Non-alcoholic beverages set to benefit in 2025 from impulse buying, convenience store traffic – analyst

Consumer value consciousness remains elevated exiting 2024, and there are still pockets of defensiveness within the consumer products category. But increased impulse buying, and more persuasive promotions leads Deutsche Bank to take a bullish posture on certain names within the category, pivoting towards non-alcoholic beverages with an upgrade to Coca-Cola (NYSE:KO), PepsiCo (PEP), and Keurig Dr Pepper (KDP).

“If there is one area where we are more optimistic on the potential for accelerating trends heading into 2025 it resides in restaurant/convenience store traffic and more impulse purchasing—dynamics that should work to the advantage of companies operating in the beverage (and snacks) industry with elevated exposure to such channels,” Deutsche analysts Steve Powers and Christopher Barnes write in Thursday’s research note on the CPG sector.

The team sees most investors assuming an offensive stance into 2025 to the detriment of defensive sectors, while fundamentals favor the U.S. given the likelihood for “slower-than-ideal” recoveries in China and the Middle East, and risks of deceleration in Europe and Latin America.

Against that backdrop, Deutsche Bank upgrades Coca-Cola (KO) to Buy with a $70 price target as the company’s underlying business momentum remains exceptionally strong with positive volume growth in each of the last three years despite double-digit average pricing. While there remain headwinds from foreign-exchange fluctuations and health-conscious consumers rejecting sugary beverages, Coca-Cola’s (KO) focus on affordability and the company’s ability to navigate hyperinflation and volatile FX conditions should serve the company well.

PepsiCo (PEP) was also upgraded to Buy, but in this case, there are more challenging headwinds for the company to overcome. North American momentum has been “lackluster,” there are lasting impacts from the Quaker Foods production disruption, and the international business slowed versus expectations. But Deutsche Bank sees ample productivity and cost flexibility cushioning forward earnings while still allowing investments to drive sequential improvement/recovery in the Frito-Lay and PepsiCo North America segment. Deutsche Bank sets a $184 price target for PEP, a 17% upside to Wednesday’s close.

For Keurig Dr Pepper (KDP), there remains longer-term questions surrounding the ability to leverage and drive sustained economic profit from the refreshment beverages network, as well as the runway for growth in Keurig’s coffee ecosystem. That said, KDP is managing against these questions correctly, putting the company in the best possible position against Deutsche Bank’s would-be objections such as investing assertively in its core refreshment beverage brands while at the same time seeking out promising partnerships, and maximizing the current K-cup uptake by focusing on affordability and innovations around cold coffee. Deutsche Bank upgrades KDP to Buy from Hold with a $39 price target, 17% upside to the prior close.

With these factors along with “historically rational competition over the past decade and relative pricing power, we see preconditions for outperformance – especially when considering starting point valuations that remain depressed relative to history and peer subsectors,” Powers and Barnes conclude.

Separately, the team initiated coverage of Celsius Holdings (CELH) with a Hold rating as the company’s potential for reaccelerated shipments and consumption is offset by an assumed heightened level of promotional activity for the brand and questions around the durability of long-term double-digit growth without a core SKU or flavor exceeding 10% of sales.