2012 Soft Drink Report
Reinventing soft drinks, strategies to re-entice consumers
In contradiction to the inherent effervescence of its products, carbonated soft drink (CSD) manufacturers are finding the current U.S. market less than bubbly. Consumers remain focused on both their wallets and waistlines, creating a challenging landscape for major CSD makers The Coca-Cola Co., Atlanta, PepsiCo, Purchase, N.Y., and Dr Pepper Snapple Group (DPS), Plano, Texas. In fact, the CSD category has lost 260 million cases to other categories since 2007, according to a DPS presentation during the Consumer Analyst Group of New York (CAGNY) conference in February.
Euromonitor International, Chicago, reports that U.S. sales of carbonated soft drinks were at nearly 36.4 billion liters in 2011. It predicts a decline in the category with forecasted performance for this year at approximately 36.1 billion liters. According to Euromonitor, the soft drink segment, which in its definition includes carbonates as well as bottled water, juice, ready-to-drink coffee, ready-to-drink tea, sports and energy drinks, will report 0.6 percent growth from 2011 through 2016 in the United States. Despite the small percentage of growth, the figure represents a rebound from the declines posted in 2008 and 2009 as shown by Euromonitor data.
“The market remains sort of depressed,” says Garima Goel Lal, senior analyst at Mintel, Chicago. “But we noticed that there was a lot of price cutting, especially at mass merchandisers in 2010, which surprisingly created dollar deflation in the market, but it also didn’t really help volume much.”
In 2010, Goel Lal notes that mass merchandisers such as Walmart and Target executed price cuts, yet CSD volume declined 4 percent in food, drug and mass merchandise outlets that year, according to Mintel data. In the research firm’s measured channels, 2011 dollar growth came from price increases, she says. Mintel predicts these price increases will stay in place this year and will drive Mintel’s prediction for 1.2 percent growth in CSD dollar sales in 2012, she says.
During its fourth quarter and full-year 2011 results call, The Coca-Cola Co. Chief Executive Officer Muhtar Kent reported that the company achieved a 2 percent price mix in the fourth quarter of 2011 including a 4 percent increase in retail prices of sparkling brands. The Coca-Cola Co. also foresees additional price increases in 2012, Kent said during the call.
“We strongly believe and have consistently proven that the best way to drive long-term sustainable value is by earning price with our consumers in concert with a robust occasion-based brand, package and channel strategy that drives profitable, sustainable growth,” said Gary Fayard, executive vice president and chief financial officer of The Coca-Cola Co., during the call. “That is why we remain confident that we can keep delivering results in line with our long-term growth targets.”
PepsiCo Chairman and Chief Executive Officer Indra Nooyi said the company has increased prices in step with commodity pricing and marketplace pressure in the competitive category, during the company’s fourth quarter and full-year results call. However, she noted that the company remains cautious about increases. “This is a tough economy; it is not that the brands don’t have pricing power — consumers don’t have the buying power,” Nooyi said.
Price increases also affected private label CSD brands, which remain a smaller factor in this brand loyal segment, Mintel’s Goel Lal says. According to the market research firm’s data, private label did not perform as well in 2011 as in prior years, she explains. Goel Lal attributes the drop in sales to price increases, from which the brands might have previously strayed.
To continue growing consumption of its sparkling brands, The Coca-Cola Co. targeted five areas, which are as follows: to recruit teens and young adults, to lead sparkling credibility, to engage family shoppers, to sustain adults, and to enhance occasion, brand, package, price and channel (OBPPC) architecture, according to the company’s North American market tour event last September.
A portion of the company’s strategies included the rollout of package options that provide multiple options for consumer entry, including the launch of a 12.5-ounce bottle that retails for $0.89. The 12.5-ounce package was designed to drive consumers into convenience stores, the company said. Mintel’s Goel Lal says various packaging sizes help CSD brands appeal to both health- and price-sensitive consumers, who might be willing to buy a 7.5-ounce mini can or 1-liter value-priced package depending on their priorities.
