Fitch: Big Beverage Company Growth Lies Overseas

Coca-Cola and Pepsi Leading U.S.-based marketers of non-alcoholic, ready-to-drink (NARTD) beverages are expected to be looking increasingly to overseas markets for growth in the years ahead, according to a new report from global credit ratings agency Fitch Ratings.

Big beverage marketers will be more strategically focused on international expansion, either through acquiring local brands/distribution networks or making capital outlays to gain share and establish comprehensive distribution for company-owned products in overseas markets, the analysts report.

While NARTD margins and operations cash flow remain healthy, shareholder pressure for continued growth and converging market factors are driving majors to look beyond the domestic market, Fitch points out:

  • A mature, saturated U.S. market. U.S. consumption levels of carbonated soft drinks (CSDs)--which accounted for 48% of U.S. NARTD volume as of last year, according to Beverage Marketing Corp. (BMC)--are much higher than in the rest of the world, leaving little room for growth, notes Fitch.



Further, CSD consumption has been on the decline since the late '90s as consumers have turned to newer, non-carbonated beverages such as bottled waters, coffees, teas, sports and energy drinks. (CSD per-capita consumption dropped from nearly 55 gallons in 1998 to about 49 gallons last year, BMC data shows.)

All non-carbonated categories except juice drinks (down nearly 10%) saw healthy volume percentage growth last year, including nearly 30% growth for energy drinks, according to Beverage Digest. However, growth rates slowed substantially versus 2006, and only bottled water and juices/juice drinks (with 29% and 13%, respectively) have achieved significant shares of overall NARTD volume, according to BMC.

Even during the pre-2008 period of economic expansion, overall NARTD North American volume growth trends for both Coca-Cola and PepsiCo, when adjusted for population trends, have been on the decline, Fitch reports.

  • Expansion opportunities through acquisition are limited in the already heavily consolidated U.S. beverages market.

Finch sees potential obstacles to Coca-Cola or PepsiCo acquiring remaining competitive beverage companies. Some targets might present antitrust issues. For instance, would Coca-Cola or PepsiCo--with their 43% and 32% shares of the CSD market--be allowed to add #3 NARTD company Dr Pepper Snapple Group, Inc., with its 15% share of carbonated, to their portfolios? Could PepsiCo's leadership in the tea space block a buy of Arizona Beverage Co.?

Further, some potentially attractive targets, such as Arizona, Red Bull GmbH and Rockstar, Inc., are privately owned and might be resistant to unsolicited acquisition--and some, like Hansen Beverage Co. and Rockstar, might lack the size or growth potential desired, say the analysts.

  • Economic pressures are forcing many consumers to reallocate dollars previously spent on more discretionary items to food/beverage staples and fuel, which does not bode well for relatively expensive, non-essential varieties of beverages.

"The weakening economy has already had an effect on the large beverage companies," the Fitch analysts point out. "CCE [Coca-Cola Enterprises, Inc., Coke's major U.S. bottler] cited weak economic growth for potential earnings disappointment in 2008." Moreover, both CCE and PepsiCo Bottling Group, Inc. "experienced weakness" in case-packed bottled water in this year's first quarter, possibly because consumers are starting to buy private-label filtered waters or even drink tap water instead of springing for brands like Aquafina and Dasani, they report.

Facing downward volume pressures domestically, the beverage companies may also experience price elasticity (even as input costs rise), potentially limiting revenue growth, Fitch points out.

Current debt-holders should "anticipate greater debt levels and possibly increased leverage" at the leading beverage companies as a result of their need to return cash to shareholders while investing in acquisitions or growth of existing brands overseas, Fitch concludes--adding that both expansion strategies "present execution risks."

The full report, "Large Beverage Companies: In Search of Growth as U.S. Trends Remain Weak," can be downloaded at

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