Markets & Finance

Big Soda's Sticky End


Soda giants Coca Cola (KO), Pepsico (PEP), and Cadbury Schweppes (CSG) bowed to immense pressure from activists, the medical community, and the government on May 3 and agreed to pull most of their soft drinks out of elementary, middle, and high schools around the country. The agreement was struck by the William J. Clinton Foundation and the American Heart Assn., which said no soft drinks would be sold in elementary and middle schools, and only diet sodas would be sold in high schools. "This one policy can add years and years and years to the lives of a very large number of young people," says former President Clinton.

The initiative is designed to help fight the obesity epidemic in the United States. In addition to banning most sodas, the beverage companies agreed to make sure that water was available in vending machines and cafeterias, and that portion sizes for milk and juices would be reduced. "If you substitute a 300-calorie drink with a 10-calorie drink, average 8-year-olds drink 45 calories less a day," says Ira Magaziner, chairman of the Clinton Foundation Policy Board, and board member of the Alliance for a Healthier Generation, the name for the joint initiative between Clinton's foundation and the AHA. "By the time they graduate from high school, they weigh 20 pounds less."

While the deal with Coke, Pepsi, and Cadbury is a landmark agreement, the alliance members say their effort isn't over. Up next? The snack companies that fill vending machines with candy and chips, and the fast-food companies that supply school cafeterias with food. Companies that could be affected by that initiative are Domino's Pizza (DPZ), McDonald's (MCD), Mars, and the Frito-Lay division of Pepsico. "We're negotiating with both snack-food companies and cafeteria-meals providers -- you can expect announcements pretty soon," says Magaziner.

PR BENEFITS? The current agreement clearly looks like a blow to Coke and other beverage makers, who are losing the opportunity to groom future soda drinkers. But their expulsion from schools may be more the result of their loss in stature, rather than its cause. Already, some parents have grown increasingly concerned about the health impact of Coke and other sodas, and consumers have been turning to alternatives, from energy drinks to juices. Experts say the deal with Clinton and the AMA looks like an opportunity for good PR, with little actual financial cost.

"This makes pure business sense -- these companies are clearly seeing that they're taking heat for a product that's not their future anyway," says Brian Wansink, professor of food marketing at Cornell University.

The drum beat of reports linking fast-food, snack and soda companies to childhood obesity has gotten louder even in the past few weeks. Recently, the AMA has estimated that 17% of children between ages 6 and 19 are obese. And last week, the Connecticut Senate approved legislation banning the sale of soda in its schools.

Then, on May 2, the Federal Trade Commission and the Health & Human Services Dept. issued a report urging food companies to develop products that are more nutritious and to "review and revise" their marketing practices. The report also suggests that the Children's Advertising Review Unit, which was set up by the industry, consider creating minimum nutrition standards for foods advertised to children.

OPPORTUNITY TO INNOVATE. That's only part of the bad news soda companies have faced lately. For the first time in 20 years, Americans drank less soda last year than in the year before. Soda consumption dropped 0.7%, to 10.2 billion cases, last year, according to industry trade publication Beverage Digest. Coca-Cola Classic sales fell 2% and Pepsi was down 3.2%, it reports.

Still, sales of other drinks have been rising. According to research from William Pecoriello, a beverage analyst at Morgan Stanley, bottled water sales have grown 64% in the past year. It's hardly a wonder that both Pepsico and Coca-Cola are bulking up on alternatives like juices and Gatorade and Powerade, sales of which grew at double digits last year. "Clearly this is a great opportunity to come up with innovative products that meet the needs of schools," says Greg Paul, a fellow with the American College of Nutrition and a director of health and nutrition for The Solae Company.

The handwriting is on the chalkboard. Soda makers are scrambling to come up with new products. Now, fast-food and snack companies need to think up innovative alternatives, too.


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