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PepsiCo Takes Aim at LaCroix, as Does Everyone Else

By Billy Duberstein - Feb 1, 2018 at 9:24PM

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Is Pepsi's upcoming sparkling water brand a danger sign for category leader LaCroix?

Warren Buffett has long stressed the importance of economic moats, or sustainable competitive advantages, in any business he invests in. That's because even if a company has a hit product or new innovation, where profits go, competition will follow. That phenomenon seems to be happening right now in the beverage industry, specifically for sparkling water brand LaCroix, produced by National Beverage (FIZZ). LaCroix has become a big hit among millennials, with its light touch, lack of sweeteners, variety of flavors, and playful packaging.

But several huge names in the beverage and grocery industries have caught on, and are gunning for LaCroix's market. Here are the recent moves by big competitors, most notably PepsiCo (PEP), and my take on whether LaCroix can withstand the assault.

Advertisement for new brand Bubly with two green and pink cans and the U in the name looks like a smile.

Image source: PepsiCo.

Pepsi gets Bubly

Last week, Business Insider reporter Kate Taylor announced on her Twitter feed that PepsiCo is unveiling a brand of flavored sparkling water called Bubly in early March. As you can see above, the brand appears to have different flavors, a cutesy logo, and brightly colored packaging.

While not exactly identical, the bright colors and a playful logo are very similar to those of LaCroix. That Pepsi is coming out with a new sparkling water is interesting, since the company already owns Aquafina, and tried to roll out an Aquafina sparkling water in 2016. According to sources, Aquafina has only managed to capture less than 1% of the sparkling water category, so apparently, Pepsi felt compelled to change things up. Pepsi could potentially put significant marketing resources behind Bubly and may run a commercial during this year's Super Bowl, according to SIG analyst Pablo Zuanic.

Plenty of other bubbles

Pepsi's move follows Coca-Cola (KO), which owns the Dasani bottled water brand, and which tried to launch Dasani sparkling water back in 2013.  Again, either that didn't live up to expectations, or Coke believed it needed another angle, as it decided to buy sparkling water brand Topo Chico late last year. Topo Chico already has a cultlike following (though not nearly as big as LaCroix's), especially in Texas, with a market share that is estimated at 3.1% and growing, according to Statista.

And the competition doesn't stop there. Of note, grocery chain Kroger (KR) has seen a lot of leverage in its Simple Truth organic private-label brand and recently announced it was looking to expand the number of products under that banner.  Kroger recently unveiled (you guessed it) Simple Truth flavored seltzer water, which -- as I've seen anecdotally as a Kroger customer -- the company is promoting right next to LaCroix end-cap shelf displays.

It's no surprise that big companies are jumping headlong into sparkling water. The U.S. sparkling water category -- irrespective of the brand -- is growing strongly at 13%, amounting to about $2.3 billion in U.S. sales, as millennials increasingly flock to healthier options than traditional soda. Meanwhile, consumption of traditional carbonated soda has declined for 12 straight years and is now at levels not seen since 1985.

Display of La Croix Pepino flavor cans along with a glass with fruit in it.

Image source: Lacroixwater.com.

Can LaCroix survive?

When thinking about LaCroix's sustainability, it may help to look at Coca-Cola. Why did Coca-Cola survive for over 100 years and come to dominate the soda industry, when there was also Pepsi, Shasta, RC Cola, and others?

Coke's inherent edge, I think, was its first-mover advantage and savvy marketing, which enabled it to lower customers' search costs. A search cost is basically the concept that consumers' time is limited, and therefore there is a cost to searching around for a new brand or a lower-priced deal. Since a can of soda is relatively low priced, customers tend to just go with the brand they know -- and know that they like. Thus, a top-of-mind brand has the potential to create inertia and staying power, even if copycats spring up.

Therefore, I think LaCroix's leading position can insulate it from these large competitors. In fact, the continued entry of new brands only validates the strength of the sparkling water category. According to Zuanic, LaCroix has been taking market share in spite of the competition, and now accounts for just under 20% of the sparkling water market. LaCroix is estimated to be growing over 65%, well ahead of the next-fastest grower, Topo Chico, which is growing at roughly 28%, according to Statista.

No need to panic

Investors may become jittery as new brands from big companies enter the sparkling water fray, but I don't think it's a reason for investors to panic about LaCroix. I think the brand will be around for a long time to come.

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Stocks Mentioned

Pepsico, Inc. Stock Quote
Pepsico, Inc.
PEP
The Coca-Cola Company Stock Quote
The Coca-Cola Company
KO
The Kroger Co. Stock Quote
The Kroger Co.
KR
National Beverage Corp. Stock Quote
National Beverage Corp.
FIZZ

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