This isn’t going to help things: In February, a government advisory committee recommended a limit on added sugar, calling out soda and candy as prime examples of “empty calories” and contributing “few or no nutrients” to consumers’ diets.
The U.S. Departments of Agriculture and Health and Human Services will use the report by the 2015 Dietary Guidelines Advisory Committee to develop final standards by year’s end.
This latest blow to the carbonated-soft-drink (CSD) industry comes as full-sugar sodas are beginning a turnaround after years of decline.
It’s become a chorus of soda makers’ earnings reports: “The CSD category continues to face tough headwinds, particularly diets, and we expect this trend to continue,” Dr Pepper Snapple Group CEO Larry Young said during an earnings report in February.
In fact, 2014 marked “the 10th consecutive year of volume declines for carbonated soft drinks,” according to Gary Hemphill, managing director of research for Beverage Marketing Corp., New York, “and we anticipate declines will continue.”
In the cold vaults of convenience stores, the result has been a priority shift. While once CSDs—still far and away the largest beverage category for the retail channel—may have locked up four of a cooler’s 10 doors, today it’s more likely two doors, with bottled water, energy drinks and other alternative beverages taking up increasingly more space on the other doors.
Beverage Marketing Corp. reported a 1% decline in CSD sales volume in all channels of retail in the first half of 2014 (the latest data available) compared to a year earlier. This followed a 3.2% decline at year-end 2013.
In c-stores—prime locations for the purchase of single-serve beverages—the decline hasn’t been as dramatic. Chicago-based IRI reports CSD unit sales in c-stores were generally flat (down 0.1%) in 2014 following a 1.4% decline in 2013 and a 5.8% drop the previous year. (See related chart.) On the positive side, dollar sales improved ever so slightly (up 0.3%) in c-stores in 2014.
The improving, albeit still disappointing, statistics didn’t come without a lot of work on the part of the major CSD manufacturers.
From packaging innovation to new-product development, manufacturers are tackling the problem with the very clear goal of meeting consumers’ growing desire for healthier—or at least perceived healthier—beverage options.
“The beverage companies are looking for a solution” to CSDs’ decline, says Judy Hong, a beverage-industry analyst for Goldman Sachs. “You’ll see a lot of innovation in this area in the next year or so.”
Much of the innovation so far has come in two forms: packaging and sweeteners.
Packed Up
“We continue to focus on expanding our participation across a range of consumption occasions,” said Muhtar Kent, chairman and CEO of The Coca-Cola Co., during a company earnings call in February. “Today, the average household globally consumes 26 beverages per day; and of these 26 beverages, only 1.4 are Coca-Cola Co. brands.”
While Kent was largely referring to Coca-Cola’s recent investments in Keurig Green Mountain and Monster Beverage Corp. (representing at-home consumption and energy-drink opportunities, respectively), the soda maker has been at the forefront of creating new package sizes of its household-name carbonated soft drinks to drive sales in new day-parts and to woo back consumers who have abandoned CSDs.
The effort began with the industry-standard 20-ounce bottle being downsized to 16 ounces. Retailers grumbled about unnecessary SKUs and sales were mediocre. One-liter and 12-ounce single-serve PET bottles followed. Pepsi began to follow suit. Retailers grumbled; sales were mediocre.
After various rinse-and-repeat cycles, Coca-Cola hit upon the 7.5-ounce can, and the stars aligned. “Mini-cans increased by 15% in the fourth quarter [of 2014], and that’s us following the consumer to smaller package sizes of the brands they love,” said Sandy Douglas, senior vice president of Atlanta-based Coca-Cola Co., in November presentation.
“The packaging architecture is important,” he said. “Our strategy at Coke is to give the consumer the prices and the packages they want … and sell these for a premium.”
Results recently have been positive, with Coca-Cola seeing overall dollar sales growth of 1.9% over the 12-week period ending Feb. 14, according to beverage analyst Bonnie Herzog of Wells Fargo Securities. “Coca-Cola continues to drive the premiumization of its CSDs through its price/pack architecture, which we believe supports ongoing top-line growth,” she said in a research report.
Pepsi has gotten into the multiple-size game, too, finding the increased occasions a boon to its portfolio. “All those smaller packages and our business for the last eight quarters has improved dramatically,” said Al Carey, CEO of Americas Beverages, PepsiCo, during an earnings call in February. “I’d also tell you that our customers make more money on these products. So they are incented to go after it, and we make a better margin on these products as well.”
Dr Pepper Snapple Group (DPSG), Plano, Texas, admittedly has been slower to adopt new package sizes, but that may change soon as the company eyes pricing advantages associated with the strategy.
Coca-Cola and Pepsi “are reporting some higher price mix from some of their smaller packages, which we’re not completely in,” Martin M. Ellen, DPSG’s CFO and executive vice president, acknowledged in February.
CEO Young said, “You’ll see some of the smaller packages with our innovation coming out. … We take advantage of any price we can, but we also want to make sure that we have the package lineup that the consumer wants out there.”
CONTINUED: Sweet But Healthier
Sweet But Healthier
With new packaging lineups firmly in place or on the horizon for the major manufacturers, the question becomes: Should retailers jump through hoops to reset their shelves with these new packages? Are consumers really willing to pay more for less product?
Douglas of Coca-Cola says that’s a second—though no less important—part of the strategy. “We have some key insights that are trend-based, that are based on the health-and-wellness trends, that suggest consumers’ strong desire for smaller packages, for premium packages that don’t give them too much liquid,” Douglas said at the Morgan Stanley Global Consumer Conference in November.
