Link: Making soda cool again | Beverage World
By: Andrew Kaplan
“It’s like death by a thousand cuts,” is how Wells Fargo Securities analyst Bonnie Herzog characterizes the situation that marketers of carbonated soft drinks have been facing for the past several years. By this she means the category has been around for so long, and grown so huge over all these years, that it’s certainly not going away. But at the point of purchase, the CSD category has seen better days as it is losing shelf space to the breadth of other liquid refreshment beverages—bottled waters both still and increasingly sparkling, energy drinks, ready-to-drink teas, and others—that are continuing to grow.
But this is by no means where the story ends for soft drinks. No, in fact, things may be just beginning as the CSD industry transforms itself into something more in line with where consumers are today: offering more premium, natural products, in more sizes—mostly smaller than in the past—and with more choices when it comes to flavors and formulations. “We think that the CSD category is evolving to meet consumer tastes and it’s actually an exciting time,” says American Beverage Association president and CEO Susan Neely. “Change also means that it’s a very dynamic time in the beverage business and a very dynamic time for the CSD category itself.”
There still may be a place for massive Big Gulps and 20 ounce PET bottles, but they are increasingly being passed up by waistline-conscious consumers who like their sodas in 7.5 ounce mini-cans or 8 ounce glass bottles. And, who may prefer a premium soda pitched by a sommelier—as a memorable and humorous ad for Pepsi’s new 1898 brand features.
Overall, the shift seems to be—at least in the U.S. market—away from a strategy purely driven by volume, as per capita consumption of CSD falls, reaching a new 30-year-low in 2015. “The consistent trend that we’ve seen in the past several quarters is that although volume continues to be pressured the offset has been more recently the net price realization for the manufacturers,” says Herzog. “I think it’s more than offsetting that. When the beverage manufacturers are able to get more pricing that certainly adds more leverage to their bottom line than a point of volume—almost two times the leverage from a point of pricing than from a point of volume, so ultimately pricing is more important. Obviously, a balance is ideal, but I think this is why this has been positive right now.”
Jeanine Lewis, brand director, Coca-Cola, Coca-Cola North America, affirms that Coke has seen tangible improvement in revenue as it has shifted to these more premium-priced options. “Our smaller package sizes, including the 7.5-oz. mini can and the 8-oz. glass and aluminum bottles, are increasing in popularity, particularly in the U.S.,” she says. “Sales of Coca-Cola mini cans have increased at double-digit rates since their introduction in 2009. Not only do people want choice, they also want control over their portion sizes, and our smaller packs meet both of these consumer needs. As Sandy Douglas, president, Coca-Cola North America, said in an interview, ‘The consumer is telling us that they like to finish their Coke based on the timeless insight that refreshment also means finishing it. It’s that last sip that has nothing left. You wish there was more.’”
That “more” is turning out to be—not only another Coke, but for the CSD category as a whole—innovation in the form of new kinds of soda and entirely new experiences around soda as well.
Cola’s in the house
One such experience will soon opens its doors—if all goes according to Pepsi’s plans—in New York City’s popular meatpacking district. It will go by the name of Kola House, and Pepsi says there is nothing else like it in North America today.
Pepsi describes Kola House as “the first experimental kola bar, restaurant, lounge and event space to open in the U.S. market,” and expects it to open sometime this spring. Explained Seth Kaufman, chief marketing officer, PepsiCo North America Beverages, at the time: “We wanted to create a modern hub for consumers to share social and immersive experiences that were anchored in the exploration of our cola’s artisanal craft and flavor. The Kola House represents a new space for us to support our consumer-first approach to drive authenticity and innovation around our beverage offerings and ideals.”
Given all the negative publicity around the category, it’s perhaps not surprising that the announcement was greeted with its share of sarcasm in social media and the blogosphere. But according to Chad Stubbs, vice president of marketing for brand Pepsi, the new space will not be one big in-your-face Pepsi ad. “It will be a celebration of cola,” he says.
