The following is transcript of Beverage Digest's podcast, The Breeze, Episode 5. In this episode, industry expert John Sicher joins Beverage Digest Editor and Publisher Duane Stanford to break down their top takeaways from the just-released 28th Edition of Beverage Digest’s Fact Book. The Fact Book captures performance results for the full non-alcoholic drinks market, not just what’s measured by store scanners. That includes everything from groceries to the fountain channel, where a lot of brand activity happens. Listen in as they talk shop.

DS:

Hello and welcome back to The Breeze with Beverage Digest. I'm your host, Duane Stanford. This is where we bring you into the kinds of industry conversations that we have daily at Beverage Digest. We dissect what's happening, connect the dots, and ask the most important question, what does this mean? So John Sitcher's back with me again today. John has covered the beverage industry for almost three decades, much of that time as a former editor and publisher of Beverage Digest. Since then, he's consulted for companies including Coca-Cola and Body Armor, and he served as an expert witness in beverage related court cases. John, welcome back to The Breeze.

JS:

Good to be here, Duane. Thank you.

DS:

So hot off the press is this morning is the 28th edition of Beverage Digest Fact Book. Now, for those of you not familiar, this is an extremely important resource for the industry because it provides a look at the full beverage industry in the US, not just what's measured by store scanners. So the Fact Book covers everything from groceries to the Fountain Channel where a lot of brand activity happens. And this is a complete picture for what happened in 2022 for carbonated soft drinks, water, tea, coffee, juice, the big important categories that drive so much retail activity. This book is available, of course, at beveragedigest.com. I invite you to take a look at it. But John, I'm sure you remember the long nights crunching the data for Fact Book. It's an exhausting but fun project.

JS:

Duane, as we say in New York, Ove. But before we get started, I want to offer a note of praise. The Fact Book, Dwayne, it's really fantastic. The depth and the breadth of the data is terrific. It's a great tool. It's a great tool for anybody doing planning, for anyone trying to analyze the industry, for suppliers. We started it years ago. The depth and breadth of the data you have today is fantastic, and my hat is off to you.

DS:

John, I really appreciate that. That means a lot. And full credit to our team. We've got an amazing team. They do some terrific database work and they've got a system and a process now that just phenomenal, great methodology, really proud of this product and look forward to continue to bring it to folks. And this year, no different. It's very interesting time, of course, in the industry.

So for today's podcast, I sent John a copy of the book and asked him to pick out a few data points that he found interesting from this year. He's of course, got years of experience with this industry, so he's perfect for us to say, "Okay, what's different now from the past and what should we pay attention to in the future?" And we're going to do a little Monday morning quarterbacking, if you will, and take a look ahead as well to what this data means for this year and even the coming year. So John, what do you think? Game for that?

JS:

I think it's a good idea. I'm happy to do it. And should we launch right in?

DS:

Yeah. So tell me, what did you see that jumped out at you this year?

JS:

One thing certainly was, for years and years and years, I've covered the industry, I compiled data, I find it striking that we're seeing a year or two of carbonated soft drink volume growth. Quite frankly, I never thought I would see that again because CSD volume has been in decline for so long. I think part of it was Covid, and the coming out of Covid. I, for one, think that the two years you're reporting in the Fact Book of CSD growth are an aberration. I think that we're going to see the CSD category return to relentless volume decline in the years to come. But what do you think, Dwayne?

DS:

Yeah, part of obviously what's happening in the last couple of years too is that when food service and fountain restaurants were closed during Covid, you had a decrease of that volume. A lot of it was pushed to the home, but it had an impact. And then now what you've seen is restaurants coming back in the last two years and that's been increasing, more people getting out. So the fountain business has really rebounded in the last couple of years. So that's some of what you're seeing reflected in the data as well from a volume perspective. One thing, John, I also note on the value side, you and I did a podcast about this several weeks ago, but the pricing environment is just unbelievable right now in terms of the ability for companies to cover some of these higher costs for production of these products.

And what I did find interesting though is last year, in 2021, that's when the costs were really escalating when you had a lot of supply chain issues and you're coming off the Covid period and companies were really trying to make up ground and they were putting multiple price increases in that year. And so the value for the soft drink category alone in 2021 grew 18%, more than 18%. Last year you had another big year compared to recent years, 12.5%, but it did slow over 2021, of course building on top of an already big year. So we've had a couple of years of just astronomical value growth as well.

