The U.S. non-alcoholic, ready-to-drink (NARTD) beverage market is mature, given the industry's concentrated structure, low volume growth, and high per capita beverage consumption trends. The weakened U.S. economy has constrained consumer spending impacting nearer term U.S. volume growth. Longer term, it is unlikely that consumers will make a noticeable positive shift in behaviors; i.e., drinking more NARTD products than currently consumed due to the already high level of beverage consumption when compared to consumption in other developed markets. Fitch also believes that achieving significant year-over-year U.S. growth through an acquisition strategy will be difficult due to the limited number of potential acquisition targets being smaller industry players.
"There are takeover candidates in the U.S. energy drink and tea segments where large beverage companies' portfolios can be strengthened through acquisitions. However, meaningful continued volume growth potential is limited,” says Wesley E. Moultrie II, senior director, Fitch Ratings.
To continue to grow internationally, beverage companies will have to either make acquisitions of established local brands and distribution networks or introduce company-owned brands and make capital outlays to establish comprehensive local distribution systems. Fitch believes that these strategies present execution risks, and how companies fund growth should be a concern for debtholders.
"The beverage companies are being pressured to grow internationally while also returning cash to shareholders,” says Christopher Collins, associate director, Fitch Ratings. “Debtholders should anticipate potentially higher debt levels and possibly increased leverage to fund these imperatives.”
Fitch notes that while U.S. growth may be limited, margins remain healthy with substantial cash flow from operations.
The full report “Large Beverage Companies: In Search of Growth As US Trends Remain Weak,” is available on the Fitch Ratings' web site www.fitchratings.com.