Changing Consumption

Coca-Cola vs. Americas Fight Against Soft-Drinks

Kathryn Entner MBA 630 Economic Analysis for Managers Fall 2011

The recent, escalating trend of health-consciousness has spread from personal decision to policy-making within our country. With the increasing concern about Americas obesity problems and health care costs, food companies and in particular soft-drink corporations have come under scrutiny and their products are routinely branded as contributors to these developing social issues. One study reported in 2005 that carbonated soft drinks provided about 7% of calories in the average Americans daily diet, the largest single source of calories 1. This paper will look at what actions have taken place already towards the consumption of soft-drinks, what regulations are being considered, and how this has affected and would affect in the future the soft-drink industry, in particular Coca-Cola Co. As of 2009, thirty-three states had adopted a sales tax on soft-drinks2 and many local efforts around the country have become more involved in restricting the access or sales of such drinks. The mayor of New York City proposed banning the purchase of sugar-sweetened beverages by food stamps3 and in Boston, the mayor is expanding the citys ban of sugar-sweetened drinks from schools to all city properties and functions which would include vending machines, concession stands, and any cityrun events4. In 1994, the Senate introduced a bill that would allow the USDA to restrict the sales of softdrinks in schools5 and since then many school boards and legislators have continued to increase their regulation of soft-drinks. Under pressure from such reforms, in 2006 Coca-Cola Co., Cadbury Schweppes PLC and PepsiCo all agreed to limit their sales to schools: The beverage companies agreed to sell only water, unsweetened juice and low-fat and non-fat milk, flavored and unflavored, in elementary and middle schools. Diet sodas and sports drinks will be sold in high schools.6 These restrictions are hailed as a good start by those who are pushing for reforms, but they want it to go further. Taxation is the most popular topic of regulation, in particular an excise tax, where each ounce of sugar-sweetened beverage would be taxed. The Rudd Center issued a report in 2009 that

stated a national excise tax of one cent per ounce of non-diet soft-drinks would raise $14.9 billion in the first year. They advocate, along with most advocates for the taxes, that such revenues be designated towards programs that advocate health, nutrition, and obesity prevention, in particular subsidies for healthy foods and school and community initiatives 7. The Center for Science in the Public Interest makes a few more recommendations: National and local government should require chain restaurants to declare the calorie content of soft drinks and all other items on menus and menu boardsThe Food and Drug Administration should require labels on non-diet soft drinks to state that frequent consumption of those drinks promotes obesity, diabetes, tooth decay, osteoporosis, and other health problems. 8 The soft-drink industry has already seen the effects of this growing trend of turning away from carbonated beverages. Coca-Cola has managed to remain in the lead position for market share and volume, however recently it has been a competition of smaller volume declines. Earlier this year it was big news that Diet Coke had bumped regular Pepsi out of its rank to become the No. 2 carbonated soft drink in the U.S. Even bigger news, though, was that the ranking was due to only a 1% decrease in volume by Diet Coke in 2010 compared to Pepsis 4.8% decrease. In fact, there has not been an increase in sales volume for soft-drinks since 2004 (see graph below), indicating that there has been more than

just the recession affecting the declines9. John Sicher, the publisher for Beverage Digest, cited two main causes for the persistent decline: Primarily, consumers have been interested by and migrated toward other categories like bottled water and ready-to-drink teas. Secondly, the price increases of the last several years have also had a dampening effect on volume. 10 The proposed taxes would increase the cost of soft-drinks significantly: a one cent per ounce tax on the typical 20 ounce drink would raise the price 15-20%. Those states that already have sales taxes on soft-drinks average at 5.2% which is said to be too small to affect consumption. Soft-drink price elasticity is estimated between -0.8 and -1.0 from one report, suggesting an increase of 10% in price would decrease consumption by 8-10%11 and thus a 20% price increase would result in a 16-20% decrease of consumption. Another report estimates elasticity at about -1.15 so that the 10% increase would incur an 11.5% decrease of consumption12 and the proposed 20% price increase would drop consumption 23%. These of course do not account of the substitution effect where many consumers would transfer their softdrink purchases to diet drinks. The graph to the right shows the effects on the quantity demand of non-diet soft-drinks if the one cent per ounce excise tax were to be imposed. Support for such food taxes has been on the rise in the past decade; a poll amongst New York state residents in 2008 found that 52% would support a tax on soda, and that number increased to 72% when the revenues of the tax would be designated to support the health and obesity prevention programs as mentioned before13. The data indicates that if each state or a federal sales tax were to be imposed upon

