New York's Big-Drink Ban Would Trim Bottom Lines

Soda Cast as Villain, But McD's, Starbucks and Others Will Likely Be Cut Deepest

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Amid the firestorm following a proposed ban on large sugary drinks in New York, beverage giants and restaurant heavyweights are striking back, seeking to protect one of the most profitable parts of their businesses.

If the sweeping ban is adopted, industry advocates say it has the potential to crimp the bottom and top lines at restaurants and beverage companies, from McDonald's to Coca-Cola to Starbucks. The American Beverage Association and the National Restaurant Association both say they are exploring legal options as a means of combating the proposed ban.

TO BAN OR NOT TO BAN
Numbers are approximate.

Carbonated soft drinks account for about 10% of fast-food and fast-casual restaurants' sales in the U.S., according to restaurant market-research firm Technomic. That's a sizable portion of top-line sales, but factor in the profitability of soft drinks for the chains -- a 90%-plus profit margin -- and the potential impact on the bottom line becomes clear, particularly for franchisees.

It's also an important business for Coca-Cola, which immediately released a scathing rebuttal to the ban. The company controls 70% of U.S. fountain sales.

The ban would prohibit the sale of large sodas and other sugary drinks, such as energy drinks and pre-sweetened iced teas, at restaurants, movie theaters, sports arenas and street carts. It would not affect beverages sold in grocery or convenience stores (so those Big Gulps at 7-Eleven are safe). And it would not apply to alcohol, juices, dairy-based drinks and drinks with fewer than 25 calories per 8-ounce serving, such as diet sodas. "Large" is designated as any container holding more than 16 ounces.

There are ways customers can get around the ban, for instance, by refilling a small 16-ounce drink multiple times. (More entrepreneurial types could request a large diet soda, which isn't banned, and fill it with regular soda at self-serve fountains.) But for fast-food chains in the U.S., two-thirds of food is purchased to go, according to Technomic.

New York Mayor Michael Bloomberg is betting many consumers won't opt for refills. "We're simply forcing you to understand that you have to make the conscious decision to go from one cup to another cup," he said on MSNBC's "Andrea Mitchell Reports." "We think a lot of people won't [order two cups], and therefore, that will reduce one of ... the contributors to the obesity epidemic."

If the ban takes effect, fast-food chains would logically turn to marketing other products that have high margins, said Joe Pawlak, VP at Technomic. Fruit drinks and drinks that contain 51% milk would be exempt from the ban, leaving calorie-rich and sugar-laden items such as milkshakes, lattes and frozen-fruit smoothies ripe for promotion. The nondairy-based frozen-drink category, for example, is a growing one for fast feeders, accounting for roughly 1% of sales at fast-food chains, or $1 billion, in the U.S., according to Technomic. Dairy products that don't meet the threshold to be exempt from the ban may be reformulated to meet the requirement.

Such a ban could also dramatically affect Starbucks and Dunkin' Donuts, which combined have hundreds of locations across the city. At press time, Starbucks had yet to determine whether its Frappuccino drinks, which include milk, would be affected, but in a statement it did say it believed "our sweetened Venti beverages (those that are 16 oz. and higher) would be included in this bill." In a statement, a Dunkin' spokeswoman, who was in New York on Friday as the city celebrated "National Donut Day," said Mayor Bloomberg's proposal was "not in the public's interest" and "not an appropriate or ideal solution for curbing obesity in New York City." She could not confirm whether the company's Coolatta drinks would be banned under the proposal; Dunkin' may also have to rethink how it pre-sweetens the coffee it serves.

"Some of the substitutes have less nutritional value than ... carbonated soft drinks," said Mr. Pawlak. "[A ban] doesn't necessarily mean that people are going to be drinking healthier."

But public-policy advocates said that argument is immaterial, as the consumption of soda dwarfs that of milkshakes, frozen fruit drinks or iced or frozen coffee drinks, and promotion of alternates would not necessarily increase consumption. "[The ban] is not going to capture every possible variation, but enough of the sugar beverages will be affected that it should have a very positive public-health impact," said Kelly Brownwell, director of Yale University's Rudd Center for Food Policy & Obesity. "In 10 years, you'll see a lot more of these things out there in public policy."

Mr. Brownwell added that the movement to 16-ounce caps for sugary drinks -- especially if other locales adopt similar measures -- will help establish a new norm and get consumers accustomed to smaller sizes, "just like the companies got people to be accustomed to larger sizes" in the first place.

"Certainly [companies] wouldn't like to see something like this pass, because once it passes in one place, it's more likely to pass in other places," said Justin Prochnow, a lawyer with Greenberg Traurig who focuses on regulatory and business issues related to food.

Thomas Farley, chairman of the board and the city's health commissioner, has voiced support for the ban, which ban could go before the Board of Health for approval as soon as this fall and be instituted in March 2013.

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