Americans drink a lot of soda each year -- in fact, that might be a brutal understatement.
Based on statistics pulled from a variety of websites, the average American drinks a grand total of 44.7 gallons of soda each year. This compares to 28.3 gallons of water, 20.8 gallons of beer, and 18.5 gallons of coffee. Furthermore, the average child is consuming 500 cans of soda annually. Mind you, these figures take into account the fact that more people than ever are trying to avoid soda. It simply demonstrates what a juggernaut the soda industry actually is.
Globally, the soda industry is a $75 billion market, and even with a 10-year decline in U.S. soda sales, it's still a profitable enough industry to command a lot of attention from investors. But figuring out which brand out of the bunch -- Coke, Pepsi, Dr. Pepper, Mountain Dew, and so on -- is America's favorite isn't as simple as just looking at sales figures. In order to establish which soda brands still have what it takes to create and retain loyal customers, we'll turn to Brand Keys' 21st annual Customer Loyalty Engagement Index.
The importance of brand loyalty for the soda industry
Brand Keys is a New York-based research firm that uses a proprietary formula along with the responses of more than 42,000 people from across the U.S. to rank how businesses engage consumers, build rapport, and grow loyalty within their customer base. The idea being that businesses with better customer loyalty will produce superior growth and profits relative to businesses with poor loyalty rankings.
Why focus on brand loyalty? For starters, loyal customers tend to be higher margin consumers. Although all consumers want a good deal for the goods and services they're purchasing, loyal customers are more liable to stick within a given brand regardless of whether or not it's on sale.
The other component is that loyal customers are great sources of free advertising. If you like a brand or service, you're far more likely to tell your friends and family about it. And regardless of the billions of dollars the soda industry spends annually in ads, consumers are far more likely to take action if told of a good experience by someone they know and/or love than because of an ad.
With this in mind, Brand Keys examined six soft drink giants in the regular soda category. Let's take a quick look at which brands went flat, and which surprising brand ascended to the top spot in 2016. Note that we're not going to be discussing diet soda today, as that's an entirely different category in Brand Keys' analysis.
Mostly falling flat
As you might have rightly guessed, there's a pretty big difference in brand loyalty between category leaders Coca-Cola (NYSE:KO) and PepsiCo. (NASDAQ:PEP) and everyone else. Poor Dr. Pepper Snapple Group (NYSE:DPS) witnessed two of its core brands, 7-UP and Dr. Pepper, come in dead last and fifth, respectively, in the rankings.
Why have brand loyalty and engagement for Dr. Pepper Snapple Group fallen so far behind that of its rivals? The likely reason has to do with its smaller marketing budget relative to Coke and Pepsi. In 2014, Dr. Pepper Snapple Group spent a scant $414 million in advertising compared to Coca-Cola, which ponied up $3.3 billion in 2013. It's tough to get the same brand presence with such a huge marketing budget differential. You'll also see this difference play out in terms of brand ambassadors, where Dr. Pepper and 7-UP are lacking the star firepower that you often see with a Coke or Pepsi.
The middle of the pack was comprised of Sprite, which is owned by Coca-Cola, in the No. 4 spot, and Mountain Dew in the third spot, which is a PepsiCo. product.
Coke or Pepsi: Which reigns supreme in customer loyalty?
For the past four years Coca-Cola has reigned supreme when it comes to brand loyalty in Brand Keys' annual rankings, and it's not hard to see why it's been so dominant. Coca-Cola has a presence in every country around the world except for one (North Korea); it's had spot-on advertising campaigns complete with well-known ambassadors; and it's an historic brand that can attract all generations of Americans.
And yet in 2016's annual loyalty rankings it was Pepsi that usurped Coca-Cola to take the number one spot in the regular soda category. How'd Pepsi do it? I'd suggest it was a blend of aggressive advertising, superior diversification, and a keen ear to the ground when it comes to listening to customers.
Let's be clear that despite Coke's dominance in the soda category, Pepsi has played a close second fiddle in each of the past four years. One reason it may have finally surpassed Coca-Cola relates to Pepsi's aggressive marketing budget. While Coca-Cola was outspending Dr. Pepper Snapple Group by eightfold in 2013, Pepsi upped its game even further and spent about $600 million more than Coca-Cola on marketing. Advertising isn't always the answer, but it's looking as if its efforts to boost impressions is working. As a quick reminder, Pepsi was the halftime sponsor at Super Bowl 50 last month, and that should further help boost its brand-image and impressions with consumers.
Secondly, Pepsi's business diversification could be coming into play. Whereas Coca-Cola leads pretty much every business on the planet in terms of geographic diversification, it's strictly a beverages company. PepsiCo., on the other hand, derives a substantial amount of revenue from snacks. It owns big-name brands such as Lays, Fritos, Tostitos, Cheetos, and Doritos, to name a few. These brands offer PepsiCo. an opportunity to hit a plurality of consumers. Whether you're hungry or thirsty, Pepsi has an opportunity to make that visual and emotional connection. This is one instance where Pepsi may have the preferred type of diversification compared to Coca-Cola.
Lastly, Pepsi has done a particularly good job of innovating and creating excitement within its brand. For example, last year the company announced, very subtly, that it would be bringing back Crystal Pepsi, a clear novelty soda that it introduced in the spring of 1992. Although it only stayed on store shelves for about a year, it left enough of an impression that consumers have been calling for its reemergence for more than two decades. Pepsi obliged last year by announcing that it would soon be bringing back Crystal Pepsi through its loyalty program as a sweepstakes. Even if it's just for the novelty, the excitement around this launch appear to be helping the Pepsi brand.
Although Coca-Cola offers clear traits that would be intriguing for long-term investors, Pepsi's emergence as the leader in soda loyalty could mean it deserves a preferential look as a company that's potentially capable of superior growth over its primary rival.