Stopping Soda's Slide

Think you aren’t getting any respect at work? It could be worse: you could be a Pepsi.

From a strategic point of view, the CSD has become the offensive lineman of the soft drink category, carrying the heavy loads of occupying shelf space and grinding out profits, while superstar wide receivers like energy drinks and enhanced waters catch flashy share gains and great publicity despite much smaller bodies of work. Coke and Pepsi might be icons, among the most recognizable trademarks in the world, but these days, they sure aren’t glamorous.

Not so long ago, being a CSD was a respectable job, at least, but now, they’ve become the pariahs of the soft drink category, derided as much for their lack of nutritional value as their dropping share of stomach. Sodas aren’t even sodas at the Coca-Cola Co. anymore – they’re part of the Sparkling Beverage Group. CSD consumption dropped by 3 percent in the U.S. last year, and to some extend that was a victory: it was nowhere as low as some had expected. So it’s hard to believe, given the amount of flack they take, but the CSD remains the center of the soft drink business, the best selling kind of drink in America, the bulwark of the beverage aisle.

“We haven’t consciously taken shelf space away,” said Mike Elmer, the director of marketing for Coca-Cola of Northern New England. “Sparkling is presently not a growth category, but it’s still a big part of what we sell.”

Major cultural shifts are catching up to CSDs, say analysts, as overriding concerns about health and wellness make them more of a treat than a standard, while increased choices dilute the sheer force of their ubiquity. The worst shift, however, might be generational: in the past five years, full calorie colas lost 15.6 million consumers 18 or over, according to the research group Mintel. While the diet segment added about 7.8 million, the insight is clear: people who aren’t switching to diet, and there are about 8 million of them, aren’t drinking soda.

“The data is overwhelmingly showing us that consumers want to be healthier, and they don’t perceive CSD’s to be healthy,” said Krista Faron, a senior analyst at Mintel. “They have a choice to choose beverages that are better for them and they don’t see CSD’s playing that role.”

It’s gotten especially bad for many line extensions that sit at the margins: according to Pointer Media Network, which measures supermarket scan data at the cash register, 20 of the top 30 CSD brands have experiences case volume declines.

But the big three in the category have all sworn to stop the slide. Last year, PepsiCo launched a massive rebranding campaign trying to tie the brand back to its strong baby-boomer, change-agent roots, and its top brass, from PepsiCo Americas CEO Massimo D’Amore to PepsiCo Inc. CEO Indra Nooyi, have all sworn they can get the company’s CSD brands moving on an upward trajectory. Coca-Cola Co. CEO Muhtar Kent has made it clear his company plans to expand its leadership position in the CSDs – although they now fall under the oh-so-healthy-sounding moniker “sparkling.” Meanwhile, in a down economy, the Dr Pepper Snapple Group has increased its marketing budget.
So what’s the plan? How do these companies stop the flood of consumers leaving the category? After studying the data and doing the interviews, this is what Beverage Spectrum has found the big three are looking at strategically to keep their front lines from collapsing:

1. INTENSE FOCUS ON SHOPPER BEHAVIOR

Rather than worry about the consumers who might be bleeding away from the category, the companies are taking a hard look at ways to sweeten the pot for those who stay. It’s a shift heralded by the rise of shopper marketing firms like Catalina Marketing, which, by quickly analyzing an individual shopper’s behavior, offers companies the ability to encourage brand loyalty or product trials at the point of purchase. Catalina made a splash earlier this spring by publishing a report revealing that the vaunted core consumer group for many brands comprised a much lower percentage of shoppers than had previously been imagined. While demographics and category management have long held to the 80/20 theory (80 percent of a given product’s sales are governed by 20 percent of its buyers) Catalina’s push into shopper marketing revealed that number to be much lower: even for a brand as widely consumed as Coca-Cola, just 12 percent of shoppers are responsible for 80 percent of its sales; the numbers drop to 6.5 percent of shoppers for Diet Coke and less than 3 percent for Coke Zero.

“They’ve started discounting to the loyal customer,” said Catalina analyst Trish Brynjolfsson.

The key takeaway is that CSD companies are becoming even more cognizant of the importance of their power shoppers, who buy products consistently or in large volumes – and they are working to incentivize continued purchases by those shoppers. Catalina reports that it is seeing four times the amount of what it calls “defensive campaigns” beverage companies trying to prevent defections by analyzing shopper baskets and printing coupons and providing encouragement to key shoppers.

And Coca-Cola North America may be getting into the business itself: CCNA recently announced it was launching its own deep study into shopper marketing. The end result likely won’t just be CSD-focused, but keeping sparkling beverage shoppers happy is bound to be a priority.

