SUBSCRIBE

Breaking News on Food & Beverage Development - North AmericaEU edition | Asian edition

News > Manufacturers

PepsiCo: Disruptive innovation, not "ridiculous pricing", the answer to diet soda slowdown

1 commentBy Elaine WATSON , 16-Oct-2013
Last updated on 16-Oct-2013 at 18:55 GMT

Indra Nooyi: 'It’s important that in the next 2-3 years, we come up with significant disruptive innovation if we want to hold people in the carbonated soft drinks category'
Indra Nooyi: 'It’s important that in the next 2-3 years, we come up with significant disruptive innovation if we want to hold people in the carbonated soft drinks category'

The recent drop in diet soda sales in North America has been “a little more rapid than we expected” says PepsiCo CEO Indra Nooyi, but PepsiCo remains convinced that “significant disruptive innovation” rather than “ridiculous pricing” is the best way to address volume declines.

Asked about the lackluster performance of diet soda in the US on the Q3 earnings call Wednesday, Nooyi said: “In the last 6-9 months, there has been an accelerated decline in diet drinks as people say they don’t want artificial sweeteners, they want more natural sweeteners, they don’t mind some calories.

“We are seeing a fundamental shift in consumer habits and behaviors.”

Her comments followed the release of a report from Wells Fargo revealing that year-to-date unit sales of diet carbonates slumped 5.1% at Coca-Cola, and 8.3% at PepsiCo in Nielsen xAOC* channels. In comparison, unit sales of regular carbonates were up 0.3% at Coca-Cola and down a more modest 3.3% at PepsiCo.

We are innovating around natural sweeteners and thinking about flavoring agents to make sugar taste more sugary

New products will hit the market next year, she said, but would not give details.

We are staying along the path of innovating around natural sweeteners and thinking about flavoring agents to make sugar taste more sugary and we’ve talked about products coming on the market in 2014, but we haven’t got a launch date yet.

“Our goal is to bring to the market a product that tastes great. We don’t want to rush a product to the market and then have to wonder why we launched something that wasn’t that great tasting.”

We don’t want to rush a product to the market

Recent launch Mountain Dew Kickstart on track to deliver first year retail sales that "significantly exceed" $100m

She added that the “shift from carbonated soft drinks (CSDs) to non-carbonated soft drinks has accelerated” with CSDs accounting for around 40% of volumes in the US liquid refreshment beverage category versus 50%+ a decade ago.

“The CSD category has been declining about 3% a year, especially in the last couple of years. And it’s important that in the next two to three years, we come up with significant disruptive innovation if you want to hold people in the CSD category and that’s what we are focused on.”

Will our innovations stop the decline? That’s anybody’s guess

She added: “Will our innovations stop the decline? That’s anybody’s guess...In today’s world we have to keep betting on innovation both for creating breakthrough products and also innovation to reduce costs through creative ingredients.”

Meanwhile, the “best insulation is to have a diversified portfolio… that covers all eating and drinking occasions and not be overly dependent on a category like CSDs”, she added.

However, she noted that Mountain Dew was performing “terrifically well in the US”, with new launch Mountain Dew Kickstart “expected to significantly exceed $100m in its first year retail sales", while PepsiCo also has six other new products set to achieve $100m in the US (Tostitos Cantina, Quaker Medleys, Starbucks Iced Coffee, Lipton Pure Leaf Tea, Quaker Yogurt and Gatorade Frost Glacier Cherry).

The industry has seen years and years of ridiculous pricing

In the past five years, US per capita soft drink consumption declined 3%. However, carbonates declined 8.9% over the same period, as consumers turned to flavored waters, energy drinks, ready-to-drink teas and other products, says Euromonitor International.

Asked about the pricing dynamics of the CSD category - in which Pepsi has seen bigger volume declines than Coke recently in part because it has adopted a more EDLP strategy whereas Coke has been aggressively promoting CSDs - she said Pepsi planned to hold its nerve.

The industry has seen years and years of ridiculous pricing... What we’re trying to do is to say given the category dynamics we have to behave in a value creating way… We’re going to keep doing that and hope that at some point in the overall category there is sensible behavior and all of us are focused on sustainable long term shareholder value creation.”

Coca-Cola: Coke Zero is becoming ever more relevant with young males

Asked about the US diet soda slowdown on its Q3 earnings call on Tuesday, Coca-Cola Americas president Steve Cahillane said: “We are actually seeing increased incidence in the past quarter between 19 and 24 year olds [in purchases of Diet Coke?].

“We think a lot of that has to do with the exciting new promotions with Taylor Swift, some of the new packaging we are bringing in the marketplace and increased focus on Diet Coke.

Meanwhile, sales of Coke Zero “grew mid-single digits” in Q3, he added: “It’s really becoming ever more relevant with young males.”

Coca-Cola Americas president Steve Cahillane : "Coke Zero is really becoming ever more relevant with young males.”

Asked about pricing, he said: “The average price today of an 8oz serving of Coca-Cola is $0.25. This is up over 5% versus two years ago and up nearly 10% versus three years ago. [So] we still have plenty of room to continue to take price.

"Addressing the third quarter in particular, we acknowledge we did strategically invest in select promotional activity in the back half of the summer through the Labor Day holiday. But these investments were tied to specific occasion-based brands and packages to help drive incremental household penetration, which they did, attract more consumers into the category, which happened.”

Q3 highlights

PepsiCo: “Starbucks Iced Coffee is performing ahead of expectations, it has reached a 7.5% value share position in the ready to drink coffee market and is on pace to achieve approximately a $100 million in retail sales in its first year.”

PepsiCo reported third-quarter net income of $1.9bn vs $2bn a year ago, while net sales were up 1.5% to $16.9bn, with weaker sales of beverages offset by stronger growth from Frito-Lay and Latin America food sales.

Coca-Cola reported third quarter earnings of $2.45bn up from $2.31bn a year ago, while revenues dipped to $12.03bn from $12.34bn last year.  

*Nielsen’s xAOC (extended All Outlet Coverage) data includes food, drug, mass merchandise, Walmart, dollar, military and club stores, but excludes c-stores.  

Click here to see more commentary on the recent volume declines in the diet soda category in the US.

Subscribe to our FREE newsletter

Get FREE access to authoritative breaking news, videos, podcasts, webinars and white papers. SUBSCRIBE

1 comment (Comments are now closed)

Answer to Soda Diet woes...

We are open for strategic collaboration. Pepsi need not wait for 2-3 years to come up with a Disruptive Innovation. Connect with the Ideaspace Foundation, Philippines and we will gladly solve the problem for the cola giants so that people need not be "poisoned" further.

Report abuse

Posted by Jun Andres DeLeon
17 October 2013 | 00h06

Key Industry Events

 

Access all events listing

Our events, Events from partners...