The company reported that trademark Coca-Cola volume increased 1 percent in North America during the fourth quarter of 2011. At the CAGNY conference in February, Fayard noted that the company is focused on the continued growth of the brand.
“We are worried about making sure that brand Coke continues to grow because it is kind of the oxygen of the business; it happens to be the name on the side of the building, and our biggest brand,” he said. “We’ve been successful — it’s grown 3 percent each of the last two years. We feel very good about that, but we’ll continue to grow all the brands because the consumer wants more of a choice, and we’re giving them all the choices for different occasions.”
Fanta, which is among the company’s Top 4 brands along with Coca-Cola, Sprite and Diet Coke, increased 3 percent in 2011, which is its second consecutive year of growth, Kent said during the company’s results call in February. To attract changing consumers, The Coca-Cola Co. is proactively reshaping its marketing initiatives, Fayard said during the company’s presentation at the CAGNY conference.
“We know that we are a marketing machine, but the 30-second spot just doesn’t cut it anymore,” he explained. “To really connect with consumers today, you’ve got to change. You’ve got to change your marketing mix, you’ve got to change what you’re doing, because consumers are somewhat liquid, they evolve, and they are changing all the time with what they’re looking for. To connect with those consumers, you’ve got to change your marketing.”
During its fourth-quarter and full-year results call, Kent highlighted the company’s Super Bowl campaign, which complemented TV ads featuring its animated polar bears with the online, interactive “Polar Bowl.” Fans were able to watch the bears’ reactions to the game and chat with them in real-time. Kent said more than 300,000 fans joined the polar bears live and by the second quarter of the game, Coca-Cola’s Facebook feed was receiving 3,400 hits a second. This year, the company is planning major campaigns around the Olympics and Euro Cup events.
Despite owning leading CSD brands Pepsi and Mountain Dew, Nooyi laid out the struggles PepsiCo faces to grow sales in its North American direct-store delivery (DSD) system, which also includes its non-carbonated brands, in its full-year results call.
“I will tell you between 2007 and 2010, we did lose some market share,” Nooyi explained. “Recently our share trends have begun to improve, but we are not happy with the pace of improvement and recognize the need to accelerate progress.”
To rebound category performance, PepsiCo plans to increase marketing spending on its most important brands, accelerate product and packaging innovation, step-up foodservice outreach and realize cost synergies. PepsiCo plans to invest and drive growth behind globally renowned CSD brands such as Pepsi, Mountain Dew and Sierra Mist in the United States. Part of this global approach is this summer’s launch of the first global campaign for the Pepsi trademark, Nooyi explained.
Nooyi also noted on the call that marketing spending is not enough to drive sales and that the company remains focused on execution and innovation. “You can talk about the brands all you want, but you need new products to drive incrementality,” she said.
Among PepsiCo’s 2012 innovation plans is a 24-ounce can of Mountain Dew that was test-marketed and performed well with Mountain Dew brand-lovers as well as energy drink users, said Al Carey, chief executive officer of PepsiCo Americas Beverages, during the company’s results call. The company intends to introduce a campaign this summer for Mountain Dew, which Nooyi said is the fastest-growing brand in the CSD category.
Within the Mountain Dew franchise, PepsiCo also celebrated Diet Mountain Dew’s status as a billion-dollar brand earlier this year, which grows the company’s portfolio to 22 billion-dollar brands, 14 of which are beverage brands. Mintel’s Goel Lal notes Diet Mountain Dew’s alignment with its fans.
“I think the brand speaks to what its loyal users need [and] they have been able to create that loyalty among its users just by communicating with them, taking their advice and launching new products and new flavors,” she says.
Through licensing agreements with Coca-Cola and PepsiCo as well as within its own system, DPS was able to grow distribution and availability of its core brands in the grocery and convenience channels in 2011, explained Larry Young, president and chief executive officer of DPS, during its fourth quarter 2011 results call in February. DPS brands increased 8 points in grocery stores and rose 2 points in the convenience channel, Young reported.
