Diet soft drinks, once immensely popular back in the 90's, have turned into a major headache for the soft drink industry. Nielsen reports that in the past three years sales of diet soda have contracted by more than those of regular soda. In the past year, dollar sales of zero-and low-calorie sodas dropped 6.8%, while sales of regular soda dropped only 2.2%.
While many who avoid diet soda claim to be on diets, consumers have also become wary of the health effects of artificial sweeteners in diet soda. Some of these sweeteners are aspartame, sucralose, and acesulfame potassium. Several industry and health organizations, as well as the Food and Drug Administration, claim that these sweeteners have been studied extensively and consider them effective weight loss tools. Others argue that there's still a lot we don't know about artificially sweetened soft drinks, and their benefit as a weight loss tool is minimal at best .
Changing consumer habits are influenced by other beverage options
Dwindling diet soda sales are bad news for PepsiCo (NYSE: PEP ) and its competitors Coca-Cola (NYSE: KO ) and Dr. Pepper Snapple Group (NYSE: DPS ) , which derive a quarter or more of their U.S. sales from soft drinks. In the third-quarter earnings call, PepsiCo chairman Indra Nooyi noted that "a fundamental shift in consumer habits and behaviors" is taking place within the beverage segment. In addition to the artificial sweetener issue, more beverage options have become available and this has played a major part in the loss of consumer interest in diet sodas.
PepsiCo is busy working on alternative sweeteners derived from natural sources, like stevia, and other flavor enhancers. While the drop-off in diet soda sales has been bigger than expected, the company has seen success with its Diet Mountain Dew product. Nooyi expects that the company's balanced portfolio of "beverages, snacks, and Good-For-You products" will protect the business from any future headwinds within the diet soda category . In fact, PepsiCo reported that the sales volume for its snack business was three times that of its beverage business in the third quarter .
Coke's not abandoning its diet brand
Coke still believes in the future of Diet Coke. It is busy promoting the safety of its sweetener aspartame, and it signed country/pop singer Taylor Swift as a new face for the brand. The diet segment is important for Coke -- it has more than 800 low and no-calorie beverages, which make up nearly 25% of the company's global portfolio . Recently, Coke launched a new cola in South America called Coca-Cola Life, a mid-calorie soda that features stevia. The company is considering selling the new cola in the U.S. There's also a new sweetener in the works called PureCircle that is pending FDA approval .
In the third quarter, Coke reported worldwide volume growth of 2%, with its international business providing a major contribution to the growth. China and India delivered volume growth of 9% and 6%, respectively. Net revenue declined 3% in the third quarter and 2% year-to-date. Like PepsiCo, Coke has a diversified beverage portfolio that includes ready-to-drink teas, juices and juice drinks, and sports drinks that support the overall business .
Dr Pepper Snapple is counting on new versions of popular sodas
To deal with the impact of decreasing demand for its diet carbonated soft drinks, Dr. Pepper Snapple is counting on new 10-calorie versions of five of its most popular brands (referred to as the TEN platform) to spark sales. So far, the company has noted that the new sodas have attracted some customers back to the brand .
Dr. Pepper Snapple reported a net sales increase of 1% for the third quarter and year-to-date. The company continues to deal with a very challenging environment, according to its President and CEO Larry Young . Sweeteners had a major impact on third-quarter costs and they contributed to a 2% rise in cost of goods sold. During the third-quarter earnings call, Dr. Pepper Snapple showed greater interest in educating the customer on the safety of artificial sweeteners than in developing a natural sweetener like its rivals.
My Foolish conclusion
Consumer research firm The Hartman Group finds that consumers are moving more and more away from overly processed food products and into more natural foods . This makes the use of artificial sweeteners challenging for these soft drink makers, regardless of whether these ingredients are safe.
Whether regular-calorie soft drink sales will stabilize the decline in diet soda consumption or if natural sweeteners will bring customers back to sodas is unknown. For these soft drink makers, the more diversified their product portfolios, the better they'll be able to manage continuing headwinds in diet soft drink sales.
What's the Fool's favorite stock for next year?
The market stormed out to huge gains across 2013, leaving investors on the sidelines burned. However, opportunistic investors can still find huge winners. The Motley Fool's chief investment officer has just hand-picked one such opportunity in our new report: "The Motley Fool's Top Stock for 2014." To find out which stock it is and read our in-depth report, simply click here. It's free!