Bloomberg vs. Coca-Cola et. al. – Will Soda-Pop Wars Bring Collateral Damage to Investors?

Too much soda makes people fat and sick. That’s been obvious for a few years, and it’s more obvious with every oversized person you see holding a Big Gulp. Public health advocates have tried to get the message out, and couch potatoes have received it. Trainers on the popular television show the Biggest Loser have implored viewers to drink water instead of soda.

America’s Supernanny showed a family 53 teaspoons of sugar, the amount of sugar (or high fructose corn syrup) in each soda bottle they drank. The film Super Size Me showed what a super-sized diet did to the filmmaker’s body. (Hint: it makes you fat and leads to diseases like diabetes.) And yet, despite all the warnings, people keep drinking their sugar water in large quantities. You probably know someone who drinks Mountain Dew for breakfast.

So last Thursday, New York Mayor Bloomberg declared war. He wants to ban sugary drinks of more than 16 fluid ounces to teach New Yorkers the concept of portion control.

That takes aim at stocks like Coca-Cola (KO), PepsiCo (PEP) and Dr Pepper Snapple (DPS) which have been solid performers, and are hardly unaware of the risk that public opinion could turn against their products. Coke in its 10-k lists public health concerns first on its list of risk factors. The stocks all pay dividend that yield close to 3%.

One aggressive mayor isn’t going to torpedo the soda-pop industry. But what the sugar-water makers have to fear is a sea-change in public sentiment, one like that suffered by the tobacco companies in recent years, that then makes the industry an easier target for taxes and other government restrictions. Discussion of a soda tax during the debate over the Obama Administration’s healthcare plan never really took hold. But any industry that grows rich by making people fat, or unhealthy, can never afford to ignore the public health debate over its products.

KO Chart

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So the industry shot back. The Center For Consumer Freedom, backed by restaurants and food companies that go unnamed on its website, ran a full-page ad in the New York Times with a picture of Mayor Bloomberg dressed like a frumpy, middle-aged woman, complete with a locket and scarf, under the headline “The Nanny.” (Note to consumer freedom advocates: nannies don’t necessarily dress like grandmas.) The industry association’s website calls the proposal “absurd: ridiculously unreasonable, unsound and incongruous” and trots out a host of data points saying, in short, move along, there’s no problem here.

Meanwhile McDonalds tweeted to the mayor, “We trust our customers to make the choices that are best for them.” It already knows they make choices that are good for McDonalds:

MCD Chart

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The Wall Street Journal came out against Bloomberg, predictably. But so did the New York Times, which inexplicably praised his other public-health efforts under an editorial titled “A Ban Too Far.” Jon Stewart ridiculed the soda war, hauling out a still-legal foot-sized pastrami sandwich and a ginormous Slurpee, which wouldn’t be regulated because it’s not sold at a restaurant, street cart or theater. He also showed a doctored photo of himself and the mayor drowning in a vat of soda. Several politicians, including Sheldon Silver, speaker of New York’s state assembly, expressed reservations.

But Bloomberg has succeeded on other public health crusades despite initial outcry. He fought trans-fats in restaurants, and chefs adapted. He made chains post calorie counts, prompting many a lunch-goer buying a crouton-heavy, dressing-drenched salad to rethink her choice. But most famously, this is the mayor who banned smoking in offices, bars and restaurants, to protect workers from the effects and health costs of second-hand smoke. Critics said the ban was misguided and a potential financial disaster, but it was enacted with little trouble, and other cities followed suit.

Before going crazy on the mayor, the industry should note how that ban affected tobacco stocks like Philip Morris (PM), Lorillard (LO), British American (BTI) and Reynolds American (RAI).

BTI Chart

BTI data by YCharts

Diabetes or not, one suspects the soda companies will be just fine.

Emily Lambert is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.



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