The soaring costs of core ingredients is resulting in a higher price tag for many soft drinks

The soaring costs of core ingredients is resulting in a higher price tag for many soft drinks

Commodity costs have rocketed in the past year and are set to cause problems for soft drinks firms in 2011, if the latest set of industry results are anything to go by.

Only last week, PepsiCo told analysts that it expects commodity prices to remain a "major headwind" for the firm this year. The soft drinks giant said its expects its core earnings per share growth to slow in 2011 for this reason.

Yesterday, the chairman and CEO of Danone, Franck Riboud, also said that he expects pressure from rising commodity costs this year. Meanwhile, last week, Bernstein Research analyst Ali Dibadj highlighted concerns over cost inflation for The Coca-Cola Co.

Agricultural commodity prices are currently almost 50% higher than in January 2010. A series of weather disasters have grabbed the headlines: There has been a severe drought in major wheat-producing countries such as Russia and Ukraine, whilst floods in Colombia, Brazil and Vietnam have affected the production of coffee and sugar. On a more underlying level, food prices are rising due to growing consumption in emerging markets.

The soaring costs of core ingredients is resulting in a higher price tag for many soft drinks. There is every possibility that this will hit consumption.

The UK is currently a case study of how higher costs are affecting prices. Tropicana juice, for example, is now regularly sold above GBP2 per litre in multiple retailers, with prices only moderated in some cases by discount offers. Historically, Tropicana rarely broke the GBP2 barrier.

According to Richard Laming, media director for the British Soft Drinks Association, a 2.5% rise in value added tax in January has added an "unfair discrimination" on soft drinks in the UK.

"The very high price of sugar also has an impact, on the 39% of soft drinks that contain added sugar," Laming said. "We hope that the European Commission will take some steps to release more sugar for use on the European market."

He added that fruit prices have also had an affect the soft drinks industry.

"It is a natural product so supply is subject to variations caused by weather and disease," Laming said. "Fruit juice is about 9% of the market, plus a further 40% of the market contains it as an ingredient."

More generally for the soft drinks industry, Laming believes that producers will be forced to cut operating costs. "Looking to the long-term, the soft drinks industry is cutting costs and boosting efficiency in order to deliver low prices," he said.

It remains unclear how successful this strategy will be. What seems clear, for now, is that volatile commodity prices are here for the medium-to-long-term and companies need to work on how to live with them.