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Why Coke and McDonald's balk at big-drink ban in Big Apple (+video)

Big Drink Ban: New York is a mega-market, but more importantly, the city sets the pace for other cities. Coke and other soft drink companies see trouble if the New York City big-drink ban spreads.

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Dr Pepper Snapple Group Inc did not return a call for comment. PepsiCo Inc referred questions to the New York City Beverage Association, which characterized the proposal as zealous and unlikely to work.

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"The city is not going to address the obesity issue by attacking soda because soda is not driving the obesity rates," said Stefan Friedman, an association spokesman.

INDUSTRY CHALLENGE

Beverage companies have several arguments on which to base possible legal challenges, including that the ban would affect interstate commerce by impacting supplies such as soda syrup and cups, said Marc Scheineson, a former associate commissioner at the U.S. Food and Drug Administration and head of the food and drug practice at the Washington, D.C. law firm Allston & Bird.

That argument could be outweighed by the city's interest in public health, he said.

Other Bloomberg initiatives to improve public health, such as forbidding smoking in restaurants and requiring chain restaurants to post calorie counts, were the subject of lawsuits, but the city prevailed.
Regardless of whether it mounts any legal challenges, the industry is likely to spend a lot of money fighting the proposal like it has fought ongoing efforts to tax soft drinks, said Tom Pirko of Bevmark Consulting.

"This is a challenge to the basic premise of their business plan, all predicated on selling sweet drinks in the largest volumes possible," Pirko said.
"New York is a mega-market, but more importantly it is New York. It sets the pace. What happens in New York has a strong influence on the rest of the country," he said.

Coke controls 70 percent of the U.S . fountain drink market, according to Beverage Digest, followed by Pepsi with 19 percent and Dr Pepper Snapple with 11 percent.

Fountain business accounts for about 24 percent of the 9.3 billion cases of soda sold a year, Beverage Digest said, in a market worth $75.7 billion.
Coke has been boosting its fountain business with its new Freestyle dispenser that lets customers pick from over 100 flavor combinations. It is unclear how the Freestyle machine would work if the ban passed, since diet drinks are not constrained.

"To me, it puts a really big wrench in that," said Moody's analyst Linda Montag.

Like draught beers, fountain sodas are often more profitable for suppliers than those sold in bottles and cans because they require less packaging and often have higher markups. That means the ban could constrain profits as well as sales.

"Maybe you make up for it in pricing. You can't sell as much anymore, but you up your price a little bit so it doesn't impact the company all that much," Montag said.
The proposal is to be submitted on June 12 to the New York City Board of Health, which will have a three-month comment period before voting on it.

If approved, the ban would take effect six months later and be enforced by the city's restaurant inspectors. Restaurant owners would have nine months after adoption of the ban before facing fines of $200 for violations, Bloomberg said.

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