After more than a decade of plunging sales, soda makers are getting some fizz back into the popular and lucrative beverage.
The question for the industry is: how long will it last?
While namesake soda companies have spent billions adding tea, water, coffee and sports drinks to diversify their offerings and soften their dependence on soda — Coca-Cola spent $5.1 billion to purchase Costa Coffee last year, while PepsiCo pivoted away from sugary drinks with its $3.2 billion SodaStream acquisition — the carbonated drink remains a key product for these beverage giants. Morningstar estimated soda is responsible for 69% of global case volume at Coca-Cola, and less than a quarter of sales at PepsiCo, which also owns Frito-Lay and Quaker Oats.
Coca-Cola and PepsiCo "have realized that they need to bring new products to market that resonate with consumer tastes in order to help stem some of the declines. They have been doing a good job kind of bolstering their innovation processes, increasing spending behind their brands, whether that be new product development or advertising and marketing."
In the last few years, PepsiCo and Coca-Cola, the two biggest players in the space, have introduced smaller cans, better-tasting sweetener options to replace sugar, and new flavor versions aimed at more health-conscious consumers.
"Both have realized that they need to bring new products to market that resonate with consumer tastes in order to help stem some of the declines," Sonia Vora, an analyst at Morningstar, told Food Dive. "They have been doing a good job kind of bolstering their innovation processes, increasing spending behind their brands, whether that be new product development or advertising and marketing."
At Coca-Cola, the trademark brand is responsible for 45% of global product volume, a major reason the company has focused more of its attention recently on refreshing it. Coca-Cola has introduced Coca-Cola Zero Sugar — a revamp of Coke Zero made to taste more like original Coke. It redesigned its Diet Coke brand last year, adding flavors like Twisted Mango and Zesty Blood Orange. It expanded the line this year to include two more options: Blueberry Açai and Strawberry Guava.
The efforts are paying off. The world's largest non-alcoholic beverage maker this week touted double-digit growth for Coca-Cola Zero Sugar. Orange Vanilla Coke was introduced earlier this year, the namesake drink's first new flavor in more than a decade, posted particularly strong results following its debut. Overall, sparkling soft drink sales during the company's first quarter rose 1%, with the Coca-Cola brand posting a 6% jump in retail sales growth.
"There’s clearly momentum across brand Coke, which benefited from continued strength in Coke Zero Sugar (with a long runway of additional opportunities long term) and new flavor innovations such as Orange Vanilla Coke," Bonnie Herzog, an analyst for Wells Fargo Securities, said in a research note. "We expect new innovations such as Coke Coffee & Coke Energy to potentially benefit from what we see as a strong 'halo effect' around brand Coke."
During a call with analysts on Tuesday, James Quincey, Coca-Cola's CEO, said "constant innovation is crucial for sustained growth." He said the soda giant will look for other production extensions of Coca-Cola to expand its reach throughout other parts of the day and uses among consumers.
In Europe, it is moving forward with Coca-Cola Energy despite objections from Monster Beverage, which claims Coca-Cola is violating a distrubution deal the two companies had made. And after testing Coca-Cola Plus Coffee last year in Asia, Quincey said the Atlanta company plans to launch it in 25 markets by the end of this year in a bid to capture consumers such as those going through "the mid-afternoon energy slump at work." It also plans to sell ready-to-drink Costa Coffee products in Europe in the second quarter.
"Brand Coke, which includes our flagship product and its many variants, has momentum because it has been continually updated to maintain its relevance." Quincey said. "Our approach to innovation is not limited to brand Coke. We're taking other brands and pushing into new spaces to offer consumers what they want by leveraging the brand edges."
Coca-Cola, PepsiCo and Keurig Dr Pepper have watched as the carbonated soft drink market — which has fallen for 14 consecutive years — was surpassed by bottled water in 2016 as the largest beverage category in the U.S. Performance in the category improved last year, according to Gary Hemphill, managing director of research with the Beverage Marketing Corporation.
Carbonated soft drink sales slipped 0.6%, the lowest decline in the last five years, according to preliminary data provided by the beverage group. Much of the improvement came in diet, which rose 0.71% in 2018 after averaging a drop of 3.35% in the prior three years. Volume growth rates in regular soda accelerated slightly, falling 1.05% compared to roughly flat in the 2014 to 2017 period, the Beverage Marketing Corporation information showed.
"Improved taste, along with the relaunch of Diet Coke, helped to improve segment performance," Hemphill said. "Time will tell if the improved performance is sustainable."
Similar to its chief rival Coca-Cola, PepsiCo also has been rolling out new flavors of its namesake soda. This week, it announced three new flavors containing splashes of fruit juice: Pepsi Berry, Pepsi Lime and Pepsi Mango. At the same time, it's refreshing the packaging on its existing flavor portfolio of Pepsi Wild Cherry and Pepsi Vanilla. It's also introducing Nitro Pepsi with a “velvety, cascading foam,” as opposed to the more traditional, flatter bubbles of carbonated soda.
Ramon Laguarta, PepsiCo's CEO, told analysts last week that carbonated soft drinks remain a "very critical category" for the CPG giant. PepsiCo has been investing in its brands, beginning with Pepsi last year before turning its attention to Mountain Dew in 2019. The investment already is paying off, with Pepsi citing share gains in the carbonated soft drink market.
"We feel good about Pepsi and it's a combination of ... non-sugar doing very well, mini-cans doing very well, so the portfolio transformation we've made as well is helping us, for Pepsi to outgrow the (carbonated soft drink) market," Laguarta said in the company's recent earnings call. "Now Dew is the next area of focus and I'm confident we'll see performance improvement in the next quarters in Dew."
Hemphill said with more beverage choices available, and consumers not increasing how much they drink each day, it becomes harder for soda to muster growth — even with the recent offerings.
"Our expectation is that the category is going to continue to be a massive category, but I would anticipate if there is growth, I would expect it to be very modest," Hemphill said. "Flat-ish performance, given the gains in pricing, would be, overall, a win for the category."