Soda taxes have been touted as a magic bullet to fight obesity in the United States. The biggest manufacturers of sugary soft drinks, the Coca-Cola Company (NYSE: KO) and PepsiCo, Inc. (NYSE: PEP), stand to be negatively impacted by any sweeping legislation. How much they will be affected is going to depend on several factors including the amount of tax levied, consumer perceptions and the diversification of company product lines.

Taxes

As of January 2014, over 35 states, including the District of Columbia, charged sales taxes on soda purchased from stores. All but nine states charge sales taxes on soda sold through vending machines. For comparison, all but 17 states charged sales taxes on bottled water from vending machines. The average tax on soda sold in stores was 3.55% in all 50 states (including D.C.) and only 1.32% for bottled water.

In 2015, Berkeley, California was the first U.S. city to pass a tax on sugary drinks. The Berkeley tax affects energy drinks, teas and other high-sugar drinks, while fruit and vegetable juices are exempt. The tax is 1 cent per ounce and raises the price of a typical 12-pack of Coca-Cola or Pepsi by $1.44. This tax is high enough to influence consumer choices, just as cigarette taxes have influenced the tobacco industry. Before Berkeley, 30 other cities and states tried and failed to institute soda taxes.

Mexico, which has similar obesity demographics to the U.S, enacted a soda tax that took effect in January 2014. Mexico consumes more soda per capita than any other country in the world, with Coca-Cola dominating 73% of its market. A 1 peso per liter tax effectively raised soda prices by around 10%. Initial results showed a 6% decline in soda sales, and it continued to accelerate ending December 2014 with a year-over-year volume decline of 12%. In another case study, Denmark repealed its tax on soda in 2013 and has since seen soda sales rise.

Consumer Perceptions

Consumer perceptions have been changing for decades, with preferences moving away from sugary soft drinks to perceived healthier options such as juices, teas, energy drinks and waters. Some of these options contain similar amounts of sugar, but consumers view them to be healthier alternatives. From 2013 to 2014, sales volumes of carbonated soft drinks fell 0.9%, but overall unit volume for all beverages and water increased 1.7%, showing strong continued demand for portable beverages.

Diversifying Product Lines

Coca-Cola and PepsiCo have different business models, and taxes on soda will not affect them in the same way. PepsiCo gets over half of its global revenue from snacks and food items, while Coca-Cola generates all of its revenue from beverages. Both companies have sought to diversify their product lines to cater to changing consumer tastes.

Coca-Cola

Coca-Cola's first acquisition was Minute Maid in 1960. This has proved to be a very valuable asset, bringing Coca-Cola over $13 billion in global revenue from juice products last year. In 2007, the company acquired Vitamin Water, which has been touted as one of its best purchases. FUZE teas joined the company lineup in 2000 and has seen a 30% compound annual growth rate (CAGR) since then. Coca-Cola now offers FUZE in over 30 different varieties. The company signed a 2015 deal with Monster Beverages to increase revenues in the expanding energy drink segment.

PepsiCo

PepsiCo has made similar acquisitions with its partnership with Lipton Teas, its acquisition of Quaker Oats for Gatorade and its purchase of Tropicana juices. All of these acquisitions play on shifting consumer tastes away from sugary carbonated soft drinks. The company also signed a lucrative agreement in 1994 to manufacture, market and distribute Starbucks ready-to-drink coffee products.

Conclusion

How soda taxes affect both companies depends on size and scope. As seen in Mexico and Denmark, taxes directly affect consumption. Taxes on all sugary drinks could affect many other products, such as energy drinks and teas. This would significantly affect margins for both Coca-Cola and PepsiCo. If the taxes are limited to carbonated beverages, both companies have sufficiently diversified to offer other options to consumers.

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