If Not Caffeine, Dr. Pepper Could Use Stevia To Recover Beverage Sales

Dr Pepper Snapple (NYSE:DPS) holds the third front in the U.S. carbonated soft drinks (CSD) market, behind The Coca-Cola Company (NYSE:KO) and PepsiCo (NYSE:PEP), both of which account for over 70% sales in this category. With health concerns targeting consumption of fizzy drinks, per capita intake of CSDs in the U.S. has fallen to 38.6 gallons per person, a decrease of nearly 10% from 2008 levels. ^[1] The biggest blow of this slowdown should be felt by Dr. Pepper, which relies on sodas in North America for ~70% of its revenues. In comparison, CSDs constituted only one-fourth of PepsiCo’s revenues in 2012, with more than half of the company’s revenues coming from its Frito-Lay snacks division. On the other hand, impact of this soda slump should be milder for Coca-Cola, as growth of its CSD division is mainly driven by international markets, where fizzy drinks are still rising. With no immediate international expansion plans, Dr. Pepper will have to step up its CSD offerings in the U.S. in order to realize any meaningful growth in this category.

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Sales of Dr. Pepper’s low calorie TEN products remained flat during the first nine months of 2013. In fact, the diet drinks segment is the most underperforming segment of the overall liquid refreshment beverage (LRB) market. Dr. Pepper’s low calorie lineup uses the artificial sweetener “aspartame”, which is not only considered unsafe, but is also known to leave a bitter aftertaste. What adds to the company’s woes is the recent surge in caffeine-fueled energy drinks, which continue to replace traditional colas and their diet versions on the shelves of convenience stores (c-stores).

Demand For Energy Drinks Hampers CSDs

Energy drink sales continue to rise, with analysts at Wells Fargo expecting a second-consecutive quarter of double-digit growth in this category in Q4 2013. ^[2] Despite high caffeine content, energy drinks have managed to grow due to their attractive packaging, product innovation and ability to target older customers. These drinks are also hugely popular among young adults who don’t mind an extra dose of caffeine to boost their energy levels. As this segment is still relatively nascent, it has the lowest per capita consumption rate among ready-to-drink (RTD) beverages, thus providing growth opportunities. ^[3] Sales of energy drinks are expected to grow to ~$16 billion by 2017  from $10 billion in 2012.

In a survey by Wells Fargo, c-stores pointed towards a further slowdown in demand for artificial sweetener-fueled diet CSDs in Q4 2013. This decline in demand has prompted c-stores to reduce shelf space for diet sodas, especially Dr. Pepper’s flat-performing TEN lineup, in favor of energy drinks. Apart from declining soda sales, this move is bolstered by higher margins of energy drinks as compared to CSDs, which increase profitability for c-stores.

While Dr. Pepper has a strong presence in the U.S. CSD market with over 17% of the share, it has an almost negligible presence in the energy drinks segment, in which Red Bull and Monster together hold ~82% of the market share. Although the company revamped its energy drink Venom in 2008, the brand failed to gather much success despite its attractive packaging. As CSDs continue to lose market share to energy drinks in the overall LRB market, Dr. Pepper will have to either work on strengthening its energy drinks portfolio, or provide for alternative CSD solutions.

Natural Stevia Might Be The Solution For Dr. Pepper

Safety concerns regarding aspartame have prompted beverage giants Coca-Cola and PepsiCo to try the artificial sweetener stevia, which is generally considered safer and more natural. While PepsiCo has filed a patent application for the commercial use of Reb D in its sodas, Coca-Cola already launched a stevia-sweetened version of its namesake cola drink, Coke Life, containing Reb M, in Argentina last year. Both Reb D and Reb M are stevia derivatives made by PureCircle, a leading supplier of stevia products, and are also presumed to have tackled the problem of bitter aftertastes left by artificial sweeteners. ^[4]

According to the Wall Street Journal, diet soda retail sales fell by 6.8% through November last year. ^[5] Amid this decline, Coca-Cola has been hinting at the introduction of its stevia-sweetened Coke Life in the U.S. this year. Coke Life, sold in green colored labels, has been a success in Argentina resulting in a 5% growth in unit case volumes in the country in the three quarters ending September 2013. Going forward, ailing soda sales might gain from the positive perception of stevia. Dr. Pepper might also have to consider using this artificial sweetener in order to resurrect its diet soda demand.

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1. “Soda sales are losing theirs fizz“, December 2013, money.cnn.com [↩]
2. “US C-stores: ditching Dr. Pepper TEN, skeptical on natural sweeteners“, January 2014, beveragedaily.com [↩]
3. “Energy drinks and shots- US market trends“, January 2013, reportlinker.com [↩]
4. “PureCircle: next generation Reb D and Reb X stevia sweeteners ready for commercialization in 2014“, September 2013, foodnavigator-usa.com [↩]
5. “New low calorie coke may be on the way“, December 2013, nypost.com [↩]