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Wells Fargo: New natural sweeteners won’t save ailing soda category

Wells Fargo: “We remain concerned about the ongoing deterioration of PepsiCo’s beverage business.”
Wells Fargo: “We remain concerned about the ongoing deterioration of PepsiCo’s beverage business.”

It’s been a grim year in the carbonated soft drinks aisles for the sector's three biggest guns, but will things look up in 2014? And will new all-natural sweeteners reverse the downward trend in the diet soda sector?

In a series of notes to investors released as Dr Pepper Snapple Group, Coca-Cola and PepsiCo prepare to unveil their Q4 results, Wells Fargo analyst Bonnie Herzog said c-store retailers at least were convinced the answer to the second question is 'NO'.

"Given the importance that many beverage companies have placed on an all-natural sweetener as a means to bring consumers back to the carbonated soft drinks (CSD) category, going so far as to describe it as the 'holy grail', we asked our convenience store retailers whether or not they believed that this would have a positive impact if and when it’s introduced,” she said.

"Our retailer contacts [representing 15,000+ c-stores across the country] almost universally believe that an all-natural sweetener “won’t bring many consumers back” to the CSD category as “the damage may already be done.”

PepsiCo's new Kickstart product is doing well in c-stores, but its core Diet Pepsi and Pepsi products have been struggling

One retailer told Wells Fargo: "Customer's taste profiles/preferences have changed. As the group that was brought up on energy drinks gets older, carbonated soft drinks become less and less a part of their daily intake. This will eventually lead energy drinks to be a bigger part of the cold vault than CSD. In some areas, this has already occurred.

Another said: “Scary, units down in CSDs, seeing shift in drinking habits. Soft drink companies and contracts still trying to impose the old order, expect a big a shake-up if Q1 2014 looks anything like Q4 2013."

Bad PR has not dented energy drink sales in c-stores

Meanwhile, despite all the negative PR surrounding energy drinks, c-store retailers remain bullish about their prospects, she said.

"Our survey respondents believe that this year’s growth of 12.4% is greater than a year prior (12.1%), which we believe is a strong signal of a long runway of growth for the category for years to come."

And space allocated to energy drinks - particularly Monster - is increasing, she said: "While the energy category today only comprises approximately 20% of our retailers’ shelves, our retail contacts think that over time, there is an opportunity to expand the energy shelf space by 50% to over 30% of total c-store shelf space."

Sparkling Ice continues to go from strength to strength in the c-store channel

Finally, SPARKLING ICE continues to go from strength to strength, she said, while many c-store retailers also predicted strong growth in teas, sports drinks and protein-based drinks.

Dr Pepper Snapple Group: Many retailers say they might de-list TEN in the spring

Drilling down to the top three players in the category, Herzog is forecasting that full year (2013) volumes at DPS will be down 2% on flat revenues.

Meanwhile, the viability of the TEN low-calorie range remains in question, she said: “We are increasingly fearful that TEN may follow in the footsteps of countless other brand extensions that fail to become meaningful brands. We can only hope at this point that DPS discontinues any further investment to promote the platform."

We remain concerned about the ongoing deterioration of PepsiCo’s beverage business

“We remain concerned about the ongoing deterioration of PepsiCo’s beverage business.”

PepsiCo, meanwhile, has seen “mixed results” as it has switched to an every-day-low-price (EDLP) pricing strategy in recent months, she claimed.

 “While we do believe that theoretically it is the right strategy, there has clearly been a negative impact on shares in measured channels.”

While recent launches Mountain Dew Kickstart and Frappuccino were  performing well, said Herzog, “We remain concerned about the ongoing deterioration of PepsiCo’s beverage business.”

While CEO Indra Nooyi has promised to announce ‘structural changes’ when she unveils the firm's full year results on Feb 13, splitting the business down the middle was probably not on the agenda, however, Herzog predicted.

We don’t expect Senomyx to have an FDA approved, all-natural sweetener prior to at least 2015

But what about PepsiCo’s work on new sweeteners and sweet flavor modifiers?

San-Diego-based Senomyx has gone public about its tie up with PepsiCo on sweet taste modifier S617 and indicated that the first products from its collaboration will be commercialized this year contingent upon a GRAS (Generally Recognized As Safe) determination for S617.

However, progress on new all-natural high intensity sweeteners (which Senomyx is also looking at) is slower, said Herzog.

“We recently met with management from Senomyx… While Senomyx has several promising compounds that could offer sweetener solutions soon, and has made significant progress in an all-natural sweetener, we don’t expect Senomyx to have an FDA approved, all-natural sweetener prior to at least 2015.

Bonnie Herzog: "We believe Coca-Cola has been increasing its prices on carbonated soft drinks."

“While we acknowledge that PepsiCo may source an all-natural sweetener from another company, or potentially develop it in house, we think Senomyx offers a good indication of the overall industry’s progress.”

Coca-Cola: We believe Coca-Cola has been increasing its prices on CSDs

At Coca-Cola, Herzog is forecasting volumes will be up 2% in 2013 with currency-neutral revenue growth of 1.9% when it unveils its results on February 18.

As for carbonated soft drinks (CSDs), said Herzog, “We believe Coca-Cola has been increasing its prices on CSDs but not on its still beverages as it continues to manage its business ‘for profits over sales in CSDs’."

Natural sweeteners

While stevia is used in scores of high-profile brands from Sprite Select to Vitamin Water Zero, the only top-tier cola brands containing it are the Australian formulation of Pepsi Next, which has 30% less sugar; and Coca-Cola Life, which has 50% less sugar, and debuted in Argentina last year.

Neither Coke nor Pepsi has yet launched a zero calorie cola with stevia, however.

Speaking to FoodNavigator-USA last year, Jonas Feliciano, beverages analyst at Euromonitor International, said finding a natural sweetener that performs well in diet carbonates is not a panacea: "I just don't think we're going to see people drinking the volumes of Diet Coke or Pepsi that they used to, even if they reformulate. 

"The idea that carbonates can win back all the market share they are losing just by reformulating with natural sweeteners I think is missing the mark."

Other commentators say the issue is not with the sweeteners, but the brands, pointing out that lightly carbonated Sparkling Ice has artificial sweeteners (sucralose), but is doing really well (click here ); while zero-cal carbonated soft drinks brand Zevia uses natural sweeteners (stevia and monk fruit) and is also doing really well (click here ).

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