stayed flat.

In a recent interview with Beverage Digest, Coke North America leader Don Knauss noted that "everyone seemed to hit a bit of a wall in July." Indeed, soft drink sales weren't the only ones to suffer. "The retailers I've talked to think higher fuel prices are really hurting discretionary spending," Knauss said.