Beverage Makers Give Coconuts a Try

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According to a recent Wall Street Journal article, as U.S. soda sales have been contracting for the last five years or so, beverage makers have been on the hunt for the "next big thing" to bridge the gap. The answer seems to have been found in coconuts rather coconut water. With coconut water sales doubling annually since 2005, the industry majors are turning to coconut-infused drinks to help boost sales.

More coconuts
Industry estimates value the United States nonalcoholic beverage industry at $100 billion and above, out of which coconut-infused drinks contribute $400 million. A small portion, yes, but growing very rapidly.

So what is so appealing about coconuts? In a market crowded with energy drinks, coconut comes as a natural, healthier drink that helps in rehydration. A host of celebrities from musicians to models to athletes have endorsed the product. In fact, the No. 1 selling brand of coconut water in the U.S., Vita Coco, last year ran a campaign featuring singer Rihanna who entices consumers to "hydrate naturally from a tree, not a lab.''

Vita Coco, which currently controls between half and one-third of the market, had revenues that jumped twofold to almost $100 million last year with a large chunk coming from the United States. ZICO, second largest in the segment, saw sales go up five times in the same period. The opportunity is huge and it isn't hard to understand why beverage makers are focusing here.

Soda sales sink
Coca Cola
's (NYS: KO) soda sales by volume in the U.S. have fallen by 12% to 5.9 billion gallons in the last decade. During the same period, PepsiCo's (NYS: PEP) sales declined by 14.5% to 4.1 billion gallons, according to a 24/7 Wall St. report. Dr Pepper Snapple's (NYS: DPS) premium brand 7UP's sales by volume during the same period dropped 53%. No wonder these top beverage makers are looking to take advantage of the sudden popularity of coconut water.

This has led to a flurry of tie-ups with coconut drink makers. In 2010, Dr Pepper Snapple signed a distribution pact with Vito Coco and the brand is expected to be launched in about 55,000 stores this April. Coca Cola is looking to increase its stake in ZICO. Pepsi isn't one to be left out; it acquired a majority stake in the third biggest coconut water brand, O.N.E., in 2010, and will start distributing the product nationwide. These investments by behemoths suggest the trend toward coconut water is not just a fad.

But is it smooth sailing?
Sourcing of coconuts may prove to be a problem though. Last year, the U.S. more or less solely relied on Brazil for coconuts, which resulted in supply shortfalls. Vita Coco is looking to get most of its coconuts from outside Brazil this year. Other options include Indonesia, Thailand, and the Philippines. O.N.E is hoping to source almost 75% of its coconuts from the Philippines this year. It may take awhile to figure out the supply chain for the product, but coconut water seems here to stay.

The takeaway
Fools, look for the market to go bananas for coconuts this year as beverage companies look to add spice to their product portfolios and top lines. Hopefully these endeavors will help compensate for the falling soda sales of beverage makers in the United States.

To stay up to date on how the market goes coconuts, add any of these companies to your watchlist. It's free, and you can start today using the links below. Fool on!  

If you're not sold on the coconut water phenomenon though, and are afraid these beverage juggernauts are too big to grow any further, then you should take a look at our special free report: "The Motley Fool's Top Stock for 2012."

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At the time this article was published Fool contributor Shubh Datta doesn't own any shares in the companies mentioned above. The Motley Fool owns shares of Coca-Cola and PepsiCo. Motley Fool newsletter services have recommended buying shares of PepsiCo and Coca-Cola. Motley Fool newsletter services have recommended creating a diagonal call position in PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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