The licensing agreements also helped DPS report a 2 percent increase in display tie-in rates, Young said. DPS also introduced new packaging in 2011 with the addition of its new CSD 20-ounce grip bottle as well as 18-packs of cans of its soft drinks. In addition, DPS brands became available on more than 43,000 new fountain valves and welcomed 25,000 incremental cold drink placements during 2011 , Young noted on the call.
DPS maintains a 40 percent dollar share in flavored CSDs, Young said during the CAGNY conference. In addition to positive Canada Dry sales, DPS’ portfolio performance was led by Sun Drop, which the company launched nationally last year. The brand drove 9 million incremental cases in 2011 and captured 4 percent of the citrus-flavored category. Sun Drop also posted 43 percent growth in the segment, according to DPS’ presentation at the CAGNY event.
Prior to the national launch, DPS partnered with MTV to develop a marketing campaign targeted at millennial consumers. Its Sun Drop TV ad featuring Matty, the Sun Drop girl, attracted close to 9 million views on YouTube in 2011, Young reported during the results call. In 2012, the company plans to continue its Sun Drop promotion through a co-brand with its Sunkist lineup to offer a chance for consumers to win a VIP trip for four to the Billboard Music Awards in Las Vegas.
Sunkist also will be a focus this year for DPS with plans to add Sunkist Grape and Sunkist Strawberry to its portfolio. The launches tap into the popularity of flavored CSDs, which DPS says occupy 51.5 percent of the category, according to its results call.
During the call, Young noted that DPS will spend an additional $10 million to $12 million on marketing in the first quarter of 2012, but that it’s more closely watching the return on its investment. Young emphasized the company’s plans to spend smarter, roll out more local campaigns and invest heavily in appealing to Hispanic consumers. One such outreach is that DPS is planning a Facebook program to promote its five core brands: Dr Pepper, 7UP, A&W, Sunkist and Sun Drop. The promotion will offer Facebook credits on specially labeled 20-ounce bottles that can be redeemed for virtual goods, the company says.
For 2012, DPS’ single largest opportunity is to increase per capita consumption of its brands, the company said. As part of this plan, the company plans to create local programs, including the rollout of targeted programs for coastal markets such as Seattle, Baltimore and New York City. The company plans to continue to expand the availability of its products in take-home, immediate consumption and fountain with at least 25,000 incremental fountain valves and as many as 30,000 new cold drink placements, Young said.
Although diet sodas remain a notable force in the industry, Mintel’s Goel Lal explains that the diet consumer base has remained constant, citing taste as the most popular reason why consumers shy away from the diet category.
“Coke Zero and Pepsi Max have shown growth, so this suggests that if we have more diet products that match the taste of the original brand, they have more chances of success and people will move more toward the diet products,” Goel Lal says.
The Coca-Cola Co. noted in its fourth quarter and full-year results call that Coke Zero increased high-single digits in North America during the fourth quarter of 2011. The brand also was up double-digits for the full year, which marks the fifth consecutive year of growth for the brand, Kent noted.
Mintel’s Goel Lal explains that Pepsi Max reported higher growth than Coke Zero last year in Mintel’s measured channels, but she cautioned that Pepsi Max’s upswing is from a lower base. PepsiCo restaged Pepsi Max in 2011 and, on the company’s results call, Nooyi noted that Pepsi Max volume increased more than 50 percent between last year and 2010. The brand now occupies nearly one share of the CSD business, she said.
Big Red Ltd., Austin, Texas, also expanded its portfolio of CSDs with the addition of no-calorie Big Red Zero. The zero-calorie variety is described as having the original flavor of Big Red without the calories. Big Red Zero launched in black packaging and marketed under the tagline “Introducing Nothing.”
Goel Lal sees potential for reduced-calorie CSDs if manufacturers properly market the brands.
“People may move especially [since] there are a lot of people who are diet conscious, and if the taste is the same, they might move to this low-calorie product, but it just remains to be seen in terms of how the company positions it in terms of marketing,” Goel Lal says. “Coke Zero just went after men and young men, and that hit the target. Dr Pepper Ten is going after men only; if you look at their marketing campaign it seems they are excluding women.”
