[GRRN] Economic Forces in the Soft Drink Industry

RecycleWorlds (anderson@msn.fullfeed.com)
Fri, 2 Apr 1999 12:12:15 -0600

I don't know if you've follow the financial pages, but recent reports
affecting the soft drink industry create the potential in the future for
significant design issues that may complicate recycling severely. Bear
with me: although it involves a good deal of financial ins-and-outs, at
times it is those forces that ultimately can wind up causing havoc for

According to the 3/31/99 Wall Street Journal ("Coke's Slower Sales Are
Blamed on Price Increases," p. A3) Coca-Cola's sales for this quarter are
expected to be growing at a much slower annual rate than investors have
come to
expect (2% instead of 4-7%). The reason reported for this is that, after a
year of price cutting to increase market share that hurt earnings, Coke
reversed course and instituted price hikes to improve its margins that had
deteriorated when a price war had broken out. This was followed the
next day by a report in the 4/1/99 Wall Street Journal, "Pepsi
Bottling IPO Falls Below Offering Price," stating that the new stock
offering for Pepsi's bottling operations had to be sold below its asking
price because investors had turned cold on soft drink companies following
Coke's disappointing announcement the day before.

The ability of a corporation's stock to command a premium from
investors -- like Coke has for years -- is substantially a function of its
ability to achieve above average growth in earnings. These reports indicate
that investors are concerned that the innate structure of the soft drink
industry may make it difficult to sustain its historic high growth rates in
the future. Indeed, it suggests that people are increasingly seeing soda as
a commodity (i.e. where one soda is little different from another) rather
than a differentiated product. According to Jennifer Solomon, an analyst
at Salomon Smith Barney, "confidence is eroding...[a]lthough we think
investors are forgiving of near-term difficulties for Coca-Cola, we think
this may be the end of giving Coca-Cola the benefit of the doubt," noting
the stock could fall further

Once a product suffers commoditization, its margins erode and Wall
Street flees to seek out tomorrow's darling. That tends, as it should in
our economic system, to focus management's attentions like little else.

One of the prime vehicles for reestablishing strong product
differentiation is the package, and we should probably expect to see
dramatic new package elements over the next year as Coke and Pepsi seek to
reestablish their credibility with the Street. Some new designs, such as
the famous contour Coke design to make a plastic bottle look like a glass
bottle, don't have any negative implications for recyclers. Others --
multiple colored PET bottles come to mind -- on the other hand, would.

This may be a area in which municipal recycling coordinators, state
recycling officials, haulers, MRF operators and reclaimers may want to
proactively and constructively make their concerns known to the soft drink
industry so that potential problems down the road can be averted.

Peter Anderson
RecycleWorlds Consulting
4513 Vernon Blvd. Ste. 15
Madison, WI 53705-4964
Phone:(608) 231-1100/Fax: (608) 233-0011