After all, according to Stubbs, Pepsi’s portfolio of CSD products today are enough to celebrate, fitting along, as he puts it, “a spectrum” that runs from the “giant mass flavors of Pepsi and Diet Pepsi and Pepsi Max, and then there’s the people that love the cherry flavors and all that, and then you can keep going down the spectrum of these microtastes.” Such microtastes include the newest CSD players in Pepsi’s roster, a lineup that increasingly leans toward premium and natural. There’s the recently announced 1893 brand, for example, named for the year a precursor soda to Pepsi Cola was introduced, and is being positioned as a premium mainstream cola made with kola nut extract, real sugar, and sparkling water. It is available at a suggested retail price of $1.79 in Original and Ginger Cola flavors, and in 12.oz slim cans with an old-fashioned design that plays off, as an ad for the brand says, “over a century of cola knowledge.”
Then there are Pepsi’s craft offerings like Caleb’s Kola and Stubborn Soda. Also made with natural ingredients, a YouTube ad for Caleb’s has the brand’s creators touting even the size of the drink’s bubbles. It characterizes the brand’s creators as a special craft soda-focused group which exists inside the larger Pepsi corporate organization. Stubborn Soda, announced last year and targeted at foodservice accounts, also is made from natural flavors, and comes in a variety of innovative flavors like Agave Vanilla Cream Soda, Lemon Berry Acai and Black Cherry With Tarragon.
“The crafted and specialty beverage category is fast-changing and dynamic,” adds Coke’s Lewis. “We see great opportunities for continued growth in this emerging part of the beverage business. That’s why we’ve recently relaunched Hansen’s Sodas and Blue Sky Sodas with new branding and taglines. Both of these brands have incredible potential to thrive and build on their already great histories, while also complementing the wide variety of products available in the Coca-Cola portfolio.”
Innovation on overdrive
Actually, Coke and Pepsi are joining a craft soda space that has been around for a long time, but which, taken in its entirety, has been very slow to take off, especially when compared with the incredible success of the craft beer industry. But at least one long-time craft soda company, Boylan Bottling, which is celebrating its 125th anniversary this year, believes craft beer is not a bad comparison to make for the craft CSD industry. “I think that looking at craft soda we’re lagging behind the craft beer movement by about 10 or 15 years,” says Boylan Senior VP Chris Taylor. Boylan was recently named an official sponsor the 2016 Tribeca Film Festival, with pouring rights of both its sodas and Boylan Heritage brand cocktail mixers. The mixers and handcrafted sodas were offered at all parties and events throughout the two-week festival. “It’s nice to see consumers come full circle and back to the basics, looking for more pure, more simple soft drinks, and we see and continue to see growth based on sticking to our basics which is glass bottled cane sugar soda the same way that William Boylan made it back in 1891,” says Taylor.
He says craft soda consumers are two-fold: one side is the 18-34 year old urban set looking for a product that differentiates itself from mainstream offerings and the second demographic is not so much characterized by age, but by a need state. “These individuals want to treat themselves,” he says. “They’re looking for a product that they deem as a healthier alternative to the original, the original being the high fructose corn syrup-sweetened sodas.” Among the other long-time leaders in the craft soda market have been companies like Reed’s with its line of Ginger Brews. At the recent Expo West show, the company was showing off its new fountain line for food service establishments.
Herzog believes the time is right for these premium offerings. “It’s very niche and small right now,” she says. “But it makes sense because it completely fits perfectly with the premiumization trend we’re seeing.”
However, beverage industry observer James Tonkin, president of Healthy Brand Builders, posits that the CSD category is facing some unique challenges today. “The momentum that’s continued to always grow the CSD category is getting young people on board,” he says. But with all the negative publicity around sodas, that has been increasingly difficult for soda companies to do, Tonkin points out. “That’s put the dagger into the CSD space,” he says. One solution he has suggested in the past is that the big soda companies start to add some kind of functionality to their CSD offerings. “The same way the orange juice industry did with adding calcium, even though they didn’t turn out to be a huge success, they definitely added some choice for the healthy alternative,” he says.