DPS noted during its presentation at the CAGNY event that taste is king, which provided the inspiration for the October launch of Dr Pepper Ten. The 10-calorie product uses breakthrough flavor and sweetener technology to offer a product with the same taste and mouthfeel as regular Dr Pepper, but with only 10 calories in each serving, the company says. In its results call, Young reported that its tongue-in-cheek “It’s Not For Women” campaign generated more than 230 million media impressions.
The company said Dr Pepper Ten’s performance helped the Dr Pepper brand family grow 2 percent in the fourth quarter of 2011. Young also noted that the repeat purchase rate on Dr Pepper Ten is exceeding the company’s expectations and that the brand presented “mind-boggling” performance in some markets in Texas, Oklahoma, Utah and Arkansas.
“The way we’ve put [the Ten platform] together was going much more after a consumer that didn’t necessarily want to go to a diet [CSD],” Young said during the CAGNY presentation. “They were going to something else, leaving the CSD category. So we want to make it where we could get them back to the CSD category. All of our Ten platforms are not designed to take any of our diet users; we have very loyal diet users. We just want to get that consumer that left CSDs and get them back into the category.”
As an example of its faith in the Ten platform, Young noted the company’s plans to offer 10-calorie 7UP, A&W, Sunkist and RC Cola varieties this year.
Across its portfolio of beverages and snacks, PepsiCo’s plans for 2012 include three types of launches: refresh innovations, which Nooyi described as non-line extensions, re-frame innovations and breakthrough innovations. It has a goal of creating a higher mix of re-frame and breakthrough innovations because she explained during the results call that those have more potential to be incremental.
“An example of breakthrough innovation would be products based on the work we are doing with natural zero-calorie sweeteners,” Nooyi said during PepsiCo’s results call. “Our belief is that when that commercializes, which I hope is pretty soon, we will really start re-framing the carbonated soft drink category.”
Before the “breakthrough” makes its debut, late last month PepsiCo nationally introduced Pepsi Next, a CSD made with the company’s proprietary sweetener technology that delivers the taste of Pepsi with 60 percent less sugar. Pepsi Next is intended to meet the needs of a segment of consumers who are resistant to both full-calorie and diet soft drink offerings, the company said. PepsiCo promoted the reduced-calorie soft drink launch through a sampling program at 800 Walmart Supercenter stores, additional sampling in more than 40 cities nationwide, advertising and a Facebook program inviting users to virtually taste new Pepsi Next by watching comedic videos.
PepsiCo’s innovations also will take advantage of a best practice from its Frito-Lay North American business, which incubates new products in a separate distribution system before launching a product into the DSD system. The company expects continued innovation into next year, including a “breakthrough in fountain equipment,” according to PepsiCo Americas Beverages’ Carey. Yet, Hugh Johnston, chief financial officer of PepsiCo, cautioned that the company is not counting on an increase in innovation as a percentage of sales in 2012, during the full-year results call.
Among The Coca-Cola Co.’s growth strategies for its sparkling business is its OBPPC architecture, which was pioneered by the Latin American division of the company. OBPPC is based on the principle that products need to be merchandised and marketed to appeal to consumers at the right time according to an individual use occasion.
Before implementing the strategy, The Coca-Cola Co. had limited assortment, few price points and dispersed messaging, according to the company’s presentation at its September 2011 North American market tour event. Now with OBPPC in place, the company has an optimized assortment, expanded price point and occasion messaging to align with shopper needs across channels and shopping occasions, it said.
It also designed programs to target bundling opportunities to inspire the co-purchase of a CSD and another item. For example, a convenience store consumer might be looking for a grab-and-go opportunity and can be enticed by value or an offer to add a snack for a given price. In a grocery store, the company creates multiple zones to attract consumers who might grab a meal on the go, are stocking their pantries or are filling in a missed purchase.
Similarly, PepsiCo plans to leverage consumer purchase synergies with Frito-Lay, according to the company’s results call and CAGNY presentation. Thirty percent of CSD shopper occasions include a salty snack purchase, Nooyi explained during the results call. PepsiCo plans to drive incremental co-purchase of the categories, and Nooyi explained that every point of additional share is worth $120 million retail sales.
