PepsiCo: Disruptive innovation, not "ridiculous pricing", the answer to diet soda slowdown

Asked about the lackluster performance of diet soda in the US on the Q3 earnings call Wednesday, Nooyi said: “In the last 6-9 months, there has been an accelerated decline in diet drinks as people say they don’t want artificial sweeteners, they want more natural sweeteners, they don’t mind some calories.​

“We are seeing a fundamental shift in consumer habits and behaviors.”​

Her comments followed the release of a report from Wells Fargo​ revealing that year-to-date unit sales of diet carbonates slumped 5.1% at Coca-Cola, and 8.3% at PepsiCo in Nielsen xAOC* channels. In comparison, unit sales of regular carbonates were up 0.3% at Coca-Cola and down a more modest 3.3% at PepsiCo.

We are innovating around natural sweeteners and thinking about flavoring agents to make sugar taste more sugary ​

New products will hit the market next year, she said, but would not give details.

“We are staying along the path of innovating around natural sweeteners and thinking about flavoring agents to make sugar taste more sugary and we’ve talked about products coming on the market in 2014, but we haven’t got a launch date yet. ​

“Our goal is to bring to the market a product that tastes great. We don’t want to rush a product to the market and then have to wonder why we launched something that wasn’t that great tasting.”​

We don’t want to rush a product to the market ​​

She added that the “shift from carbonated soft drinks (CSDs) to non-carbonated soft drinks has accelerated” ​with CSDs accounting for around 40% of volumes in the US liquid refreshment beverage category versus 50%+ a decade ago.

“The CSD category has been declining about 3% a year, especially in the last couple of years. And it’s important that in the next two to three years, we come up with significant disruptive innovation if you want to hold people in the CSD category and that’s what we are focused on.”​

Will our innovations stop the decline? That’s anybody’s guess ​

She added: “Will our innovations stop the decline? That’s anybody’s guess...In today’s world we have to keep betting on innovation both for creating breakthrough products and also innovation to reduce costs through creative ingredients.”​

Meanwhile, the “best insulation is to have a diversified portfolio… that covers all eating and drinking occasions and not be overly dependent on a category like CSDs”, ​she added.

However, she noted that Mountain Dew was performing “terrifically well in the US”, ​with new launch Mountain Dew Kickstart “expected to significantly exceed $100m in its first year retail sales", ​while PepsiCo also has six other new products set to achieve $100m in the US (Tostitos Cantina, Quaker Medleys, Starbucks Iced Coffee, Lipton Pure Leaf Tea, Quaker Yogurt and Gatorade Frost Glacier Cherry).

The industry has seen years and years of ridiculous pricing ​

Asked about the pricing dynamics of the CSD category - in which Pepsi has seen bigger volume declines than Coke recently in part because it has adopted a more EDLP strategy whereas Coke has been aggressively promoting CSDs - she said Pepsi planned to hold its nerve.

“The industry has seen years and years of ridiculous pricing... ​What we’re trying to do is to say given the category dynamics we have to behave in a value creating way… We’re going to keep doing that and hope that at some point in the overall category there is sensible behavior and all of us are focused on sustainable long term shareholder value creation.”​

Coca-Cola: Coke Zero is becoming ever more relevant with young males ​

Asked about the US diet soda slowdown on its Q3 earnings call on Tuesday, Coca-Cola Americas president Steve Cahillane said: “We are actually seeing increased incidence in the past quarter between 19 and 24 year olds​ [in purchases of Diet Coke?].

“We think a lot of that has to do with the exciting new promotions with Taylor Swift, some of the new packaging we are bringing in the marketplace and increased focus on Diet Coke.​

Meanwhile, sales of Coke Zero “grew mid-single digits” ​in Q3, ​he added: “It’s really becoming ever more relevant with young males.”​

Asked about pricing, he said: “The average price today of an 8oz serving of Coca-Cola is $0.25. This is up over 5% versus two years ago and up nearly 10% versus three years ago. ​[So] we still have plenty of room to continue to take price. ​

"Addressing the third quarter in particular, we acknowledge we did strategically invest in select promotional activity in the back half of the summer through the Labor Day holiday. ​But these investments were tied to specific occasion-based brands and packages to help drive incremental household penetration, which they did, attract more consumers into the category, which happened.”​

Q3 highlights​

PepsiCo reported third-quarter net income of $1.9bn vs $2bn a year ago, while net sales were up 1.5% to $16.9bn, with weaker sales of beverages offset by stronger growth from Frito-Lay and Latin America food sales.

Coca-Cola reported third quarter earnings of $2.45bn up from $2.31bn a year ago, while revenues dipped to $12.03bn from $12.34bn last year.  

*​Nielsen’s xAOC (extended All Outlet Coverage) data includes food, drug, mass merchandise, Walmart, dollar, military and club stores, but excludes c-stores.  

Click here​ to see more commentary on the recent volume declines in the diet soda category in the US.