For many soft drinks companies in 2011, rising raw materials costs have become a major concern

For many soft drinks companies in 2011, rising raw materials costs have become a major concern

As rising commodity costs and sluggish volumes pressure North America's soft drinks industry, analysts at Sanford Bernstein believe that companies need to concentrate more closely on their pricing strategies.

US beverages companies continue to measure their success in terms of volume growth, market share gains and dollar profit growth (at almost any cost to margins), Sanford Bernstein said in a recent note on the industry.

However, the analysts believe that a greater focus on price/mix would be more appropriate, particularly in the new era of integrated bottling and production systems.

Last month, PepsiCo and The Coca-Cola Co confirmed to just-drinks that they will increase soft drink prices in the US in the second half of the year. For many soft drinks companies in 2011, rising raw materials costs have become a major concern, with both PepsiCo and Coca-Cola having warned of increases at a global level.

Separately, Bernstein analysts also believe that the likes of Coca-Cola, PepsiCo and Dr Pepper Snapple should focus on price in the face of sluggish volumes in North America.

"Questions surrounding the adequacy of US beverages industry pricing in 2011 start, in our view, with disconnects between the stated pricing intents of the major players," the analysts said. "Across most investors with whom we speak, the perception (rightly or wrongly) is that PepsiCo would like there to be more pricing increases in the marketplace, but that Coca-Cola is holding prices back.

"Concerns that US beverages companies (and especially Coca-Cola) are moving too slowly are especially acute in part because industry/Coca-Cola executives have repeatedly said they would strive to maximise profitability," the analysts said.

That said, companies must balance investor pressure to "up the pace" with the cost of price hikes to the consumer.

According to the latest Consumer Price Index data from the US Government, nonalcoholic drinks prices for May 2011 were below those in the same month of 2009. Based on a benchmark of 100, prices hit 125.8 in May this year, an increase on 124.2 in May 2010 but lower than 126.6 in 2009.

With the cost of living on the rise, partly due to higher fuel prices, and US unemployment relatively unchanged since 2009, the likes of Coca-Cola and PepsiCo need to tread a careful line.