Blog: Chris Brook-CarterSoft drinks going soft?

Chris Brook-Carter | 12 July 2004

US bottler stocks have been strong performers of recent times, as the market anticipates earnings momentum deriving from an inflationary US economy and increased price leadership by the market leader, the Coke system.

So it was interesting to receive a research note from Legg Mason last week, casting some doubt on the sector's performance going forward.

The note considered whether revenue momentum for carbonated soft drinks will sustain in 2005. It did so against a backdrop of what have become widely-held market expectations of increased revenue momentum in 2004.

"We do not expect category revenue momentum to sustain in 2005 due to positive but slowing price realisation. In principle, this is a risk to bottlers' earnings growth given the low-margin nature of bottling," said Mark Swartzberg, Legg Mason's beverage analyst.

Swartzberg went on to explain that the leading regulator of rates of sector price growth is broad rates of inflation, or consumers as a group, not competitive unity or disunity.

Correspondingly, if economic forecasts are right, further inflation in 2004 will be
followed by a slowdown in inflation in 2005, suggesting a slowdown in revenue growth for carbonated soft drinks, Swartzberg said.


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