It is well known by now that growing health awareness has raised concerns over high amounts of carbohydrates and calories in some beverages, especially in carbonated soft drinks (CSD). Consumers are thus looking for alternatives to fizzy drinks, thereby bolstering the growth of non-carbonated beverages (NCB) such as sports drinks. Gatorade is the best selling sports drink in the U.S. and contributes over 10% to the valuation of PepsiCo (NYSE:PEP), according to our estimates. In 2010, PepsiCo revamped this product portfolio and introduced the G series, comprising of Gatorade Prime, Perform and Recover.
We estimate a $87 price for PepsiCo, which is around 5% above the current market price.
Sports drinks sales have surged in recent times in the U.S., reaching $6.3 billion in 2012. While this market has grown by 20% from 2007 to 2012, it could grow by a staggering 52% from 2013 to 2017, according to Mintel.  Gatorade is the market leader with an impressive share of around 75%. Given the present scenario, Gatorade is in a strong position to capture a significant portion of the incremental sales. However, its dominance could be challenged by Coca-Cola’s Powerade, which accounts for 20% of the U.S. sports drinks market.
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Unlike CSDs, Diet Sports Drinks To Grow
The CSD sales have been declining in the U.S., following widespread health concerns surrounding such drinks. In 2012, CSD sales declined by 1.2% while the overall beverage market grew by 1% in the U.S.  Sales of low or no-calorie CSDs such as Diet Pepsi and Diet Coke have also decreased due to serious concerns over the usage of sugar alternatives such as “aspartame”. Recent studies have argued that this artificial sweetener can cause serious health problems along with sugar cravings, dehydration and even weight gain. 
On the other hand, diet sports drinks have accounted for a majority of the growth in the domestic sports drinks market since their introduction in 2009. This is because consumers now demand sports drinks with high amounts of electrolytes but less carbohydrates and calories. Gatorade G2 and G2 Perform together generated $600 million in sales in the fiscal year ending February 2013. G2 uses PureVia, an extract of the Stevia plant, which has been accepted as a safer low-calorie sugar substitute.
Coca-Cola Not Ready To Accept Defeat
Coca-Cola’s Powerade is a stiff competitor to PepsiCo’s low calorie sports drinks. While G2 has just 30 calories per 12 oz. serving, Powerade Zero and Zero Ion4 are calorie-free. Sales of Powerade Zero Ion4 increased by ~16% this fiscal year, more than both G2 and G2 Perform. In fact, sales of Gatorade G2 Perform fell by 10% during this period. As most of the growth in the U.S. sports drinks market is expected to come from diet products, Gatorade will look to increase investments in marketing and innovation in this category, in order to maintain market share.
PepsiCo’s share in the overall U.S. sports drinks market has also decreased in the last few years. It fell by ten percentage points over a span of five years to reach ~74% in 2011. This is because Coca-Cola has munched into the market share of PepsiCo in the last few years. The latter’s efforts to reverse this trend by re-branding in 2010 also failed, as consumers were seen confused and unaware of the new Gatorade logo.  In 2012 as well, volumes of Gatorade sports drinks declined by a low-single-digit figure in North America. 
Even though the outlook for the U.S. sports drinks industry remains positive, depleting market share of Gatorade could hurt PepsiCo’s chance to benefit from the growth potential of this industry.Notes:
- “Sports and protein drinks share the glory“, May 2013, bevindustry.com [↩]
- “The U.S. liquid refreshment market“, March 2013, beveragemarketing.com [↩]
- “Intake of sugar-sweetened beverages and weight gain“, National Institute of Health, United States [↩]
- “Grief at gatorade“, cbsnews.com [↩]
- “PepsiCo 10-k“ [↩]