Coca-Cola (NYSE:KO) and PepsiCo (NASDAQ:PEP) own some of the most durable beverage brands in the world. Both Coke and Pepsi are household names around the globe and few soda drinkers do not have a preference between the two. However, Americans are growing wary of diet soft drinks, which are linked to a slew of health problems including cancer and heart disease. Public awareness of the health risks associated with diet soft drinks has sent volumes plunging. Coca-Cola and PepsiCo are left with only a few options to combat the problem.
Diet volumes plunging
For the most part, Coca-Cola and PepsiCo have been able to offset soft drink volume declines by raising prices even higher, allowing the two companies to grow soft-drink revenue even as U.S. case volume declines. But plunging diet soft drink consumption is dragging down volumes more than can be offset through price increases.
According to Nielsen, diet soft drink sales declined 7.3% from mid-February to mid-march, while regular soda volume increased 0.6%. Coca-Cola and PepsiCo's diet drinks fared slightly better than the overall category: the former's soft drink volume declined 5.8% while the latter's fell 6.9% over the month-long period. At the same time, Coca-Cola's regular soft-drink volume improved 2.3% and PepsiCo's increased 1.7%.
The diet category has so many problems that even Coca-Cola's newly launched Diet Coke Frost -- the much-heralded frozen soft drink served in 7-Eleven stores -- had to be pulled from shelves due to viscosity issues. According to Advertising Age, it was the one diet drink product that consumers had actually embraced. Nothing is going right for diet soft drinks.
What is going wrong?
Americans are growing concerned about the health risks associated with diet soft drinks. In a continuation of the steady drumbeat against diet soda, CNBC reports that a recent study found that women who consume a large amount of diet soda are more likely to develop heart disease and die. The results of the study come with an important caveat: diet drinks may not actually cause the increased risk of heart disease; they might just be a tool used by some women to make up for other unhealthy habits.
Despite its innocuous conclusions, the study provides yet another reason for consumers to stop drinking diet soda. Already, there is evidence linking the artificial sweeteners used in diet soda to diabetes, kidney problems, and preterm delivery. As more research is conducted on diet-soda consumption, the findings may become even worse, setting up the diet category for further declines.
What Coca-Cola and PepsiCo are doing to solve diet problem
With mid-single-digit declines in volume, price increases are not enough to keep diet-soda revenue from falling further. According to Nielsen, price cuts will not solve the problem either. Coca-Cola's sparkling beverage prices declined by 4.5% from mid-February through mid-March, but volume increased only 3.8%. As a result, overall sparkling revenue declined.
The only way to save the category is to change consumers' perceptions of diet soft drinks. That is unlikely to happen through more in-depth studies of the current drinks -- it seems that science only comes out against diet soda. The only solution is to develop an artificial sweetener that does not have the baggage of aspartame and actually tastes good (unlike Stevia, which many consumers report having a bad aftertaste).
Coca-Cola and PepsiCo are hard at work developing the next generation of artificial sweeteners. PepsiCo is working with food additive company Senomyx to develop a new sweetener, codenamed Sweetmyx S617, that would replace the majority of sugar (and, thus, calories) in soft drinks. Sweetmyx S617 was recently deemed Generally Recognized As Safe, or GRAS, by the industry's self-regulating expert panel. This gives it the go-ahead to be used in commercial products, an important step for PepsiCo in its quest to salvage diet drink volume.
If PepsiCo's new sweetener tastes as good as the regular drink, it could do wonders for Diet Pepsi's market share. Currently at 4.7%, Diet Pepsi's market share is seventh among carbonated soft-drink brands, while Diet Coke's 9.4% share puts it in second, placed behind Coke.
Although Coca-Cola is hard at work at developing its own sweetener, it is also rolling out a new Stevia-packed drink with success. Coca-Cola Life, a 64-calorie drink that is sweetened with Stevia but also contains sugar to offset Stevia's bitter aftertaste, has met with success in Argentina and Chile. The company plans to introduce the drink to other markets in 2014. Given the industry's inability to find a blockbuster new sweetener thus far, mid-calorie options with a mix of Stevia and sucrose could be the future for diet drinks.
Diet soda -- and soda in general -- will never be popular with the healthy, all-natural crowd. But people who are struggling to adhere to a healthy diet may view the diet category as an easy way to enjoy a beverage without drinking excessive calories. As a result, Coca-Cola and PepsiCo need only come out with good-tasting low-calorie beverages that do not contain suspect sweeteners. PepsiCo's Sweetmyx 617 or Coca-Cola Life could be the answer -- investors will have to wait and see.
Ted Cooper owns shares of Coca-Cola. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of Coca-Cola and PepsiCo and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.