With New York City outlawing the sale of cola beverages larger than 16 oz. in restaurants, there is fear among investors that such a move could have a domino effect on other major cities. With this law, soft drink majors PepsiCo (NYSE:PEP) and Coca-Cola Co (NYSE:KO) remain more committed than ever to developing more mid-calorie and diet sodas.
While soft drink consumption has been declining for 7 consecutive years in the U.S., the diet versions have shown positive volume growth. Getting the right formula will certainly help eat up market share as well. Diet Coke has been doing that to Pepsi for a while now.
The problem with diet versions is that they don’t appeal to everyone. Although they contain zero calories, their taste differs from the flagship sodas. This is because the traditional sodas use high fructose corn syrup as a sweetener while diet versions often use aspartame. Aspartame has a bitter aftertaste and is a reason why diet drinks aren’t popular with everyone. Moreover, since aspartame is an artificial sweetener, it is viewed with skepticism by a certain segment of the population on its health consequences.
Recently, there were reports that PepsiCo was in the process of tweaking the formula of Diet Pepsi since the beverage often loses some of its taste at high temperatures and during the process of transportation. 
The mid-calorie drinks launched in the last couple of years are an attempt to lure customers who don’t want to consume the calories present in a non-diet version but don’t like the taste of diet versions either. It also allows the beverage companies to target a different demographic set. For example, diet sodas usually attract more women and therefore Dr Pepper TEN‘s marketing was primarily aimed at men. Both Dr Pepper TEN and Pepsi Next use a combination of high fructose syrup and aspartame (along with another artificial sweetener called acesulfame potassium). The cola companies hope to get rid of the aftertaste by using this combination as the sweetener.
Still, the biggest hope comes from stevia, the natural sweetener found mostly in South America. It was approved by the U.S. FDA in December 2008. Stevia is not entirely calorie free but it has fewer calories than high fructose syrup or sugar. Moreover, its natural angle gives it an edge over aspartame. The problem with this sweetener is again the bitter aftertaste associated with it. Thus, the soft drink companies are still in the process of perfecting the drinks so that consumers don’t feel a distinct aftertaste. As easy as it may sound, there are complications associated with the consistency of taste. Human taste is a complex science and it takes multiple variations of the same product to be tested in laboratories before the companies can be somewhat confident of the product’s success.
Therefore, the soft drink companies are not rushing into introducing stevia-sweetened drinks. Any slight change in the taste could see the sales plummeting. PepsiCo, for example, added stevia to SoBe in 2008. Volume sales have fallen from 431 million liters in 2007 to 318 million liters in 2011. Thus, the quest to develop the perfect tasting low-calorie/mid-calorie soda remains. The products that are successful here can be launched internationally as well.
We have a price estimate of $78 for PepsiCo, which is about 10% higher than the current market price.Notes: