Will Exorbitant Soda Taxes Derail PepsiCo and Coca-Cola?
Editors' pick: Originally published July 8.
Updated to include information on South Africa's new soda tax.
Widespread soda taxes could put another dent in an industry that has long been in decline as consumers have migrated to healthier alternatives.
"The [soda] taxes we have seen tend to have a one-year impact and then the category goes back to whatever their trajectory was before that," PepsiCo (PEP) - Get Report Vice Chairman and CFO Hugh Johnston told TheStreet.
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Philadelphia recently passed a tax on soda and sugary drinks, and similar plans are in the works in other major U.S. cities. They also appear to be on the docket overseas, too. South Africa's Treasury said Friday that it's proposing a 20% tax on sugar-sweetened beverages in an effort to curb consumption of such products and lower obesity levels.
Philadelphia's tax of 1.5 cents per ounce of sugar-added and artificially sweetened soft drinks -- which would add 18 cents to the cost of a 12-ounce can of soda, $1.08 to a six-pack or $1.02 for a two-liter bottle -- will go into effect on Jan. 1, 2017. Tax proposals are active in San Francisco and four other cities, as well as the states of Alabama and Illinois, according to Healthy Food America, an organization that supports soda-tax efforts throughout the U.S.
Johnston added, "Obviously, from a company perspective, we are not in favor of taxes that target individual products. We understand there is some political will to do this, but we think we will manage it very successfully."
PepsiCo and rival Coca-Cola (KO) - Get Report may be looking to Mexico to gauge the potential impact of soda taxes on sales of the brown fizzy drinks. In 2013, lawmakers there approved a tax of one peso, or about 8 cents, per liter on soft drinks, and an 8% sales tax on high-calorie foods such as potato chips, sweets and cereal.
According to research from the University of North Carolina in concert with Mexican public health officials, there was an average 6% decrease in soda sales in 2013 after the tax went into effect. By December 2014, the final year of the study, sales fell 12% from the prior year, as lower-income Mexicans appeared to reduce their consumption.
Luckily for their shareholders, the soft drink giants have worked hard to diversify their product portfolios away from down-trending sales of 12-ounce soda cans and 2-liter soda bottles. Increased soda taxes, while painful in the short term, would unlikely create dire financial straits for these two companies.
Both Coke and Pepsi have found success selling 7.5 ounce drinks -- "mini cans" -- to shoppers. If soda taxes push consumers to buy smaller can sizes, it would actually be good news for the beverage companies -- small cans boast higher profit margins relative to larger drink sizes.
Meanwhile, the companies have successfully launched many other non-soda drinks such as sparkling flavored water and cold pressed juices.
In North America, Pepsi's beverage business was able to overcome sluggish sales of full-calorie and diet colas. Pepsi delivered solid revenue and profit increases of 1% and 6%, respectively, in the second quarter, due to demand for new products such as Aquafina sparkling water, Mountain Dew Black Label, Propel flavored waters and Naked cold-pressed juices.
Coke hasn't reported its second-quarter results yet. But is first-quarter organic revenue, which excludes the impact of currency fluctuations, rose 2% on global momentum for sports drinks, teas, packaged water and energy drinks.