For ten years now, soda consumption has been declining in the U.S. As health and obesity concerns have mounted, Coca-Cola (NYSE:KO) and Pepsico (NYSE:PEP), the titans of the industry, have had to look elsewhere for growth. Coca-Cola has found some relief by pursuing a number of still beverage brands, acquiring such labels as VitaminWater, Honest Tea, and Odwalla as well as forming strategic partnerships with beverage companies on the rise like Keurig Green Mountain and Monster Beverage.
Pepsi, on the other hand, has more of a cushion against the secular decline of soda thanks to its snacks business through its ownership of Frito-Lay and Quaker, but beverages, especially, still make up the largest portfolio.
That's why Pepsi is undertaking a bold new project to bring "craft" sodas to soda fountains nationwide. The line, called Stubborn Soda, aims to capitalize on the popularity of craft beer and other niche foods, by introducing flavors like orange hibiscus, pineapple cream, and lemon berry acai to a soda fountain near you. The new sodas will be sweetened with sugar cane instead of high fructose corn syrup, giving them a natural blend and a more authentic flavor.
The decision seems like a natural response to the country's changing tastes and a complement to many fast food chains' efforts to rid themselves of preservatives and other artificial additives. Pepsi, however, did not say if it had made any agreements to put the new flavors in restaurants
Is Fast Food nation ready for this?
A collection like Stubborn Soda, complete with its own kitschy soda fountain could be a perfect way for an upstart fast casual chain to differentiate itself from the likes of McDonald's and the other legacy brands.
Chipotle Mexican Grill, for example, has gone to great lengths to banish unnatural ingredients from its kitchen, becoming the first national chain to eliminate GMO's, however the company still serves Coke products. Chipotle has been testing organically sweetened root beer, for example, which could be expanded in coming months, but it's yet to take the plunge on natural sodas the way it has with its food.
Alternative sodas have developed a cult following in some corners, but no major brand has been able to break through, likely due to Coke and Pepsi's domination of the industry. Jones Soda, for example, carved out a profitable niche in the 1990's and was successful through 2006, but some bad business decisions, the general decline in soda and the financial crisis soaked the company and it is now worth just $15 million.
Other niche operators, however, have found success more recently. Reed's, which makes Virgil's Root Beer and Reed's Original Ginger Brew saw sales grow 16% to $43.4 million last year. Those numbers pale in comparison to the billions Coke and Pepsi are bringing, but distribution capability is likely the best explanation for the wide gap.
After all, Coke and Pepsi have already begun adapting to the shift in natural beverages. Coke has been increasing its imports of Mexican Coca-Cola, which is made with sugar instead of corn syrup, and carries a trendy aura that is lacking from the rest of its portfolio. Pepsi, meanwhile, came out with Caleb's Kola last year, whose formula includes cane sugar, kola nuts, spices, and citrus, and CEO Indra Nooyi said she thinks the potential for craft cola is "huge."
Following the fast food chains and the big food makers, Coke and Pepsi may finally be adapting to the changing consumers. New products like Stubborn Soda won't be a smash hit overnight, but they're the beverage giants best hope at reversing the decade-long slump in sales, and in the process could restore a positive image to their core product.
Jeremy Bowman owns shares of Apple and Chipotle Mexican Grill. The Motley Fool recommends Apple, Chipotle Mexican Grill, Coca-Cola, Keurig Green Mountain, Monster Beverage, and PepsiCo. The Motley Fool owns shares of Apple, Chipotle Mexican Grill, Monster Beverage, 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.