Sales of soda fell for the first time last year, as the US began to develop a taste for functional and healthier drinks – a challenge for the world’s biggest pop brand says Polly Devaney
A high-stakes marketing battle has been fought for many years in the US soft drinks industry for the top spot in the soda pop charts. But there are increasing signs that the battle lines within the $68bn (Ã&£39bn) fizzy drinks market are being redrawn.
Volume sales of soda in the US declined for the first time in 2005 since records began 20 years ago. According to figures released this month by industry trade publication Beverage Digest, case volume in the US market for carbonated soda slipped by 0.7% over the previous 12-month period. The figures also highlight the differing positions of the key players in the US soft drinks market, particularly with regard to the growing demand for so-called functional drinks, which include sports drinks, energy drinks and nutrient-enhanced waters.
Health considerations feature as one of the more likely reasons behind the shift away from traditional, high-sugar carbonated sodas such as Coca-Cola and Pepsi. Recent studies have increasingly pointed to excess consumption of sugared fizzy drinks as a probable contributory factor in weight gain and obesity in the US. It is certainly not news that the North American population has a weight problem – current estimates indicate that about 62% of the US population are overweight, while over 5% suffer from morbid obesity – yet it does seem to have taken time for this kind of statistics to sink in and have an impact on consumption habits.
It now appears that alongside health concerns, American taste buds are also changing, and consumers are enjoying new and innovative alternatives to the once-ubiquitous colas. Not all of these are healthier options – energy drinks, for example, have seen double-digit growth in recent years, with sales increasing by 75% in the first half of 2005. While this sector still accounts for just under 5% of the soft drinks market, at a value of $3bn (1.7bn), it is regarded as an attractive sector with significant growth potential. As characterised by the sector’s mainstay – Austrian Red Bull, which accounts for 40% of the US market – the names of the energy drinks brands make fully clear who they are targeting: young men. Monster, Full Throttle, SoBe No Fear, Shark, Rip It and Amp, are a few examples. It is an increasingly crowded market, however – there are an estimated thousand brands in the US energy drinks sector, with another hundred set for launch each year.
Creating a strong brand is certainly essential and becoming more difficult, so marketers are having to come up with more innovative tactics. Red Bull just announced it has spent $100m (Ã&£57m) buying a New Jersey-based US soccer team called the MetroStars, and is renaming it Red Bull New York. Meanwhile, Hansen Natural – owner of Monster Energy, the number two energy drink brand in the US – recently signed a two-year deal with Motorcross super-star Ricky Carmichael to promote its brand.
On the healthier side, lower-calorie sports drinks, smoothies and “enhanced waters” are capturing market share – as well as regular bottled water.
Diversify to dominate
All of this may sit uneasily with the Coca-Cola Company. Though Coke retains a leading share of the market for carbonated drinks (43.1% in 2004 versus 31.7% for Pepsi), it has been argued that with the new market trends, PepsiCo has the upper hand over its long-time rival thanks to a diversification programme that has taken the company focus away from the declining fizzy drinks sector. While Coca-Cola continues to make about 85% of its worldwide income from carbonated soft drinks, only about 23% of Pepsi’s profits come from carbonated brands (Drinks Business Review Online). In 1996, for example, Pepsi formed a joint venture with Starbucks to exploit the growing market for ready-to-drink (RTD) coffee beverages. Following the release of the Starbucks Frappuccino coffee and Starbucks Double Shot espresso, the venture now has a 93% share of the sector. In 2001 Pepsi beat off strong competition from Coke to purchase both Quaker Oats (owner of the hugely successful Gatorade brand) and the South Beach Beverage Co, which manufactures the SoBe drinks range. It also counts Aqua Fina bottled water, Tropicana and Mountain Dew among its brands. Pepsi has certainly been active in this sector, announcing in January this year that PepsiAmericas, its second largest bottler, had bought functional drinks maker Ardea Beverage, and that it would work with the bottler to market Ardea’s Nutrisoda range, which contains amino acids, vitamins, CoQ10, herbs and minerals, in the US. And this month, Pepsi announced the launch of SoBe Life Water, which it claims contains the full recommended daily amount of Vitamin C, along with Vitamin E and many of the B vitamins the body needs, and no preservatives or artificial flavourings.
According to Datamonitor, functional foods and drinks have so far proved more popular with Americans than Europeans, with the market worth $19bn (Ã&£11bn) in 2004. Functional water is emerging as a key sector in the US beverages market, with an estimated current annual value of $500m (Ã&£288m) and a number of brands already battling it out. Gerry Khermouch, editor of Beverage Business Insights magazine, says he expects to see many more brands entering this market, including Coca-Cola. “Vitamin water is one of the fastest growing products out there, and a lot of the larger beverage companies want to capture some of that magic.” He believes: “Consumers seem to be getting bored with conventional soft drinks, but plain water is kind of boring.”
Still top of the pops
Yet while companies such as Pepsi and Red Bull have made significant inroads over the past few years, it would be unwise to rule Coke out of future market dominance. After all, this is a market which Coke continues to wield unrivalled distribution and marketing muscle. The company has begun an aggressive new product strategy. After a launch campaign at this year’s Oscars pre-show, April 3 sees the North American release of its new Coca-Cola Blak beverage, a “premium blend of Coca-Cola, natural flavours and coffee essence”. It’s likely to challenge the dominance of Starbucks and Pepsi in the RTD coffee market. Moreover, Coca-Cola’s worldwide marketing budget of over $2bn (Ã&£1.1bn) a year buys it a presence at the most high-profile global sporting events. A sponsor of the FIFA World Cup since 1978, Coca-Cola was also the first sponsor of the Olympic games in 1928, and in 2005 extended its sponsorship agreement with the Olympics to 2020. The deal is estimated to be costing the company about $20m (Ã&£11.5m) a year.
It is easy to forget that in the early days of Coca-Cola, it was sold only at soda fountains, in drug stores and as an occasional treat in a 6.5oz bottle. With the era of mass marketing, mass distribution and super-sizing came the 12oz can and the 20oz bottle as standard, and a generation has grown up not viewing Cola as a treat, but as an everyday part of life. However, the American thirst for innovative new drinks and healthier options looks set to continue, and there are plenty of brands eager to quench it for them.