JS:

Right. And I think that as we discussed before, I quite frankly think though those days are coming to an end. I think that we're going to see, and I think we're already starting to see the huge pricing increase is starting to more deeply depress volume. I think there was an analyst reported on that in the last day or two. I think that as we move into the last part of 2023, ended in 2024, we're going to see a return to modest price increases, modest volume declines. Hopefully the increases in price will more than offset the decline in volume and we'll continue to see some dollar gains. But I think I would predict at the risk of predicting anything that next year's Fact Book or your Fact Book for the 2024 data is going to look much more like the data back in the 2018, 2019. I just do not believe, I don't see any fundamental reason why CSDs should return to volume growth on a sustained basis in the future.

DS:

So what else are you seeing, John? What's the next thing that jumped out at you in this year's book?

JS:

Staying on CSDs for a minute, one of the things that struck me was the decline in the cola's share. Cola's are the biggest segment in the CSD category with lemon lime, pepper, citrus, etc. Going back 20 years or so, cola's held about a 60 share of the category. Cola's made up about 60% of the carbonated soft drink business. Your data, Dwayne, shows that cola's are just barely half the business now. And if what's happened in the past continues, cola's next year or this year, in the data you're going to report next year, cola's will for the first time drop below half the CSD business. And there's been talk for a long time about cola decline and people have speculated on the reasons for that. But I think that it's striking to me that cola's are, even with the growth of Coke Zero, Pepsi Zero, some of these new diet cola's, the cola's are about to drop below the 50 share horizon in the industry. Do you see any reason or potential for cola's beginning to regain share?

DS:

You've seen some pretty large cola's that have lost share within carbonated soft drinks. You've got Diet Coke, those are issues related to a lot of those consumers aging out. And then you have to ask, "Okay, do you lean into that with marketing to try to recruit new consumers?" And there have been attempts to do that as well. There's still a question, could you ever grow something like a Diet Coke with the new generations? I think right now the answer seems to be, from Coca-Cola at least, that they're going to focus on Coca-Cola Zero as sort of the new generation of these diet soft drinks. They're growing as you mentioned, but not necessarily making up for all of the declines that you see from that older cohort that's now either aging out or moving away from those cola's. So that's some of what you see there.

And then you've got a big multicultural demographic in the US and that's growing and it's a lot of buying power. And so that's where you see some of the growth in brands like Sprite and some of the categories like fruit sodas and brands like Dr. Pepper have been really performing well within CSDs, which is also pulling some of that to the Pepper side. So yeah, I think those factors are taking a bite out of cola, but these companies are looking at these as a full portfolio of products. And at the end of the day, what does the full category do is probably what's most important. But I don't know, do you agree or disagree?

JS:

Yeah, there were folks over the years who talk about cola decline. That cola's were your parents, your grandparents, soft drinks. I never really fully bought into that. Cola's a unique flavor. Cola's go very well with food. They're very refreshing. Cola's are one of the few flavors where when you drink one you want more. I personally think that with the right marketing, cola's can grow again. I think that going back some years, PepsiCo seemed to have an ambivalence toward carbonated soft drinks. And I don't think they do now. I think that they are very much behind their carbonated soft drink portfolio. And it seems to me that their brand, Pepsi, Diet Pepsi, Pepsi Zero should and can perform better in the future. I personally think that cola's can grow again if the two big cola companies really get behind them.

DS:

And do you think that's going to be on the back of these zero sugar versions or are you saying full and zero sugar, the whole cola portfolio?

JS:

I think it's got to be both. I think that they have to basically minimize the decline of their sugared cola's, hold those to either flat or a very small decline and let these new products, the zero calorie products keep growing and begin to lift the cola segment again someday. I think what may happen is we may see cola's drop below the 50 share, but then over the next few years as products like Coke Zero Sugar and Pepsi Zero Sugar begin to get bigger and if they keep growing, I think we might see the cola category revive a bit.

DS:

Yeah, interesting. What else you have, John? What else jumped out at you?