“This is such an interesting category,” adds Debbie Wildrick, chief strategy officer, for the beverage incubator MetaBrand. “There have been natural and craft sodas around for a long time.” However, she says she is currently seeing very few of the entrepreneurs who pass through her doors express any interest in starting a new craft soda. “The challenge that I think that we’re experiencing is that full-calorie soda’s gotten a really bad rap. Over the last 20 years it’s plummeted by more than 25 percent,” she says. “There are so many choices today that I wouldn’t necessarily see it as a bad time to do a carbonated soft drink, but I would certainly want to make sure that I had innovation around that entry into the market that was disruptive. The consumer, from a carbonation perspective, has not walked away from that at all. And the consumer’s interest in refreshment has not necessarily declined at all. It’s increasing. We do need to understand that it isn’t about walking away from carbonation.”
And, she adds, “As a consumer, there’s a lot of us that are drinking straight water. It’s just become a huge category. But there’s always a daypart or an experience that makes us really want something maybe with a little bit of sweetness in it, maybe carbonation.”
Neely, of the ABA, says, “Consumers still love the taste of a regular Coke or Pepsi or Dr Pepper. They like the taste of their old favorites in different portion sizes and in different kinds of packaging so I guess we see it as the major manufacturers that have deep innovation capability are on overdrive right now and we’re seeing some of the fruits of that in changes of package sizes and different mixes of sweeteners, but we believe there’s more to come. That’s why I conclude it’s an exciting time for the category.”
Some of that innovation overdrive Neely speaks about is also evident in the recent marketing programs the companies have rolled out around their CSD brands. Several of them have been major hits that have really hit home with consumers. Love it or hate it, Stubbs says Mountain Dew Kickstart’s “PuppyMonkeyBaby” Super Bowl ad was an enormous success for the brand on social media which had a lot of people talking, and sharing. And when it comes to packaging, the promotions Coke and Pepsi have done around personalization like Share a Coke and this year’s Share a Coke and a Song sequel, and the new Pepsi Emoji bottles, have also brought enthusiasm and attention back to CSDs.
“Don’t misunderstand,” says Herzog, “this is not the end of CSDs in my opinion. Retailers will still allocate them space, but they are taking at the margin a little more shelf space or cooler space from CSDs to the faster growing categories. CSDs will continue to keep the bulk of the shelf space or cooler space for a number of years, but fast-forward 20 years, yes, it’s going to be a lot smaller realistically in North America.”
She continues, “Consumers have evolved and everyone needs to listen to them and I think they’re all sort of broadly doing that whether it’s small pack sizes, the personalization with some of their packaging, the innovation.
“Consumers like bubbles. Coke knows this. They always have.”
How did the CSD category get here?
How did the CSD industry get to where it is today—in a sense taking some of the biggest measures in many years in an attempt to recalibrate itself to what today’s consumers want?
Mark Pendergrast, author of the Coke history, “For God, Country and Coca-Cola,” thinks the roots of today’s situation may lie back in 1955 when Coca-Cola first introduced King Size Coke bottles to compete with Pepsi’s larger sized packaging. Thus was laid the course for decades of competition around giving consumers more soda for their money that continued until only recently—and resulted in much of the criticism CSDs have attracted as the obesity epidemic spread in the United States.
“Americans wanted a good deal so they would put them in larger and larger containers,” Pendergrast says. “That movie ‘Supersize Me’ made fun of that, but that was exactly what they were doing.”
He believes the move to smaller sizes like 7.5 ounce mini cans is a step in the right direction. “CSDs are better when they are ice-cold and bubbly,” he says. “They go flat and lukewarm in too-large containers. I loved the 6.5 ounce bottle. I’m old enough, I’m a baby boomer, that’s what I remember as a little kid. You could reach into a cooler and get one of those out and it would be so cold that there would be little ice crystals in it. That was the best.”
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