Another option is to reduce prices to keep volumes intact. But that is probably a short-term solution to a bigger problem. Even if it results in higher revenue, it hurts profit margins. And it can be tough to raise prices in the future if consumers grow accustomed to big promotions.
Large price cuts may not even stave off volume declines. Coca-Cola-owned sparkling beverage prices declined by 4.5 percent from a year earlier in the four weeks through March 15, but volumes only rose 3.8 percent, according to domestic Nielsen data cited by Ali Dibadj, an analyst at Sanford C. Bernstein. The overall impact was to increase market share slightly in sparkling drinks but revenue declined, Dibadj said.
The better option is probably to continue on the path of price hikes, which Coca-Cola has indicated it wants to do. The tobacco industry went through a phase of aggressive discounting a couple of decades ago when health concerns impacted volumes. But Big Tobacco ultimately focused on boosting prices and the industry has largely been successful.
That said, soda and cigarettes are different because consumers can switch from Diet Coke to another non-cola beverage—even bottled water. Dibadj points out that the price premium of carbonated drinks over bottled water in the U.S. has increased from 125 percent in 2010 to more than 150 percent today. Any moves to widen that price gap further may make it more tempting to stop drinking soda.
All this comes as Coca-Cola has been through a rough patch. Since the start of 2012, Coca-Cola shares have risen 10 percent, compared with 25 percent for PepsiCo and 47 percent for the S&P 500. And earlier this week, large Coca-Cola shareholder Wintergreen Advisers publicly complained about the company's 2014 executive compensation plan, which it argued could dilute shareholders by 14 percent. The company disputed the claim, saying that the awards would only be paid if employees met specific goals. Coca-Cola and Wintergreen both declined to comment to CNBC Digital.
Coca-Cola, given its global brand strength and pricing power in most markets, deserves to trade at a premium multiple. But the stock is no bargain with an enterprise value, including net debt, of 14.2 times consensus 2014 earnings before interest, taxes, depreciation, and amortization. Unless the company gets its diet problem under control, more investors may soon be up in arms.
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