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Is Coca-Cola losing its fizz?

It won’t be the first time many readers will have heard that sales of soft drinks (or “sugar water” as they were called in the good ol’ days) are coming under pressure in developed nations where an increased focus on health and nutrition is turning some consumers off of perceived ‘unhealthy’ foods and beverages in favour of ‘healthy’ foods and beverages.

The latest findings by Roy Morgan Research state that: “In the 12 months to June 2009, around 2 in 3 Australians 14-25 or 25-34 had some soft drink in an average week. By June 2013, the consumption rate in each younger age bracket had declined 9% points, to 56% and 57% respectively.”

The research also suggests most regular consumers are now in the 35-49 age bracket, though consumption within this age bracket is in decline as well. While the research breaks consumption down by age brackets, weekly consumers versus less frequent drinkers and total volume, perhaps the two most glaring statistics are that today only 50% of Australians over the age of 14 consume soft drinks on a weekly basis compared with 56% in 2009, and that around 5 million fewer glasses of soft drinks are being consumed by those aged under 35.

These finding have implications for Coca-Cola Amatil (ASX: CCL). On the plus side, Coca-Cola Amatil has a diversified range of beverages including water and alcohol, which have the potential to replace any decline in volumes of Coke and other soft drink sales. Consumption habits may change but consumer demand for beverages in general is less likely to fall. Secondly, Coca-Cola Amatil’s business in Indonesia has huge potential. The Indonesian market is very large and as the nation becomes wealthier, the potential for increased beverage consumption rises.

However on the down side, investors shouldn’t dismiss the evidence from studies such as the recent Roy Morgan poll that suggest there is a structural shift to declining consumption of soft drinks. Given the high margins Coca-Cola Amatil earns from its soft drink division, the profitability of the firm would certainly be diminished should consumer tastes shift significantly away from soft drinks.

Foolish takeaway

As shareholders in newspaper companies such as APN News & Media (ASX: APN) and Fairfax Media (ASX: FXJ) have discovered, a business that does not wake up, accept and evolve quickly to a structural change can in a short space of time irrevocably destroy enormous shareholder value.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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