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Why Soda's Decline Represents An Opportunity To Revolutionize The Beverage Sector

December 17, 2018 2:35 pm
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For over a decade now, Big Soda companies have been struggling with a threat to their very existence. Soda sales have been on the decline for over 12 years in a row while bottled water sales have skyrocketed, growing by 6.2 percent in 2017. It looks like Big Alcohol companies are likely to face similar challenges as alcohol sales have declined for the second year in a row. This trend is particularly pronounced in states where marijuana has been legalized, even states that have only legalized medical marijuana states have seen a 15 percent reduction in alcohol sales.

At first glance, this is grim reading but adversity is an opportunity in disguise. While PepsiCo (NASDAQ:PEP) and The Coca-Cola Company’s (NYSE:KO) have seen their homegrown brands decline they’ve scrambled to acquire innovative products. Coke alone has acquired 400 new brands since 2014 and looks set to continue this trend with its recent acquisitions of the Costa Coffee chain and small beverage producer Moxie.

Big brands don’t innovate, they acquire

The reality is that big companies generally struggle with innovation. This forces them to acquire brands from elsewhere. This represents a huge opportunity for smaller brands who are able to build highly focused niche beverage offerings that the bigger players simply can’t. This has created a unique window of opportunity for small beverage companies and their investors.

Take the Alkaline Water Co. (NASDAQ:WTER). This health-focused bottled water company turned traditional sales strategies on their heads by skipping convenience stores and going straight for big retailers. This approach saw The Alkaline Water Company has made $19.8 million in sales revenue in 2018 with $40 million in revenue projected for 2019.

The company is clearly looking to attract the attention of big players. Not only do they still have the convenience store market completely open to them, providing a huge amount of potential organic growth, but on December 4th they announced their approval to uplist to the NASDAQ stock market.

Soluble cannabis offers further opportunities.

The same company has also tapped into the changes affecting the alcohol industry. The company also launched the A88-infused division whose goal is to create a CBD infused beverage. This taps into a going trend for millennials to eschew alcohol in favor of marijuana products. The marijuana beverage sector is set to be worth $600 million by 2020 and there are already some impressive developments in the space.

Big companies have already begun to take interest. For example, Heineken's fast-growing California beer label, Lagunitas, have launched Hi-Fi hops. The cannabis beverage comes in both a pure THC and a THC, CBD mix variety. This is part of a growing trend of established companies that have shown an interest in the marijuana sector. For example, Constellation Brands (NYSE:STZ) obtained a 9.9 percent stake in one of Canada’s largest marijuana companies, Canopy Growth (NYSE:CGC), for just under $200 million.

Water-soluble cannabis will set the sector on fire

The main problem facing the sector is cannabis solubility. Cannabis is normally extracted as oil, which means that onset and offset times can be highly unpredictable and the emulsifiers often alter the taste of CBD or THC infused beverages.

As ever it is small companies that will solve this. Sproutly Canada, Inc. (OTCQB:SRUTF) has pioneered water-soluble cannabis. By using advanced extraction technology Sproutly is able to gently extract cannabis directly into water. This ensures a reliable onset and offset time and Sproutly has already begun to share the technology with other innovators in the sector like the Alkaline Water Company.

Innovative companies make natural acquisition prospects

As the sector continues to grow large companies will let the likes of the Alkaline Water Co. and Sproutly do the innovation for them. This creates opportunity for investors who can spot the juiciest acquisition targets. Generally, the likes of Coca-Cola and Pepsi will be looking for acquisitions that either offer something truly innovative or have an established brand with a loyal following.

Investors who can spot these companies before the industry giants have everything to gain from the death of Soda.


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