JS:

Yeah, speaking of brand Pepsi, one other thing that jumped out from your data was that if 2022 growth trends continue over the next few years, we're probably going to see Gatorade, Dr. Pepper and Sprite all become bigger in volume than brand Pepsi. And I wonder whether or not, does Pepsi care about that or is Pepsi focused on their entire portfolio and do you think Pepsi is basically focused on trying to do whatever it can to grow Pepsi again? Or basically are they more focused on Gatorade, the Lipton portfolio, the diet cola's, Mountain Dew. Pepsi dropping in size below Gatorade and Dr. Pepper and Sprite would be news for the category. But again, Pepsi's got a much bigger business than brand Pepsi. And I was wondering, Dwayne, what do you think their view of the importance of putting a lot of marketing muscle behind brand Pepsi is?

DS:

Pepsi's always going to be important to that company. It's in the name. But I do think they have not shied away from the notion that they do look at where the future of beverages are going, at least in their minds, and they look at what are young people drinking, what are the next generations going to drink. And I think they see Pepsi as something that's still a very viable part of that category, but they also see it as the place where they can always be on the edge culturally and make sure they're still appealing through music and making sure that younger generations see that as that cutting edge brand when it comes to cola's. But they believe that because of health and wellness trends and ingredient trends, functionality trends, that products like Gatorade are really where they're going to continue to see meaningful growth and where they're going to invest.

And so I think they haven't shied away from the fact that we don't necessarily feel like Pepsi has to be always the number one shining star, that we can have room in several categories for other brands. One of the really interesting things from the data is that Gatorade, for instance, from a value perspective, they jumped up in our top 10 LRB ranking. They jumped up two spots. So they have now moved above Dr. Pepper and Mountain Dew from a value perspective, and that is a brand that they put considerable emphasis behind. They've worked through their supply chain issues, they're now moving their Gatorade distribution to Bottler's to DSD in the large format stores where they've been in convenience stores for some time. So you're going to see them continue to emphasize that. So I think they just take this broader perspective when it comes to some of theirs.

And you have to remember, you can never separate the fact that when you compare PepsiCo to Coca-Cola, the thing you have to remember is that they have a massive snacks business that requires investment as well, that is just a lifeblood of that company. And so they're always going to balance that investment to make sure that they're feeding Frito-Lay the way it needs to be fed.

And when you look at a company like Coke, their big overall brand driver and their halo is red can Coca-Cola, regular Coca-Cola, and then of course the variants from that. So the investment's just going to be different when it comes to those two companies. Now, what Pepsi has, at times, they've over pivoted. They never want to get to a point where they're losing so much share against to Coca-Cola that that becomes long-term detrimental. So it's a balancing act. They get it right sometimes, sometimes they don't. But again, it's important to understand how they both view those portfolios in very different ways. Your thoughts?

JS:

No, I think that's right. And I think one thing you alluded to is very important, and that is though often people think of Coke and Pepsi as similar companies and talk about the cola wars. I think in your Fact Book, Dwayne, one of the interesting things you do is, you basically analyze the relative importance of different categories to the companies. And not surprisingly, CSDs are a much more important category volumetrically to Coke than they are to Pepsi. In fact, I think your Fact Book shows that although Coke is bigger in LRBs and bigger in CSDs, I think Pepsi is actually bigger in non-carbonated beverages largely because of Gatorade. So I think that these companies today, they are different. PepsiCo has got the number one sports drink, the number one ready to drink tea, the number one ready to drink coffee. They're practically as big a player as Coke and water. So I think when you talk about how they view their beverage business as well as their snacks business, I think that's that's a good insight.

DS:

And speaking of non-carbonated beverages, Coke versus Pepsi, one of the interesting things in the last two years is the acquisition of Body Armor by Coca-Cola, of course. Body Armor was reporting 40 and 50% volume growth rates prior to the acquisition. Last year in measured data, as you alluded to earlier, Body Armor was down in our data. We showed Body Armor sports drink up by about a little more than a percent, which may be surprising to some given what the trend has been, especially during the second half of last year in measured channels. I think one of the key differences here is that Coca-Cola, since taken on the brand, has been able to get it into a lot more bottling canned food service outlets, so more restaurants. So I think that has helped that equation, but still it doesn't change the fact that that that brand, and as Coke has acknowledged, that brand is not performing the same way it did last year.