The package-size variety gives consumers “the ability to refresh and enjoy, but not necessarily to overconsume. And we’re well set up to take advantage of that trend because of our proprietary packaging.”
Overconsumption has been a recent concern. In the early ’80s, when Diet Coke launched, the pitch was: Remove the calories and avoid the weight gain that comes with full-sugar sodas. There it stayed for decades.
But in the 2010s, a backlash began. We saw a proliferation of articles with headlines such as: “The Diet Coke Weight-Gain Paradox,” “10 Reasons to Give Up Diet Soda” and “Aspartame: the Most Dangerous Substance on the Market That Is Added to Foods.”
The new perception became: Diet sodas can still cause weight gain, and the predominant sweetener is dangerous. “Diets are way off … and the No. 1 thing we see from consumers is a complaint about aspartame,” said Carey of PepsiCo. “Aspartame is just one sweetener, but it’s the one that seems to get most of the negatives in the press and on YouTube. [If] you research it, that’s where the negatives are coming [from].”
Perception, in this case, seems far from reality. The FDA says aspartame is safe to use in foods as a sweetener. Still, Carey expects the challenged marketplace to continue for at least the short term, but not without a fight. “We have some ideas on how we might address it, but yes, it’s a definite drag on the business,” he said.
To date, Pepsi’s main play in this arena was the October introduction of Pepsi True, a 60-calorie (per 12 ounces) version of its namesake cola sweetened with a blend of sugar and stevia, the sweetener du jour.
Even PepsiCo’s optimistic pitch couldn’t shake off the haters.
“Sweetened with real sugar and stevia leaf extract, Pepsi True has 30% less sugar than regular Pepsi and contains no high fructose corn syrup or artificial sweeteners,” Pepsi said when introducing the product.
The headline on the Huffington Post version of the story? “Pepsi Launches 60-Calorie Soda With Controversial Ingredient.”
“Amid declining sales of soda—especially of diet brands—beverage companies are getting desperate,” Huffington Post reported. “They’re banking on stevia as a panacea.”
The site isn’t entirely wrong, either, as beverage makers keep one eye on the need to produce healthier, or at least perceived healthier, products.
Coca-Cola Co.’s most significant play since the diet decline was the January introduction of Coca-Cola Life, a reduced-calorie cola sweetened, like Pepsi True, with a blend of cane sugar and stevia leaf extract.
“We see Coke Life as a platform,” said Douglas. “It’s going to continue to get an improving formula, probably less calories, better taste. We’ll keep working on it until we think it’s the perfect Coca-Cola for people who are looking for more natural ingredients and natural positioning.”
Similarly, DPSG is testing “naturally sweetened versions” of Dr Pepper, 7UP and Canada Dry, each with 60 calories per 12-ounce can and sweetened with—you guessed it—a blend of real sugar and stevia.
This comes on the heels of its continued push behind the TEN versions of its most popular carbonated soft drinks introduced in 2012. While the TEN products, each with 10 calories per serving and sweetened with a blend of high fructose corn syrup and aspartame, have seen tepid sales results, DPSG executives say the sales are incremental.
The TEN platform “continues to bring lapsed occasions back into CSDs,” Young said in February: “A lot [of CSD drinkers] went to fruit juices, to sports drinks. Now, with TEN, they’re coming back to CSDs.
“It takes a long time to build a brand. We told everybody … when we were first coming out with Dr Pepper TEN three years ago that we were going to stay committed to it and continue to build it. All the results we’re looking at tell us we’re still on the right track.”
Taking a Sample
All these new-product introductions raise one other advantage of the smaller packaging that is hitting the market: the ability to regularly offer a sample-sized product.
“There is some growth now back into the CSD sugared side of the business,” said Carey, “and it’s coming from mini-cans, glass bottles, different packs that weren’t in existence before.”
This has led Pepsi to a new way of viewing new-product rollouts. “An unwritten rule in our team right now is that all new [products not be] dependent on deep discounting and take-home,” he said. “We really want to see all of our new products in smaller packages, not dependent on the 12-pack, 12-ounce cans and the 2-liters.”
And so, after a decade of decline, CSDs’ top execs are enjoying a recarbonation of a class of beverage that had gone flat.
“We view there to be a significant upside pricing opportunity in the sparkling-beverage category,” said Douglas of Coca-Cola.
“We are driving that with significant investments in brand building and execution of a bright package architecture that will expand margins for our system and our customers.”
Now let’s just hope new dietary guidelines won’t throw that off target.
CONTINUED: Category Data
CSD Volume-Growth Trends
Volume sales growth in c-stores has slowly recovered over the past two years but remains in negative territory.
| Year | Volume sales growth |
| 2010 | 1.6% |
| 2011 | 2.6% |
| 2012 | -5.8% |
| 2013 | -1.4% |
| 2014 | -0.1% |
Source: IRI, CSP’s Category Management Handbooks
Largest Non-Alcohol Beverage Categories in C-Stores
| Category | 2014 case volume (in millions) | Growth direction |
| CSDs | 5,193.9 | Flat |
| Energy drinks | 3,214.6 | Up |
| Bottled water | 2,132.3 | Up |
| Sports drinks | 1,516.4 | Up |
| Shelf-stable bottled juices | 915.5 | Flat |
| Milk | 726.2 | Down |
Source: IRI
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