“They are absolutely trying to retain and grow volume with their core consumers and trying to expand consumer purchases across beverages,” said Brynjolfsson. “Simultaneously, they are trying to bring them into the Minute Maid and the Powerade families, trying to do more enterprise-wide types of shopper marketing opportunities.”

2. SHAKING UP PACKAGING

It might seem like Marketing 101, but playing with package sizes and arrangements is at the heart of much of the defensive posture of CSDs. PepsiCo has, of course, changed Pepsi’s look repeatedly over a two-year period. And Kent recently claimed packaging innovation as the biggest driver of sales increases around the world. His bottlers are apparently taking that to heart. While at Coke Northern New England, for example, Elmer said the major shakeup in the CSD aisle has been the use of alternative packaging. His organization has cut back on the traditional 2 L PET bottle in favor of 8 oz. cans and 8-packs of 12 oz. bottles, both of which appeal to portion-conscious consumers. And those nonstandard packages are a double bonus, he says.

“You don’t have to discount those as deeply,” Elmer said. “Consumers don’t expect the prices to be elastic, because they’re not as used to them.”

While Elmer might be happy he’s been able to hold the line with clever packaging, he knows he’s just grinding it out, for now.

“They’re all singles and doubles,” he says. “They’re not home runs. The real wins will be around product innovation.”

3. PRODUCT INNOVATION WHERE THE CONSUMER WANTS IT

Where has innovation been in CSDs? Marketers point to Coke Zero, the core cola’s diet doppelganger, which showed 14 percent volume growth last year, according to Beverage Digest.

“It’s more than a brand extension,” Elmer said. “It’s giving people a reason to come back.”

That kind of innovation isn’t going to save the CSD category, necessarily, but it’s good for Coke, notes Faron.

“Good ideas, even in declining categories, can at least help individual brands,” said Faron. “One product that responds to what consumers are thinking can be the catalyst for millions of dollars in consumer response. When all of the conditions are in place and consumers are put in the middle of the equation, some products can be successful.”

To that end, Coke and Pepsi are both tinkering with their new pet sweetener, stevia. While CSD attempts at the product have evolved slowly, Coke’s Sprite Green uses a stevia/sugar mix and is in test markets.

Meanwhile, Dr Pepper continues to try to ride the line extension express, rolling out Dr Pepper Cherry this year; while it has shown formidable skill at keeping its franchise alive through compatible flavors, distributors would prefer more attempts at innovation that line up with the overriding health and wellness trends. Canada Dry’s Green Tea Ginger Ale or Cherry 7Up Antioxidant may both fit into those small boxes.

Finally, PepsiCo is going for throwback innovation as well, launching sugar-sweetened (as opposed to high-fructose corn syrup) versions of its products in short runs. With “throwback” Pepsi and Mountain Dew rolling out this month, the company might be able to build buzz similar to its short run of Pepsi Cucumber in Japan.

4. RIDING THE ECONOMY

The throwback brands are interesting because Pepsi isn’t pitching them as a cure for HFCS – it’s pitching them as a cure for the blues, a kind of liquid meatloaf for the soul (although some analysts believe a strong consumer reaction would cause an expansion of the Throwback program).

But the negative economy has actually been something of a positive for CSDs themselves. While CSD sales have been decreasing since 2005, those declines were moderated somewhat this year by an economy that may have kept consumers away from more expensive noncarbonated options, according to a report from Consumer Edge Research CEO Bill Pecoriello.

In fact, CSD profitability was up 1.8 percent over the past 52 weeks, according to Catalina Marketing statistics, partially the result of strong performance by private label brands but also because the big CSD companies have held steady on – or even increased – prices as sales have fallen off. But in a dropping economy, if the CSD category is going to point to itself as the big beverage companies’ life raft, it’s also going to have to show a way to bail itself out – and that means it’s going to have to play the pricing game, as well. Deutsche Bank’s beverage team of Marc Greenberg and Andrew Kieley released a report in late 2008 encouraging lower prices on single serves, identifying $0.99 as the “magic number with unmatched drawing power among consumers.” For sales growth to pulse out beyond core consumers, to grab them as they head into convenience stores, the tactical price cuts the pair suggested might just be the ticket.

Such a price-driven recovery wouldn’t be a pretty one, particularly when it comes to profit margins. Promotions can lead to price wars, and that’s when things can really get ugly. But then again, the offensive line isn’t known for its beauty or grace. It’s known for getting the job done. With the way things have been going lately, if the big companies manage to stop the volume slide of CSDs, to bring it in for a soft landing, that might be pretty enough, indeed. •