soft-drinks it would have the desired effects of reduced consumption that the advocates were aiming for, and this would most certainly continue the trend of volume decline for the soft-drink industry. Despite the declining volume sales for Coca-Cola and its market competitors, there has been an increased retail value in the U.S from 2009-2010 of 0.4%14, and in 2007 it had risen 2.7%, partially due to price increases. Diet sodas also seem to be faring the market better, in 2008 it was reported that while Cokes volume declined 3%, Coca-Cola Zero increased 37.5% as consumers transfer their preferences to the non-sugar-added beverages 15. The Coca-Cola Co. has shifted its focus on how to cater to its home market in light of these changes in consumer preference and increasing regulations. Their website boasted that in 2010 there were 600 new beverage products introduced, over 150 of which are low- and no- calorie products, bringing their total count to over 800 diet drinks16. This suggests that not only are they diversifying their product line to incorporate those consumers that have moved away from carbonated beverages, but that they are also trying to retain a market share of diet or healthier alternatives in beverage options. Also, in September they just introduced a strategy that has been utilized in Mexico since the 1990s, of increasing the available options of product sizes. To accompany the long-standing 20 ounce bottle, there will now be 12.5 and 16 ounce bottles as well as an eight-pack of 7.5 ounce mini-cans, all priced accordingly. Consumers will now have cheaper alternatives to the 20 ounce bottle, although they will pay more per ounce in the smaller varieties. The 7.5 ounce cans in particular are an attempt to regain lost consumers as well as attract new ones with its calorie count below 100 per can in a regular Coke pack17. The mini-cans will include along with regular Coca-Cola, the varieties of Barqs, Cherry Coke, Fanta Orange, and Sprite18. Catering to the nutrition-conscious consumers, Coca-Cola joined the U.S. beverage industry in 2010 to make a Clear on Calories commitment. This is a labeling initiative with a goal to provide

calorie information on the front of most of their products by the end of 2011 and on Company-operated vending machines. Also, where appropriate the company will have on product packaging percent Daily Guidance Indicators (DGIs) which place the quantities of select nutrients in the context of populationbased dietary guidance19. As the debate and increasing demand for regulation or taxation of non-diet soft drinks continues, it will be important to watch and anticipate where Coca-Cola will direct its company and how it will respond to such influences. They have already seen the shift in demand from sugar-sweetened beverages and have acted accordingly to accommodate any lost market share by introducing products that satisfy the substation need whether because of price or nutritional demands. Recent reports already show that taxation will hurt the sales volume, however any regulation, such as New Yorks banning of soft-drink sales by food stamps, will be a regulation that the company will need to address more directly. They will most likely find support with those vendors that sell Coca-Cola products since they are also anticipating a loss of sales under such regulation. In Boston, Jim Hardy who runs a caf at the police headquarters said that under the new city-wide ban of non-diet soft-drinks, the new plan could curb 20% of his business as officers and civilian employees begin bringing in their own sodas and eventually sandwiches20. The future of Coca-Cola and the rest of the soft-drink industry will depend on their ability to adapt to changing consumer demands, and potentially how they engage over any more regulation over their products. If increased taxation continues, Coca-Cola will also need to ensure that they are able to provide the differing products as consumers look for substitutions, whether that will be varying diet soft-drinks or simply a smaller sized container. As consumers, if we are interested in retaining this product which has proven to be a national favorite, we need to ask ourselves whether the benefits

outweigh the costs both towards retaining the option of consuming sugar-sweetened soft-drinks, as well as addressing the national issue of obesity and related health concerns.

1 2

Jacobson, p.4 Brownell, Andreyeva, Friedman, p.2 3 Pear 4 Irons 5 Nestle, p.314 6 Non-diet sodas, Associated Press 7 Brownell, Andreyeva, Friedman, p.2,4,5 8 Jacobson, p.5 9 Kowitt 10 Geller 11 Brownell,Farley, et al. 12 Brownell, Andreyeva, Friedman, p.3 13 Brownell, Farley, et al. 14 Kowitt 15 Soft Drink Sales Slip, CSPDaily 16 Coca-Cola website, Variety 17 Esterl 18 Coca-Cola website, Variety 19 Coca-Cola website, Active Healthy Living 20 Irons

Bibliography

(Graph 1 - U.S Carbonated Soft Drink Volume in Long-Term Decline) Socially Responsible Investing (posting on July 6) http://socialresponsibleinvest.blogspot.com/view/classic (cited to Beverage Digest and Beverage Marketing Corporation) (Graph 2 Price Elasticity of Non-Diet Soda) I created this graph using the price data from Esterls Coke Tailors Its Soda Size , the price increase and elasticity from Brownell, Farley, et al The Public Health and Economic Benefits of Taxing Sugar Sweetened Beverages (price elasicity used because it was the average that my sources gave).

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