America: Still a soda nation, after all these years

April 19, 2013: 5:00 AM ET

PepsiCo and Coke reported first-quarter earnings this week, and soda sales in the U.S. have flat-lined. But we're still hooked on the sugary stuff.

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FORTUNE -- Maybe we shouldn't drink more Coke than water, some Americans are starting to realize. More people in the U.S. are spurning the soda isle, reaching instead for tea, juice, and flavored water.

Soda sales in the U.S. have, in fact, flat-lined for the two biggest pop retailers, Coke (KO) and PepsiCo (PEP), both of which reported earnings this week. This is part of a larger trend, says Thomas Mullarkey, a senior stock analyst with Morningstar, who adds that sales of carbonated beverages in the U.S. and Western Europe have been dragging for the past 10 years.

"Mayor Bloomberg is trying to encourage consumers to make healthy decisions, but they have already made healthy decisions themselves," he says.

So, what's a soda giant to do? For starters, look beyond the U.S. Emerging markets are extremely important for Coke and Pepsi. Overseas sales account for roughly half of Pepsi's revenue, and more than 60% of Coke's.

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Americans still drink a ton of pop. Some context: Yes, big soda sellers are turning to emerging markets because there is a tremendous potential for volume growth -- meaning liters of soda these companies can sell. And yes, many consumers are choosing beverages they view as healthier than soda. But it's important to remember that the American market is saturated with sugary carbonated drinks.

The average American consumes about 180 gallons of beverages per year, and about one-fourth of that is soda. To break it down by a specific brand, every American consumes, on average, 400 8-ounce servings of Coke products per year. Now that includes Coke's entire suite of products: soda, energy drinks, premium organic teas, and others. Non-soda markets are growing, but they are relatively small. Let's face it: Coke didn't get to be the No. 1 soda retailer in the U.S. by pushing Oolong.

The global average consumption of Coke products, by contrast, is about 90 8-oz servings per year. Executives look at the U.S.-global consumption discrepancy and see dollar signs. As workers in emerging economies climb the income ladder, they can afford to incorporate more Coke products in their everyday lives, the thinking goes.

In the U.S., the game for carbonated beverage companies is not to focus as much on volume, but on profit. Take, for example, Coke's recent move, announced during its earnings call April 16, to restructure its U.S. bottling operations to make them more cost-efficient. Pepsi is similarly trying to work on pricing and other strategies to get more value from the U.S. market, not necessarily push more liters of soda on customers.

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"It's a big, profitable category, and we run the risk of sucking the profits out if we don't play this game responsibly," said Pepsico CEO Indra Nooyi during the company's earnings call on April 18, referring to the beverage market in North America. "You do need some cash cows to be able to invest in growth engines."

Our soda consumption at home, which is still substantial, finances growth overseas. And should more consumers make the switch from carbonated beverages to seemingly healthier drinks, Coke and Pepsi are ready. They own many of those products too, not to mention the distribution networks and branding power to keep everything they sell front of mind. We are still a soda nation, even if the name of the game has shifted. Have a Coke, emerging markets. It's on us.

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Shelley DuBois
Shelley DuBois
Writer - Reporter, Fortune

Shelley DuBois writes on management issues for Fortune.com. Before joining Fortune, she was a producer for National Public Radio's Science Friday and worked for Wired. Shelley has a graduate degree in science, health and environmental reporting from New York University. She lives in Brooklyn.

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