Dairy processors have often looked upon the soft drink segment as a sort of troublesome interloper that has snatched away market share with sugar and flashy marketing. But in the past few years, soft drinks have been reeling while milk can do no wrong.
Sales of standard carbonated soft drinks are down for sure, but no one in the segment is sitting and wringing their hands. Instead, it seems entrepreneurial players are busy reinventing the soft drink, and as always there are lots of new products and line extensions from the top dogs.
First let’s look at some sales data, and then we’ll get into some analysis. We start with quarterly sales of CSD’s from Information Resources Inc. IRI’s FDMX measure looks at scanner data for food, drugstore and mass merchandiser retailers other than Wal-Mart.
Sales of carbonated soft drinks in those channels have gone south in each of the last six periods but one, according to IRI. In the second quarter of 2007 sales actually grew by double digits. Unit sales receded by as much as 9.7% during some of those periods, but more recently the losses were much less significant, with units slipping less than 1% in the final quarter of 2007, and dollar sales dropping just a bit more than 1%.
Looking at volume sales for the top companies Coca-Cola and PepsiCo are in a dead heat with 35% market share each, across all channels. No. 3 Cadbury holds 18% of the market.
Coke maintains a measureable edge in the grocery channel, and has a big advantage over Pepsi in drugstores. Pepsi, however, is the leader in mass merchandiser, and especially in the convenience and gas station channel.
Each of the top three CSD players offer a broad portfolio of brands. For PepsiCo and Coca-Cola, many of those are extensions of the flagship cola. All three are losing market share to smaller competitors, many of which are offering new brands, new flavors and in some cases all natural ingredients. Looking at the performance of Coca-Cola’s top brands from 2007 compared to 2006, gives you some idea of where the market is headed. The table on page 36 shows all of Coca-Cola’s brands headed south, with one exception-Coke Zero. The zero-calorie brand does not have the word diet in the name, and is therefore thought to have gained more acceptance among male consumers. Sales were up 23%, but that may be a statistical anomaly, and Coke Zero had just 1% of the market at year’s end compared to the 13.7% still enjoyed by Coke Classic. Coke has already extended Coke Zero into Cherry and Vanilla versions and combined they have grabbed closer to 2%.
No other top brands offered by the big three are getting any traction right now, and the combined cola offerings of those companies lost about 6.8% volume market share in 2007 on average.
The 2008 Soft Drink Report in our sister publication Beverage Industry indicates that consumers of soft drinks are much like consumers across the food spectrum in that they are less interested in affiliating themselves with the hottest top brand and more interested in finding a product that meets their personal preferences. And negative perceptions about CSDs and their potential role in obesity have hit the category across the board.
The same March issue of Beverage Industry also included a company close up on Reed’s Inc., a Los-Angeles based marketer of specialty soft drinks including fruit juice infused ginger ale type products. Reed’s is moving into mainstream channels from the natural foods stores, it went public last year, and it is moving into more markets coast to coast.
With the assistance of our partners at the Mintel International Group we offer a detailed look at new product launched in the category. There were less rollouts in 2007 than in 2006, but more than in 2005.
One of the most profound changes in the CSD category has been an evolution toward more natural ingredients. As consumers seek products that are simple and unadulterated, many shun ingredients such as high fructose corn syrup that may be perceived as overly processed or artificial. Although high fructose syrup has always been ubiquitous in carbonated soft drinks, Jones Soda took a groundbreaking step in early 2007 when it replaced that controversial ingredient with pure cane sugar. Other niche CSD manufacturers using cane sugar in U.S. products include GuS (Grown-up Soda) and Hansen’s Natural. The transition to cane sugar has even been embraced by one of the world’s leading CSD companies-PepsiCo. In March 2008, Pepsi introduced RAW, a sparkling cola drink made with cane sugar, in the UK. This CSD is available only in UK bars and clubs and it is free from artificial colors, sweeteners, flavorings and preservatives. Although no plans have been announced for extending Pepsi RAW to the United States, it is possible that the product, or a similar concept, could be introduced in North America soon.
Some companies have elevated the natural trend by launching products with ethically sourced ingredients. According to the Mintel Global New Products Database (GNPD), 23 organic carbonated soft drinks were introduced between March 2006 and March 2007. To date, most of these products have been marketed by smaller, niche manufacturers, but opportunities in the organic CSD space could attract the attention of major beverage companies. Another emerging trend among ethically sourced sodas is Fairtrade ingredients. Fairtrade is a movement committed to providing fair wages and working conditions to producers in the developing world. Fairtrade-certified ingredients are most commonly associated with coffee and tea, but they have begun appearing in U.S. CSDs. In 2007, two notable introductions included JavaPop, made with Fairtrade coffee, and The Healthy Beverage Co.’s Steaz Green Tea Soda line, containing Fairtrade ingredients.
Juice-based carbonated soft drinks have also gained traction with American consumers. In 2006 Pepsi purchased Izze, a line of sparkling juice beverages, and dramatically raised its visibility and distribution. Smaller players including ESSN and Apple & Eve’s Fizz Ed have also been extremely innovative in developing sparkling beverages with fruit juice bases. While some products have added fruit juice into their formulations, others have leveraged the “healthy halo” that superfruits provide by incorporating them as CSD flavors. Pomegranate has become a go-to flavor for small and large companies alike, as evidenced by 7-Up’s limited-edition launch of its Pomegranate Soft Drink during the 2007 holiday season.
Several years ago it would have been difficult to imagine a mainstream CSD marketed on a functional platform. But in 2006, Coca-Cola took a health and wellness risk by introducing Diet Coke Plus fortified with vitamins and minerals. Other brands have followed suit including Ardea Beverage Company’s Airforce Nutrisoda. This line of carbonated soft drinks contains 15 calories and is fortified with soluble dietary fiber, L-glutamine, L-arginine and B-complex vitamins. Even more groundbreaking has been Enviga, the joint venture between Nestlé and Coca-Cola. This sparkling green tea contains EGCG, an ingredient claimed to aid in weight loss. Although the efficacy of Enviga has been widely debated by consumers, advocacy groups and the beverage industry, the product has spawned a number of copy-cats that replicate its formula and benefits.