Mumbai: Major US-based marketers of non-alcoholic, ready-to-drink beverages will look increasingly to overseas markets for growth in the years ahead, global credit rating agency Fitch Ratings said in a new report.

Big beverage marketers will be more focused on international expansion, either through acquiring local brands/distribution networks or making capital outlays to gain share and establish comprehensive distribution for company-owned products in overseas markets, the report said.
 
While margins and operating incomes remain healthy, shareholder pressure for continued growth and converging market factors are driving beverage companies to look beyond the domestic market, the report said

The US market for beverages is more or less saturated and the consumption levels of carbonated soft drinks (CSDs), which accounted for 48 per cent of US beverages consumption last year, according to Beverage Marketing Corporation. (BMC). This, the report say, is much higher than in the rest of the world, leaving little room for growth.
 
Consumption of carbonated soft drinks has been on the decline since the late '90s as consumers have turned to newer, non-carbonated beverages such as bottled waters, coffees, teas, sports and energy drinks. (CSD per-capita consumption dropped from nearly 55 gallons in 1998 to about 49 gallons last year, BMC data shows.)
 
Fitch said, all non-carbonated categories except juice drinks (down nearly 10 per cent) saw healthy volume percentage growth last year, including nearly 30 per cent growth for energy drinks, according to Beverage Digest. However, growth rates slowed substantially versus 2006, and only bottled water and juices/juice drinks (with 29 per cent and 13 per cent, respectively) have achieved significant shares of overall NARTD volume, according to BMC.

Expansion opportunities through acquisition are limited in the already heavily consolidated U.S. beverages market, it said, adding volume growth trends for both Coca-Cola and PepsiCo in north America has also been declining even before 2008, when adjusted for population trends.

It said further acquisitions by Coca-Cola or PepsiCo - with their 43 per cent and 32 per cent shares of the CSD market - may face anti-trust issues.

A potential acquisition by Coca-Cola or PepsiCobe of Dr Pepper Snapple Group, Inc, with its 15 per cent share of carbonated soft drinks or Arizona Beverage Co in the tea space is likely to invite anti-trust moves.

Further, some potentially attractive targets, such as Arizona, Red Bull GmbH and Rockstar, Inc., are privately owned and might be resistant to unsolicited acquisition--and some, like Hansen Beverage Co. and Rockstar, might lack the size or growth potential desired, say the analysts.

Economic pressures are forcing many consumers to reallocate dollars previously spent on more discretionary items to food/beverage staples and fuel, which does not bode well for relatively expensive, non-essential varieties of beverages.

"The weakening economy has already had an effect on the large beverage companies," the Fitch analysts point out. "CCE (Coca-Cola Enterprises, Inc., Coke's major US bottler) cited weak economic growth for potential earnings disappointment in 2008." Moreover, both CCE and PepsiCo Bottling Group, Inc. "experienced weakness" in case-packed bottled water in this year's first quarter, possibly because consumers are starting to buy private-label filtered waters or even drink tap water instead of springing for brands like Aquafina and Dasani, they said.

Facing downward volume pressures domestically, the beverage companies may also experience price elasticity (even as input costs rise), potentially limiting revenue growth, Fitch points out.

Current debt-holders should "anticipate greater debt levels and possibly increased leverage" at the leading beverage companies as a result of their need to return cash to shareholders while investing in acquisitions or growth of existing brands overseas, Fitch concludes--adding that both expansion strategies "present execution risks."