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Beverage Makers Fight for Smaller Rewards

Sales volumes are contracting, and companies are cutting costs.
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According to several pieces of data that were released this week, U.S. consumers are being far more choosy about beverages. According to Beverage Digest, soda sales have been on the wane since 2005, and last year was no exception. Total sales by volume of carbonated soft drinks fell 3% in 2013 to 8.9 billion cases, the lowest since 1995.

What's been taking the fizz out of the beverage industry? Concerns about obesity and about the healthfulness of artificial sweeteners have hit diet soda volumes. But soda sales aren't all that is slowing at soda companies such as Coca-Cola (KO), PepsiCo (PEP), Dr Pepper Snapple (DPS), National Beverage (FIZZ) and Jones Soda (JSDA). Sales growth in bottled water has also slowed. In fact, the only category to post growth was the energy-drink group, which includes Red Bull and Monster Beverage (MNST).

Soda companies are not the only ones feeling the pain of changing consumer preferences. Total beer sales of $93 billion were essentially flat in 2013, according to the food industry tracking and consulting firm Technomic, despite an increase in craft beer sales. And while craft beer volume rose, total beer production fell 1.4% last year. Overall, craft beer's share of the total U.S. beer market grew to more than 14%. In 2012, and it accounted for about 10% of the nearly $100 billion in beer sales, the association says. Boston Beer (SAM), which shipped about 3.4 million barrels in 2013, a 25% increase over 2012, was the No. 5 U.S. brewer last year, behind Anheuser-Busch (BUD), Molson Coors (TAP), Pabst Brewing and D.G. Yuengling.

Anytime we see slowing growth, let alone actual contracting industry volumes, it means it's a battle for market share while companies also keep a close eye on costs. Last year, even though overall industry soda volumes fell 3%, market-share leader Coca-Cola took share, increasing its share of the U.S. soft drinks market by 0.4 percentage points to 42.4%. Who lost share last year? PepsiCo and Dr Pepper Snapple, which experienced sales drops of 4.4% and 2.4%, respectively. Coca-Cola benefited from shares gains with its Sprite 

The saving grace for some of these companies, such as Coca-Cola and PepsiCo, is that they are what I call dividend dynamos. That means we can see a step function higher over time as those companies continue to bump up their dividend payments. The negative is they are more likely than not to be range-bound, but that simply means you should buy them when the time is right, when they are at the lower end of their trading ranges.

Chris Versace does not own any shares of the companies mentioned, but the Thematic Growth Portfolio that he manages owns KO shares.