They say, and I think there's some evidence of this, that PepsiCo obviously had pretty significant supply chain challenges with Gatorade out of stocks, ramping out of stocks for a period of time. Body Armor took really good advantage of that, plugging those holes with their product and also just being available. So there was a meaningful increase that Coke is now lapping over the last year. So what's going to be interesting is once they fully lapped that at some point this year, will they start to show the kind of growth that people assumed that brand was going to bring to the company in their non-carb portfolio. But what's your take on that overall look when it comes to Body Armor and what's next for that brand?

JS:

Look, I think it's very difficult for Coke to do what it's trying to do. I can sell it to Body Armor as you mentioned in your opening comments. And I saw a management and a sales team, which was extremely focused on Body Armor's relationship with its bottlers, with major retailers, marketing Body Armor. They were very, very, very focused on that brand and growing it, and they did a very good job. Fast forward, Coke buys it. Good idea, because Body Armor's a great brand. But it's much more difficult to manage a two brand category than it was for the Body Armor team who was managing one brand. Coke is now trying to basically figure out a way to manage Powerade and Body Armor in the sports drink category. And there are price differentials. They have to create points of difference between these two brands so that they can get Body Armor growing again and maximize the performance of Powerade. I think it's going to be very hard.

However, what I do think is that in the years to come, one untapped market for Body Armor is the international market. I don't consult to Body Armor anymore or Coke, so I don't know the answer to this, but I don't think Coke has basically done much with an international rollout of body Armor. I would think that they probably would in the next year or two or three. And I think that will return Body Armor as a global trademark or brand for Coke to some growth. But I think it's going to be complicated for them to manage those two brands in the US.

DS:

John, looking at our overall volume and value table, this has been true for a couple of years now that water is a bigger category than CSD, but since Covid the water category did not grow. It was relatively flat last year. You've had a major brand, Pure Life, which was acquired by BlueTriton from Nestle. That brand has gone through clearly some transitional issues. Some of that probably on purpose is they try to create profitability around that brand, some of it perhaps because of changes in distribution methods. What do you see happening with that water category over time? Again, larger than CSD, but not necessarily growing at the same rate right now and going through a bit of a transition it seems?

JS:

Yeah, I think that's right. Look, anecdotally and observationally, as you walk around the streets of New York, 10 years ago, everybody had a bottle of bottled water. Today you see many, many more people carrying a refillable container. One of those little sports containers, I'm not sure what you call them. At home, my wife and I used to buy bottled water all the time. Now we bought those refillable containers and we refill them. The drinking water in New York is just fine. So we went from a household probably buying a 12 pack of bottled water every week or two to buying no bottled water anymore because we use these refillable containers.

I think that part of that is spurred by the concern about plastics. I think that one of the big differences between carbonated soft drinks and water is you can get water out of a tap. You can't get Coke or Pepsi out of a tap. So if people want to, or people concerned about plastic containers, plastic bottles, the environment, filling up landfills, it looks to me like a shift has begun to people using more refillable containers for water, something they can't use for carbonated soft drinks or sports drinks as easily. And I think that has had and will probably continue to have some flattening impact on the performance of the bottled water category.

DS:

Yeah, you've seen the industry responding to that too, even when it comes to product innovation, you've seen companies like Noon with tablets and you've got various powders and even Celsius, they have a powder that's growing as well. And then you've got, we broke the story last week that Gatorade and Propel from PepsiCo are both moving into tablets as well. Obviously this isn't going to supplant ready to drink beverages, but they will take some occasions. They could also be enhancing in terms of just a balanced portfolio as well. And that's what the companies are working through. But as especially younger generations really take to the notion that they need to have a refillable bottle for their beverages, on the one hand that means they aren't buying bottled water and sometimes they aren't buying ready to drink beverages, but it also means that there's a market for other beverage enhancers.

And that is a way for companies like the big beverage producers to make sure they keep those people in their brands at least. And then as they get older and look for the convenience of ready to drink, perhaps see themselves balancing it between bottled and can and refillable bottles, depending on the occasion, then you keep them in those brands and that's only good for them long term. But it'll be interesting to see the extent to which powdered enhancers, tablet enhancers can take actual occasions away from ready to drink or the extent to which they can really enhance the overall portfolio for these companies.

