If current trends continue, carbonated soft drinks volumes could decline 15-20% by 2020 driven by sharp declines in diet variants, predicts Wells Fargo. But why have Americans fallen out of love with diet soda, and what are they drinking instead?
According to Wells Fargo senior analyst Bonnie Herzog, consumers are instead gravitating towards waters, teas, energy drinks, and in some cases, going back to regular soda, owing to concerns over artificial sweeteners.
“Because of the ongoing declines and worsening performance of diets which we attribute to broader awareness of studies questioning the safety of artificial sweeteners, we believe we are seeing a fundamental shift in consumption behavior as Diet drinkers leave the category altogether.”
Her comments came as the latest Nielsen xAOC* data revealed that unit sales of diet carbonates from the top three players combined declined by 7% in the year to date (Coca-Cola -5.1%, PepsiCo -8.3% and Dr Pepper Snapple Group -7.6%).
In comparison, unit sales of regular (full sugar) carbonates were up very slightly at Coca-Cola ( +0.3%) and down a more modest -3.3% for PepsiCo and -1.7% at Dr Pepper Snapple Group.
Could a prolonged price-war commoditize the carbonates category in the US?
But how are the key players responding to these dismal figures, and who will be hit the hardest if these trends continue?
According to Herzog, the relative strength of Coca-Cola’s regular offerings coupled with its exposure to international markets positions it most favorably - although its current US strategy of heavy discounting is risky if it persists, she says.
“If Coca-Cola is able to capture material volume share from its peers while the sector is under pressure… and then return to a more rational pricing environment, we think its North America business could emerge stronger in 2014.
“However, our optimism is tempered by fear that this unravels to a long-term price-war and full commoditization of carbonated soft drinks, which would bode poorly for Coca-Cola’s long-term prospects in the US.”
With the exception of Mountain Dew, nearly all of PepsiCo’s carbonated soft drinks brands are underperforming the sector
And while PepsiCo’s overall carbonates portfolio is less weighted towards diet variants than Coke’s, it does not benefit from such a strong regular soda platform to offset the weakness in the diet category, notes Herzog.
“With the exception of Mountain Dew, nearly all of PepsiCo’s carbonated soft drinks brands are under-performing the sector this year.”
Dr Pepper: Diet soda accounts for <10% of portfolio, but very overexposed to
Finally, while Dr Pepper Snapple Group is the least exposed to the ‘Diet Downturn’ given its relatively small diet portfolio, sales of its low-cal TEN platform are not meeting the mark, she adds. Meanwhile, it has “nowhere to hide” from the weak carbonates sector overall, as carbonates account for 90%+ of its portfolio.
We believe we are seeing a fundamental shift in consumption behavior as Diet drinkers leave the category altogether
But why have consumers suddenly started to spurn diet soda, given that concerns over artificial sweeteners are nothing new?
Clearly something has changed in the past 2-3 years, says Herzog, who notes that unit sales of diet carbonates suddenly started to decline much more rapidly than their full-sugar counterparts in 2011-12.
“We believe the recent Purdue University study [an opinion article by behavioral neuroscientist Dr Susan Swithers alleging that regular consumption of diet sodas may be linked to multiple health problems] has only served to accelerate this fundamental shift.
“We attribute much of the increased impact of negative news to the rapid rise of social media, and the speed and ease with which information becomes broadly disseminated. Therefore… we believe the most recent Purdue study and related news articles have been seen by a far broader audience."
Euromonitor International: Finding a natural sweetening solution that works in diet cola is not the panacea some people seem to think it is
But can Big Soda turn things around if R&D experts can come up with natural sweetening solutions that really deliver for zero calorie colas and other carbonates, or are consumers just bored of fizzy drinks now?
Jonas Feliciano, beverages analyst at Euromonitor International, told FoodNavigator-USA that finding a natural sweetener that performs well in diet carbonates will help tackle the category funk.
Notion that carbonates can win back all the market share they are losing by reformulating with natural sweeteners misses the mark
But it's not the panacea, he stressed. "Increasingly people are choosing beverages based on what does this product do for me, not just what this brand says about me. They are looking for functionality and health.
"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."
Asked about the TEN platform, expecting it to stretch beyond Dr Pepper and "just work" in other products such as Sunkist and 7-UP may have been optimistic, he added.
"I think it made sense for Dr Pepper and was backed up by a solid marketing campaign, while the unusual flavor profile of Dr Pepper also means that you can mask the taste of the artificial sweeteners better.
"But I think you can't just assume that TEN will work across the rest of the platform."
Pepsi should stick to its guns on EDLP pricing strategy; Coke is just buying share in a declining market with mega-deals
As for the promotional dynamics of the soda category, Pepsi has been testing out an 'everyday low pricing' (EDLP) strategy (instead of a 'high-low' approach with higher prices and big promotions) to smooth out demand and better reflect changing consumption patterns (consumers are increasingly buying soda in smaller pack sizes, more often, instead of stocking up on huge 12- and 24-packs), he said.
"When you look at the data, you could argue that Pepsi's new strategy is not working, but that's probably because Coke has been aggressively promoting its products at the same time. But arguably, Coke is just buying share in a declining category."
And while the pressure is on PepsiCo to respond in kind with heavy discounts, it would be "smart" if it could instead "hold its course", said Feliciano.
"The whole carbonates category is declining, so ultimately, I think everyone is going to have to switch to a more EDLP strategy."
*Nielsen’s xAOC (extended All Outlet Coverage) data includes food, drug, mass merchandise, Walmart, dollar, military and club stores, but excludes c-stores.