In its new campaign, the company is promoting “perfect pairs” across its snack and beverage brands, which present cross-channel benefits, explained John Compton, president of PepsiCo, during the company’s presentation at CAGNY.
“The size of the beverage business and the snack business in grocery stores is roughly the same size,” Compton explained. “… In convenience stores, the reverse is true — the beverage business is almost five times larger, so snack can benefit from leveraging the business there.”
PepsiCo launched this concept during the Super Bowl with a campaign linking Lay’s potato chips and Pepsi in the form of streamers flowing from the products and creating the shape of a football. The company will expand the program this summer with digital and outdoor billboards, media placements, imagery on its equipment and customizable local programs.
Pitching to niches
Demographics present options for CSD expansion. PepsiCo is planning targeted and relevant Hispanic advertising and grassroots marketing to promote its Pepsi Next brand. During the company’s full-year results call, PepsiCo’s Carey noted the importance of the demographic to its marketing plans.
“More than 60 percent of the growth in the category is going to come from the Hispanic consumer, and I have seen some estimates that are quite a bit higher than that,” he said. “… [The] opportunity is becoming bigger in almost every city, not just in those Southwest cities that we typically talk about.”
DPS also cited statistics during the CAGNY conference that Hispanics are more likely to consume regular non-cola CSDs. To better position its portfolio, the company is creating strong partnerships and developing programs that resonate with Hispanics, including sponsorship of Spanish-language TV channel Univision’s PJ Awards. To drive awareness and trial of its new Dr Pepper Ten brand, DPS is engaging the Hispanic consumer by partnering with popular wrestling association Lucha Libre. The company also plans to continue its relationship with musician Pitbull and will partner with a new crossover musician from the Latin Grammy’s later in 2012, Young said at the CAGNY event.
Mintel’s Goel Lal also sees continued opportunity for development of CSDs with preferred sweetener profiles. She notes the success of PepsiCo’s reformulated Sierra Mist Natural, which is sweetened with sugar. However, Goel Lal emphasizes that a portion of Sierra Mist Natural’s performance could be that it was not priced at a premium, unlike the company’s higher priced Pepsi Throwback, which is sweetened with sugar.
Although she sees sugar as the best option for growth, Goel Lal sees an emerging niche for stevia-sweetened sodas, such as Zevia. Mintel research shows that 16 percent of all soda buyers have tried a stevia-based soda, and 10 percent said they would try it again. But stevia-sweetened CSDs largely remain unknown to general consumers.
“People are just not aware that something like this exists: 43 percent say they don’t even know what stevia-based soda is,” Goel Lal says. “I think at this point big companies don’t see the incentive to take out a brand because their key consumers are not really interested in the health point of view, rather they are more interested in taste. So that would be a big step for them; it could be risky.”
Overall, the category’s biggest opportunity lies in re-capturing consumers, she says.
“We need to find the reason that consumers drink the soda and then connect,” Goel Lal says. “From our research we find that consumers drink it for refreshment and particularly in a family setting.” BI
|Efficiency through integration|
The Coca-Cola Co., Atlanta, PepsiCo, Purchase, N.Y., and Dr Pepper Snapple Group (DPS), Plano, Texas, each highlighted several efficiencies achieved in 2011 as a result of taking advantage of distribution and warehouse synergies.
Although it maintains licensing agreements with both The Coca-Cola Co. and PepsiCo, DPS instituted a rapid continuous improvement (RCI) program across its own warehouse and distribution system. RCI was designed to free-up critical resources, people, time and money that can be directed toward building its brands and growing per capita consumption, explained Larry Young, president and chief executive officer of DPS, during the company’s presentation at the Consumer Analyst Group of New York (CAGNY) conference in February.
“This is not a productivity improvement program with a defined end goal,” said Marty Ellen, chief financial officer of DPS, during the company’s fourth-quarter results call in February. “Rather, this is about creating a sustainable business model of continuous improvement, underpinned by a mindset of relentless focus on providing value to our customers and consumers. In fact, as we get better at it, we will involve customers and bottling partners so that we can strengthen the entire value stream. Based on our early results, I remain extremely confident that we’ll achieve at least $150 million of cash productivity over the first three years of this journey.”