JS:

But I also think that unlike some other categories like carbonated soft drinks and sports drinks, I don't think Coke or Pepsi or Nestle ever really had an opportunity to build big and powerful brands in the bottled water business. I think they tried, but I think pricing came down so fast and so much in the early years of the bottled water category. And so today you have private label having probably a 50 share of the category or slightly more. I think when you have that, you don't have as much stickiness to a category or a category of beverages. So I think that there's certain consumer stickiness to brands like Coke and Pepsi and Gatorade, but there's less stickiness to the bottled water category. So as concerns about plastic and people began to realize they could use refillable bottles, I think that that coupled with the less brand stickiness in the bottled water category, I think that's having an impact too on the performance of that category, Dwayne.

DS:

So John, I think we have time for one more. One thing, I'm looking at our data, we see the coffee category, the ready to drink coffee category up about almost 2%. You've got the ready to drink tea category down more than a percent, about 1.5%. What's going on there with tea? You would think tea should be getting more traction than it seems to be. Is it just a lack of big players there with the big distribution muscle, so it's a lot of smaller items. Of course, on the coffee side you've got Starbucks as the big BMF and they have the largest share of the category, but young people are drinking a lot more cold coffee than hot coffee it seems, at least from a growth perspective. What's happening with both tea and give me your thoughts on coffee too?

JS:

It's a fascinating question. The ready to drink tea business is almost a billion and a half cases. The ready to drink coffee business is about 400 million cases. So ready to drink coffee is about a quarter of the size of ready to drink tea. Why is that and what's the future? I think that one of the reasons the tea category has begun to decline is that some years ago people believe that consumers saw tea as a healthful healthy beverage. And it may be, but I think tea now is perceived more as the other ready to drink beverage categories are, like juices and juice drinks. I don't think people are buying tea as much anymore because they believe it has functional or healthy benefits.

As to coffee, one of the big questions has always been, tea is certainly a gulpable beverage. You can buy a bottle of Snapple if you're thirsty, gulp it down, it tastes delicious, and it quenches your thirst. People have wondered whether coffee would become a refreshment gulpable beverage. I'm not sure it has, but I think that the tea business probably will not perform very strongly in the years to come. I think coffee basically, as they diversify the selection of ready to drink coffees, I think that will, so I'm pretty bullish on the future of the ready to drink coffee category, less so on the tea business.

DS:

You've got to wonder if there was a time when it seemed like tea, the Heyday of Arizona, Snapple, Arizona's still doing great, but when those brands came along, and that was at the same time that there was this pushback about the amount of sugar in carbonated soft drinks, and this was still before some of the sweetener systems for the zero sugar soft drinks and cola's became better and better. There was a time when tea almost was becoming a replacement for soft drinks. You still got your caffeine, you still could chug it, like you said, it could be refreshing. In the years since, the sweetener systems for Diet Cola's have gotten way better, you've had people migrating back to those for that same kind of usage. You've got lots of other refreshing beverages that can give functionality like caffeine. It almost seems like there's just more options.

And also you have to think, I have to think that some of this zero sugar cola and zero sugar soft drink growth and people moving into those more aggressively, especially again as the sweetener systems are better, has probably pulled some occasions away from tea and also created a situation where the soft drink companies really want to put some of that investment behind those really highly profitable cola categories versus tea. That's a theory I have. As we sit here, does that ring true to you?

JS:

Absolutely. I think you're totally right. I think that I certainly have not done research, but watching the data and talking to people over many, many years, I think that consumers moved from seeing tea as a healthy healthful beverage to a non-carbonated soft drink. And there's nothing wrong with that. Tea is delicious. The products like Lipton and Snapple and Arizona are delicious products. I drank them, but I think they basically are now going to move more in line with the beverage category instead of outperforming the beverage category. Coffee, I think, can outperform the beverage category in the years to come, but I doubt that tea will

DS:

John, as always, it's been a pleasure. Really appreciate your expertise. If you're not familiar with the Fact Book, go to beveragedigest.com, check it out. For those of you who have been waiting for the next edition, it's there ready for you. And thanks so much for listening, and we'll see you guys again soon.

Speaker 3:

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