What Could Removing Aspartame From Diet Pepsi Do For PepsiCo?

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PepsiCo (NYSE:PEP) is a food and beverage behemoth, with revenues nearly split evenly between the snacks and beverage businesses. Carbonated soft drinks (CSD) formed approximately one-fourth of the net revenues for the company in 2014, and according to our estimates, constitute around 15% of the company’s net valuation. Considering that 51% of PepsiCo’s net sales came from the U.S. alone last year, and that CSDs are a core business for the company, the performance in this segment has a significant bearing on the beverage giant’s financials.

We estimate a $98 price for PepsiCo, which is roughly in line with the current market price.

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This now leads us to the topic of the hour–Diet carbonated drinks. Initially formulated to win back customers who shifted to other alternatives from sugary carbonated sodas, diet sodas have fared even worse in recent times. Volume sales of CSDs declined 1% in the U.S. last year, capping off the tenth consecutive year of decline for this segment, which still forms around 41% of the country’s liquid refreshment beverage market, as per our estimates. Customers continue to let go of their soda-drinking habit due to the large calorie content in these drinks, however, the usage of artificial sweeteners, such as aspartame, has resulted in more serious safety concerns, which is why sales of low/no calorie drinks continue to fall by more than that of regular sodas. Despite the FDA’s positive comments about aspartame’s safety recently, the sweetener still carries a negative customer perception, causing Diet Pepsi volume sales to fall by 5.2% year-over-year in 2014, more than the 1.8% decline for regular Pepsi-Cola.

So what’s the next step PepsiCo takes to try and reverse the trend of falling diet sales? Remove aspartame altogether from Diet Pepsi.

Diet Pepsi is now the seventh highest-selling CSD in the U.S. soda market, with only a small 4.3% share. In comparison, Diet Coke, which lost its second position to Pepsi-Cola last year, has an 8.5% volume share in this market. [1] PepsiCo is replacing aspartame in Diet Pepsi with sucralose, better known as splenda, which has a slightly better customer perception than aspartame.

As can be seen from the table, volume sales of Diet Pepsi have declined over the years, and also more than the declines in volume sales for Diet Coke (with the exception of last year) and the overall U.S. CSD market. Aspartame might be the answer to PepsiCo’s problems, as beverage makers look to find the solution to the high-sugar problem.

However, the decline in low/no calorie soda sales might not stop by replacing one artificial sweetener with another. Diet drinks are criticized for the bad aftertastes of the artificial sweeteners, usage of artificial colors and preservatives, and other ingredients including phosphoric acid. Customers have been shifting away from CSDs to bottled water, sports and energy drinks, ready-to-drink teas and coffees, and even coconut water, which is why the overall U.S. liquid refreshment beverage market grew by 2.2% year-over-year in 2014, despite the 1% decline in soda volumes, and a 2.8% fall in fruit beverage volumes–another voluminous category. Energy and sports drinks grew 6.4% and 3%, respectively, last year, over 2013 levels, and as the penetration of these categories still remains smaller as compared to CSDs, there is much room for growth.

CSDs continue to decline as customers shift to other, healthier, and more natural drinks. Even with the replacement of aspartame with sucralose, PepsiCo might not be able to win back customers, especially millennials, who now seem to be more inclined towards carbonated water, sports drinks, and energy drinks. Even so, the news of a new Diet Pepsi might stimulate some demand for the ailing product, and considering how Diet Pepsi is the third largest-selling CSD in the U.S., behind Pepsi-Cola and Mountain Dew, the performance of this reformulated product will be crucial for the company. In addition, the possible success of the new Diet Pepsi might also prompt PepsiCo to launch this product in its other major markets, and maybe, eat into Coke’s market share, which still supports its aspartame-containing Diet Coke.

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Notes:
  1. Beverage Digest- U.S. beverage results 2014 []