In 2011, DPS completed 92 improvement projects in its system, and plans to execute 150 more this year, Ellen said. The company has increased its selling time, removed eight days from sales inventory, closed seven outside warehouses, implemented 250 safety improvement programs, and enhanced speed to market in cold drink placements and innovation, Young said during CAGNY.
At the CAGNY conference, Gary Fayard, executive vice president and chief financial officer of The Coca-Cola Co., noted the synergies of its acquisition and integration of the North American operations of Coca-Cola Enterprises (CCE). As separate entities, increasing commodity costs would have caused bottlers to implement price increases, which The Coca-Cola Co. might not have been comfortable with for the health of the brands, he explained. Together as Coca-Cola Refreshments (CCR), the companies have been able to take a rational approach to pricing.
“What the transaction allowed us to do, actually, was moderate that and come back to this consumer-led-type pricing versus a cost-led pricing scenario, use some synergies, accelerating synergies coming through to make that work, and then continue on this year,” Fayard said. “So I think long-term, we are in a much better position because of the transaction.”
The company has seen its customer scores improve since the transaction closed, Fayard noted at the CAGNY event. In addition, CCR has been able to realize cost synergies that help support its business, he said during the company’s fourth quarter and full-year results call.
“As we move through 2011, we accelerated our CCR integration to support brand-building initiatives, reinvest in marketing and sales capabilities as well as to partially offset some of last year’s increasing commodity costs,” Fayard explained. “As a result, we effectively realized nearly all of the $350 million in annualized savings in 2011, almost three years ahead of schedule.”
Fayard also said that CCR has identified additional synergies, particularly in its North American product supply, that can be improved. The Coca-Cola Co. estimates that an incremental $200 million to $250 million in synergies on top of its original $350 million target can be captured starting this year and through to 2015.
During its fourth quarter and full-year results call in February, The Coca-Cola Co. also discussed its Bottling Investments Group (BIG), which is part of CCR. The division is its No. 3 bottler in the world, is the most geographically diverse bottler and maintains a business based on re-franchising, buying, fixing and re-franchising bottlers, Fayard explained. Fayard also emphasized the strength of the financial condition of BIG, which has been expanding and buying additional territories around the world, according to his presentation at the CAGNY conference. He expects BIG to be a net seller of franchises during the next three to five years.
PepsiCo Chairman and Chief Executive Officer Indra Nooyi set forth a reset strategy that will take effect this year during PepsiCo’s fourth quarter and full-year results call in February. However, she noted the plan could have been put in place earlier.
“Had we not had this macroeconomic meltdown and this commodity cost volatility, this whole reset would have happened earlier and the transformation could have happened earlier,” Nooyi explained on the investor call. “The problem is we faced the worst [economic] crisis and we had to reset in the middle of this crisis.
“The other problem was anytime we wanted to reset our North American beverages, there was this giant sucking sound where the bottling system took out all of the extra funding and demanded bottler funding,” she continued. “So we had to address the structural problem we had with the bottling system so that we didn’t have two companies fighting over shrinking profit or a flat profit pool.”
Now that the company has integrated its bottlers, it’s hoping to leverage another internal benefit: the Frito-Lay North America distribution system.
“In terms of ensuring perfect orders and on-time delivery, our beverage business will be creating a centralized dispatch headquarters in order to use sophisticated dynamic routing algorithms currently being used by Frito-Lay to improve service levels and reduce costs,” Nooyi explained during the full-year results call. “In terms of new product execution, our beverage business will start to deploy Frito-Lay’s industry-leading tools to ensure disciplined store level execution and tracking of all new products.”
PepsiCo’s strategies also include consolidation of manufacturing, warehouse and sales facilities in addition to implementation of a more simplified organization structure with wider spans of control and fewer layers of management, explained Hugh Johnston, chief financial officer of PepsiCo, during the company’s full-year results call in February.