How Can Soda be Cheaper Than Water?

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The Mintel International Group, a market-research company, claims soda outsold bottled water, juices, sport drinks and most other beverage segments over the past 18 months. “Half of all buyers changed their nonalcoholic-beverage habits due to the recession,” says Garima Goel Lal, an analyst at the firm. “Consumers shifted from more expensive beverages, such as energy drinks and ready-to-drink tea, to carbonated soft drinks.”

Soda is the single-most consumed beverage in the U.S., and a $70 billion-plus market, according to research conducted by Julie Wernau at the Chicago Tribune.

The Nielsen Company claims sales of carbonated beverages totaled $18.7 billion for the 12 months ending in ending May — $5 billion more than total milk sales over the same period. Bottled water, by comparison, totaled a paltry $6.3 billion.

“People stopped drinking the more expensive stuff and kept drinking soda … because soda isn’t that expensive,” says Damian Witkowski, an analyst at Gabelli & Company.

The reason for the low cost of soda can be summed up in one word: Wal-mart. According to industry analysts, beverage companies had “only recently managed to persuade consumers to pay more for soda” to compensate for “higher bottling costs and a decade of stagnant pricing”.

Because of its immense purchasing power, Wal-mart can sell a brand-name beverage like Coca-Cola for 20 cents a can. In 2009, when Coca-Cola disputed Wal-mart’s low pricing, Wal-mart simply stopped selling Coca-Cola brands. Wernau says no retailer had ever dictated terms to a powerful brand like Coca-Cola before.

Because of Wal-Mart’s size, power and customer penetration, Wal-mart can deal directly with manufacturers to secure lower prices.

“They just have so many stores that they can really push back, they can really squeeze, not just soft drink companies but other food firms, to force them to take the hit and take their margins down,” said Philip Gorham, an equity analyst with Chicago-based Morningstar who covers the beverage sector.

Wernau cites a study published in June 2009 by researchers at multiple universities, headed by the Tuck School of Business at Dartmouth College in Hanover; the study indicates median sales decrease 40 percent at similar high-volume stores when a Wal-Mart enters the market, 17 percent at supermarkets and about 6 percent at drugstores.

“We’re fiercely competitive on price and routinely shop our competitors, including Wal-Mart, to ensure we’re providing our guests with the best possible value,” said Jennifer Mooney, a spokeswoman for Target.

The investment firm J.P. Morgan notes that price rollbacks create production spikes and disruptions to the supply chain and inventories. Ultralow pricing, says the firm, poses a threat to brand equity.

But the threat of Wal-mart’s ultralow pricing extends far beyond brand destruction. Through the years, the Wal-mart business paradigm has decimated the “mom and pop business” landscape in virtually every city and town across America.

That 20 cent cola comes at another price: slave wages, the loss of jobs and thousands of small businesses across the country. As one study found, the only way other companies can compete with Wal-mart is by doing their best to differentiate themselves from Wal-mart, rather than attempting to compete.

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Spence Cooper
Inquisitive foodie with a professional investigative background and strong belief in the organic farm to table movement. Author of Bad Seeds: A FriendsEAT Guide to GMO's. Buy Now!
Spence Cooper

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