Panic over sugar in America has become pervasive. Sugar is now the new bogeyman for health activists and health-conscious consumers. In 2012, market-research firm Mintel asked consumers which ingredients or foods they were trying to avoid—sugar topped the list—by a wide margin.
This is bad news for the big beverage companies, even as many of them have attempted to be proactive about the growing concerns about sweetened drinks. What are drink makers doing to offset these fears?
The story of beverage giant Pepsico (NASDAQ:PEP), illustrates how difficult it may be for big drink companies to change course. In fact other companies joined Pepsico, including Coka-Cola (NYSE:KO) and Dr Pepper Snapple Group (NYSE:KDP) in marketing low-calorie sodas. Their products; Coke Zero and Dr Pepper Ten joined Pepsi Next as "different" and less sugary sodas, which also included a variety of packaging options, like smaller cans.
When new CEO at the time, Indra Nooyi, attempted to introduce healthier options via the company's drink and snack food operations back in 2006, health-conscious consumers balked; the firm's stock price dropped, and stockholders became restless.
During Nooyi's tenure, the stock price of rival Coca-Cola (NYSE:KO)has nearly doubled. Even worse for Pepsi, its flagship brand no longer claims second place in market share of the carbonated soft drink market. In 2010, Diet Coke supplanted Pepsi-Cola as number two (Coca-Cola remains number one) and has maintained that position.
Is it possible for big drink makers to make soda and other beverage products that are healthier and still maintain market share?
Taking the pledge and taking the plunge
Soda companies have attempted to get out in front of consumer demand—fueled by health awareness—for about a decade.
While sweetened, carbonated beverages still make up nearly one-fifth of all liquids consumed, volume has fallen, per capita, every year since 1998. Consumers are more afraid of sugar than they've ever been, and recent health scares about soda and heart health have only increased consumers' trepidation about soft drinks and other sugared drinks.
For PepsiCo and Coca-Cola, their legacy brands matter and both have adopted a marketing strategy around them.
"Two years ago, PepsiCo committed to spending an additional $500 million to $600 million on its core brands, of which Pepsi is one. More recently, Coca-Cola committed to spending an additional $1 billion on media and brand-building efforts by 2016," wrote Natalie Zmuda in Advertising Age.
According to recent data released by Beverage Digest, overall sales declined 3% last year, and leading no-calorie brands with artificial sweeteners slipped at more than double that rate. "The beverage industry is getting more and more challenging in the U.S. The obesity and health and wellness headwinds are not letting up," said Beverage Digest editor, John Sicher.
So what are soda makers to do?
Moving beyond soda
The news hasn't been all bad, at least not for Pepsico. The company is holding down the second position in beverages globally and remains the leader in salty snacks. With their ownership of leading health and wellness brands such as Gatorade, Quaker, and Tropicana, Pepsico is positioned well with consumers with an eye to healthier foods that also provide the convenience option.
Nooyi has increased prices and worked to boost sales with new products, such as Gatorade Energy Chews and Pepsi Next. Spending has been increased on marketing brands like Lay's and renewing the company's focus on U.S. soft drinks in hopes of reviving lagging beverage sales and regain market share from Coca-Cola.
PepsiCo has a definite competitive advantage of selling both snacks and beverages, which are complementary food categories; the company believes that the business mix will shift more heavily toward snacks.
Long-term growth should be realized in its investments made in developing and emerging markets. This provides upside growth potential due to their relatively low per-capita consumption. Additionally, in these markets, there is a burgeoning middle class with rising income levels, which translates into disposable income capable of boosting demand for convenience food and beverages.
Pepsico's strong fourth quarter and full-year 2013 results in February, showing a substantial increase in its targeted shareholder cash returns for 2014 is a positive sign, as was the extension of its $1 billion annual productivity savings targets through 2019. The company announced 2014 financial targets that are consistent with its long-term goals.
While investors ought to be wise about sugar concerns and soda, in the case of PepsiCo, the company's savvy pivot toward health and wellness products, a strong showing coming into 2014, and its complimentary mix of beverages and snacks is a positive trifecta and makes it a company worth considering.