Why Cott Can't Keep Up in Soft Drinks

(MoneyWatch)  Theoretically, Cott Co., a maker of discount, store-brand soft drinks, should be doing well. As overall sales of soft drinks continue to drop due to rising prices, logic dictates that consumers should be flocking to lower-priced alternatives.

But they aren't, and that spells trouble for Cott.

Overall, soft-drink sales dropped by 2.3 percent last year, Beverage Digest reported this week. For Cott, sales fell by 8.5 percent, and the company lost 0.3 percent of its market share.

The bad news is likely to continue. Last month, Wal-Mart informed Cott that it was reducing the shelf space it gives to the company, which makes the store brands for Wal-Mart's flagship stores and for its Sam's Club warehouse outlets.

Wal-Mart makes up nearly 40 percent of Cott's sales. It's not yet clear how much shelf space Cott will lose.

Cott is just as vulnerable to rising commodity prices are the dominant players, Coca-Cola and PepsiCo. Like them, Cott has had to raise its prices and has lost sales as a result. But soft-drink consumers tend to be brand-loyal, and few Coke- or Pepsi-drinkers have switched to lower-priced alternatives. For one thing, the price gap just isn't wide enough. For another, there are many more alternatives than there used to be.

That's not to say Coca-Cola and PepsiCo are doing well. They have raised their prices by 5 percent in the past year, and their sales of soft-drinks have each fallen 2.7 percent, according to Beverage Digest.

"Ugly stuff," declared Paul Kedrosky on his blog, Infectious Greed.

Like most other food and beverage producers, the soft-drink giants are being squeezed by leaping commodity costs. The resulting higher retail prices have sent consumers scurrying not to discount soft-drink brands, but to alternatives such as "enhanced" water, energy drinks, and tea-based beverages.

Energy drinks are included in the soft-drink category. If they hadn't been, the fall-off in sales might have been far worse, Beverage Digest noted. Energy drinks are among the beverage categories that are on the rise, but they still make up a small percentage of the market.

The trouble is, although both Coca-Cola and PepsiCo have made major forays into alternative beverages in recent years, it hasn't been enough to offset losses in their core products.