Well, that didn't work out as planned. After claiming just a short time ago that artificial flavor-infused soft drinks are bringing customers back to carbonated soft drinks, Dr Pepper Snapple Group (DPS +0.00%) said last week it would test a new line of natural flavored sodas that would be sweetened with real sugar and stevia.
I pointed out last month that convenience stores were practically begging Dr Pepper to pull its 10-calorie Core 4 TEN beverages from their shelves because of slow sales -- and if it didn't act they were going to do it on their own come the spring, replacing the sodas with more popular and higher margin juices and energy drinks. Consumers are concerned about the health effects of aspartame, high fructose corn syrup, and acesulfame potassium, and diet sodas made with these ingredients are witnessing an alarming multiyear decline in sales.
According to Beverage Marketing, following consumer worries about sugar's contribution to obesity, diet sodas with all these fake flavors became all the rage and the consumption grew to 31% of the segment from 26%. But then arose even greater concerns about using chemical additives to create taste, and dollar sales of low- and no-calorie soda tumbled, falling 6.8% in 2013 alone.
PepsiCo (PEP 0.52%), which reported earnings results last week, said carbonated soft drink sales declined by middle single-digit rates in the fourth quarter. We're waiting on Coca-Cola (KO 0.48%) to report its numbers, but last quarter the company admitted Diet Coke sales were "under pressure," without giving specifics. And, of course, Dr Pepper said its carbonated soft drinks were down 2% by volume and 4% by sales, with the Core 4 Ten brands falling 2% as well, done in once again with middle single-digit declines from 7Up and Sunkist. If nothing else, the Canada Dry brand continues to perform, growing by middle single-digits.
Dr Pepper's flirtation with natural sweeteners comes after Coke and Pepsi have explored adding sugar and stevia to their sodas. Coke is testing out a stevia-flavored beverage in Argentina and Chile called Coca-Cola Life, while it's so-called "Mexican Coke," a version made south of the border with real sugar, has gained almost cult-like status here in the states. Pepsi, for its part, has enjoyed success with its "throwback" line of sodas that are made with real sugar; it also replaced aspartame with stevia in Pepsi Next in Australia. And it was as a healthier way for consumers to drink carbonated soft drinks that SodaStream International (SODA +0.00%) positioned its DIY home-based carbonation systems.
Despite the generally poor showing, Dr Pepper Snapple stock bounced higher on the earnings news and has stayed aloft since. Even though sales were down, profit was down, and volume was off, it still managed to beat analyst expectations. Its shares have gained more than 20% over the past year but still trade at a slight discount to its larger rivals.
Still,, I think the beverage maker is in trouble here because its results are largely tied to carbonated soft drinks and its revenue is derived almost completely from North America, where sales of such sodas across the board are falling. With Coke and Pepsi being more diversified and able to withstand the changing winds, I believe Dr Pepper Snapple Group's stock has bubbled up too high and investors should be concerned it will burst sooner rather than later.
