The Pepsi Challenge: Dealing with Continued Declines in Soft Drink Consumption

It's not news that carbonated beverage consumption is down. The U.S. is in the midst of the 13th year of declining volume.

Industry leaders Coke and Pepsi have struggled to find growth as soda-drinking consumers buy less, and have tackled the problem differently. Pepsico's (NASDAQ: PEP) North American Beverage (NAB) division's performance for the first half of 2018 showed a 2% case sales decline and an 18% operating profit shortfall. Coca-Cola (NYSE: KO) eked out 2% growth in cases during this same time, with gains in Classic Coke, Zero Sugar and Diet Coke.

During the company's Q2 earnings call, Pepsico CEO Indra K. Nooyi, who is stepping down from the CEO role on Oct. 3, noted the slowdown in NAB sales. Nooyi mentioned an as-yet-unseen return to revenue growth in the second half of the quarter. So far, Pepsi has leaned on increased media spending to try and juice its carbonated beverage segment -- but is that the right strategy?

More media spending may not be enough for Pepsi

The "Pepsi Generations" campaign launched with a SuperBowl ad earlier this year. The advertising showcases past Pepsi icons like Cindy Crawford, Britney Spears and Michael Jackson and emphasizes the brand is still for people who like to have fun.

The campaign has been supported with limited edition cans and a loyalty program offering Pepsi-branded merchandise like grills, beach chairs and t-shirts. Although Pepsi is creating connections through nostalgia, there hasn't been much innovation with the brand, a tactic known to get the media to buzz and consumers to buy. When asked about new products during an interview earlier this year, Pepsico CFO Hugh Johnston mentioned Pepsi might introduce new flavors but didn't provide additional details.

Coca-Cola has taken a different tack than Pepsi, introducing the first new Diet Coke flavors in more than 30 years. Diet Coke's ginger lime, feisty cherry, twisted mango and zesty blood orange flavors hit shelves mid-January, targeting Millennials and flavor-loving consumers.

Could Pepisco offset cola losses by winning the 'non-cola' war?

Although Pepsi hasn't had as much news as Coke in the cola segment, the company has been aggressively pursuing growth in non-carbonated beverages. Recent new brands and flavors include:

  • LifeWater, Lipton and Pure Leaf teas, Kevita kombucha and probiotic cleansing drinks.
  • Bubly, an 8-flavor line of sparkling water with no artificial flavors or sweeteners.
  • Tropicana's kid-targeted organic juices and Coco Blends, fruit drinks made with coconut water.
  • Three flavors of Gatorade Zero with no sugar or carbs. This most recent introduction arrived in June to help Pepsico maintain its leadership position in a market where products with shorter ingredient statements are gaining ground.

Coca-Cola does compete in non-carbonated beverages with brands like Minute Maid, PowerAde, Fuse and Honest Teas, and Glacier Vitamin Water. But its U.S. market shares trail the Pepsico counterparts. Even without leading shares, Coke continues to look for opportunities to capture more of the non-cola space. Its 2017 acquisition of Topo Chico sparkling mineral water gives them additional access (beyond Desani and Smartwater sparkling options) to a market up more than 40% in the U.S.

Why Pepsi needs to keep fighting in the cola war

Winning the non-cola war is no small feat, but the size of the carbonated beverage market makes it one worth Pepsi's continued pursuit. Yes, consumers are buying fewer cans and bottles of soda, but 90% of U.S. households continue to buy more than a little, spending an estimated $195 billion in 2017. Carbonated beverages won't be disappearing any time soon.

Consumer's interest in new flavors, health(ier) options, and a bit more fun have fueled development of craft sodas, house-made sodas, and even brewed sodas. These pockets of growth in carbonated beverages might be worth exploring as Pepsi continues to shore up its core business.

Lisa Jackson has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.