Bottled Water Continues to Take the Fizz Out of Diet Soda

Apr 19, 2017

Diet sodas sold by Coca-Cola and PepsiCo posted steep volume declines in 2016, dragging down demand for the total carbonated soft drink category as consumers buy more bottled waters and other healthier beverages.

Total volume for carbonated soft drinks dipped 0.8% in 2016, a drop that was less severe than 2015's 1.2% tumble and 2014's 0.9% decline, according to a new report from industry tracker Beverage Digest. The steepest volume declines were for Diet Pepsi (down 9.2%) and Diet Coke (falling 4.3%), with both losing market share last year though each still rank among the ten most popular soft drinks sold in the U.S. Diet Mountain Dew's volume dropped a more modest 0.1%.

Diet sodas were at one point the industry's savor as consumers looked to cut back on calories but increased skepticism of artificial sweeteners have led to sales weakness for those zero-calorie beverages. Most of the concerns center on aspartame, a sweetener often used in diet colas.

Diet Pepsi—which suffered a steeper volume decline in 2016 than it did in 2015—aimed to confront that narrative head on when PepsiCo (pep) replaced Diet Pepsi with an aspartame-free version. It didn't end up resonating and PepsiCo ended up opting to sell three different calorie-free options to appeal to two groups of consumers: those weary of aspartame and those that like the taste and don't mind consuming the sweetener.

Full-calorie soda sales were also weak last year, as demand for Coke, Pepsi-Cola and Mountain Dew softened, Beverage Digest reports. There were some bright spots: volume increased for Sprite and Fanta, both brands that are made by Coca-Cola (ko). Dr Pepper Snapple's (dps) core Dr Pepper brand also grew and the parent company gained market share last year. Within carbonated beverages, PepsiCo lost share and Coca-Cola's was flat.

Since 2004, carbonated soft drinks have shed 1.6 billion cases in volume to total about 8.6 billion 192-ounce cases last year. But encouragingly, dollar sales grew last year by about 2% to $80.6 billion because of the success Coke and other major soft drink makers have had in aggressively marketing smaller packages at higher price points and focuses less on larger discount packs. That has been a savvy move because if consumers want to cut back on soda, they might opt for a smaller serving in a can that they would deem as a treat (rather than buy a big 2 liter bottle and risk overindulging).

Meanwhile, the star performers were again bottled waters and that shouldn't be a surprise because various data trackers have reported that Americans are drinking more bottled water than soda. Beverage Digest reported that volume growth was solid for Nestle's (nestle.s-a) Poland Spring, PepsiCo's Aquafina and Coca-Cola's Dasani.

The big soda makers have long been aware of the tilt away from soda and toward healthier beverages and that explains why Coca-Cola and PepsiCo have each sought to remake their portfolio to be more on trend with what Americans are drinking today. At Coke, those efforts have included selling more bottled waters like Dasani and the premium-priced Smartwater. Volume gains have also been strong for flavored water Vitaminwater and dairy brand Fairlife. As a result, growth in the key North America market outpaced the total business in 2016.

That narrative is similar at PepsiCo. Naked Juice is on its way to becoming the company's next $1 billion brand and new launches like Tropicana Essentials Probiotics and the premium-pried LIFEWTR are also on trend. Globally, the Pepsi cola trademark accounts for 12% of net revenue. But 25% of revenue comes from so-called everyday nutrition products that include bottled water and foods and drinks that are packed with grains, fruits and vegetables.

There have also been acquisitions to better compete. PepsiCo last year bought sparkling probiotic drink maker KeVita on the same day that Dr Pepper Snapple acquired Bai Brands. Industry observers expect Coca-Cola's new CEO James Quincey, who officially took over earlier this month, will also step up efforts to boost the portfolio via acquisitions.

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