Coke & Pepsi’s Low-Carb Conundrum

Coke C2 and Pepsi Edge, coming this summer.

by John Craven, Editor;

@@img1 Coke and Pepsi are getting into the low-carb / mid-calorie category this summer with C2 and Edge, respectively. The two beverage giants are extending their flagship cola lines and trying to capture beverage dollars of over 30 million Americans on low-carb diets. While the products have not hit the store shelves, there’s already plenty of room to discuss the pros and cons of Coke & Pepsi’s decision to enter the category.

First of all, there’s no question that Coke & Pepsi’s entry into this category will fully ignite the low-carb soft drink category. It will no longer be a niche or “up and coming” part of the industry. Their entry into the market is (as with any move by Coke & Pepsi) to be taken very seriously -but at what price to their companies?

If Coke & Pepsi are to fully endorse and promote low-carb, they must do so by essentially admitting the flaws with their other product lines. Specifically, their regular product lines have too many calories and much sugar while their diet lines offer an inferior taste to what’s on the market today. The health-focused nature of low-carb products make this trend unlike any other that Coke & Pepsi have dealt with in recent times. Never has a product trend been specifically targeted such a key ingredient to Coke & Pepsi’s business: sugar. In fact, one could go as far as to say that Coke & Pepsi products are a good part of why the low-carb movement is necessary in the first place. Even the short term effect of these products is cannibalistic at its core.

Is it really worth it for Coke & Pepsi to launch these products? Does the potential upside outweigh the potential for disaster?

Investors and the media will definitely approve of Coke & Pepsi’s decision. From an investor point of view, the low-carb craze appears to be a trend that has the potential to revitalize otherwise flat domestic sales of CSDs. A new business opportunity that has over 30 million consumers and plenty of media buzz surely looks great on paper – and its not an opportunity to be passed up. This only increases the stakes for Coke & Pepsi. Coke specifically has a lot to risk – an incumbent CEO, recent SEC investigations, and plenty of recent bad press make this play one that Coke cannot afford to fumble. Pepsi, on the other hand, has a system that is much more forgiving to failure. Regardless, this situation has many more people watching than in previous product launches. The amount of scrutiny that will accompany these product launches that will simply not permit a Pepsi Edge to be quiety put out to pasture the same way that Pepsi Blue has.

Throughout the history of the industry, Coke & Pepsi have dominated based on the fact that trends eventually fizzle and consumers go back to what they’ve been drinking since birth – Coke & Pepsi. These two products are so much a part of our culture that almost all beverages are, at some point in their history, described using Coke or Pepsi as a point of reference. Most Americans (myself included) have been consuming Coke & Pepsi since the early days of childhood – and odds are that you’ll keep doing that. However, the low-carb / mid-calorie category seems to threaten this more than any other category in beverage history. Therefore, Coke & Pepsi cannot afford to sit and watch this one go by (as they attempted to with Energy Drinks).

@@google Another problem for Coke & Pepsi is that they are entering the market with an inferior product (vs. the competition). Unlike other companies which have come up with formulas that mask the flavor of the artificial sweetener and provide a “full strength” flavor, Coke & Pepsi cannot do this. As previously stated, such a move would make the flagship line somewhat obsolete. In addition, statistics have shown that low-carb consumers are a bit less price-conscious than ordinary consumers. Coke & Pepsi’s entry of non-premium products could backfire as their value-oriented products are not presently in line with the premium expectations of the low-carb consumer.

On a positive note, there will definitely be an overall benefit to the beverage industry with Coke & Pepsi helping to promote the low-carb category. Specifically, the biggest short-term beneficiaries of Coke & Pepsi’s entry into this category are going to be the little guys who are already in the market with superior products. The big guys will spend a lot of money educating and promoting the category as one that deserves the consumer’s attention and money. This process is otherwise extremely tedious and somewhat impossible for the small company to influence. BevNET favorites such as Steaz, Speedowater, and Clearly Canadian simply cannot afford national in-your-face campaigns.

The long term effect of C2 and Edge is anyone’s guess. I am certainly not suggesting that this category will mark the downfall of Coke & Pepsi and high-carb beverages in general. However, I do not believe that the inherently contradictory elements in the low-carb trend and traditional soft drink products will likely mean that Coke & Pepsi won’t be able to succeed in this category. Therefore, it seems very likely that Coke & Pepsi will most likely be forced to acquire incumbent beverage companies who have a strong image in the low-carb category.