The following is transcript of Beverage Digest's podcast, The Breeze, Episode 1. Duane Stanford invites beverage industry expert (and former Beverage Digest publisher) John Sicher to discuss the sports drink category's past, present and future.

Please excuse any transcription errors.

BD:

Hello and welcome to the first episode of The Breeze with Beverage Digest. I'm your host, Duane Stanford. This is where we talk beverage industry shop, news of the day, interesting competitive trends, new products and categories, whatever. We bring you into the kinds of conversations that we have here at Beverage Digest every day to dissect what's happening, connect dots, and ask the most important question, what does this mean? Today, I've asked my friend John Sicher to shoot The Breeze about the Sports Drink category, which he knows quite a lot about.

John happens to be the former publisher of Beverage Digest. He covered the industry for two decades before selling the publication in 2015. Since then, he's consulted for companies including Coca-Cola, BodyArmor, and he served as an expert witness in beverage related court cases. John, welcome to The Breeze.

JS:

Duane, happy to be with you.

BD:

I said that you know Sports Drinks, and in fact, you probably remember quite well the day 23 years ago that PepsiCo bought Gatorade. This came just after the height of the cola wars. Who knew then just how big this category would get and how important a brand like Gatorade would become for PepsiCo?

JS:

Duane, I can remember it so well. It was November of 2000. Up until that time, PepsiCo, Danone and Coke had all been rumored at interested in buying Quaker Oats, which owned Gatorade. In late November, sources came through and said that Coke was on the verge of announcing an acquisition of Quaker Oats. I was sitting in my home office ready to put out a special edition. I think we know what those are, Duane.

BD:

Yes.

JS:

I got a call from Coke late at night on late in November saying the Coke board had decided not to go forward with the deal. And literally about a week or 10 days later, PepsiCo swooped in and bought the company, and the rest is history.

BD:

First of all, I think people forget that Danone was actually in the running then, you said.

JS:

Yes, they were.

BD:

That would be interesting, would it not?

JS:

Right, exactly. But it was a deal that... It changed the makeup of the North American beverage industry. I mean, PepsiCo got this huge and successful brand, and they already had in their non-carb portfolio Lipton and Starbucks. It changed the landscape. Coke had they bought it would've had a much bigger non-carb business than they do now. It was really a game changer.

BD:

This was after the height of the cola wars, as I mentioned. This was after the Michael Jackson and all of that just warfare between the two companies. This was a time when some of that was subsiding. There was a real belief that these companies had to diversify beyond carbonated soft drinks. You started having some of the early days of consumer pushback against sugar, et cetera. I mean, this was sort of a critical time to make these kind of moves. No?

JS:

It was, and PepsiCo really was really out ahead back then. I mean, they already had the Lipton partnership with Unilever. They had the Starbucks ready to drink partnership. They came into the mark with Aquafina a little bit before Coke did with Dasani. They really believed in the total beverage company approach. But again, everything, as you said, changed. The CSD started slowing, the cola wars became more muted, and the competition became much more about brand portfolios.

BD:

At that time when people looked at this acquisition by PepsiCo of Gatorade, did people think this was going to become this tremendous category that it is today? Was that even in the thinking then, or was it just really interesting segment, interesting category, a lot of good growth here, some potential, but wouldn't necessarily something you would think would be the biggest PepsiCo brand right now actually?

JS:

Well, I mean, Gatorade was a big brand and a well-known brand even before PepsiCo bought Quaker. Back in the '90s, Coke had Powerade. They were trying to make a dent in Gatorade's market share without much success. The other thing which brought Gatorade into the mind and presence of the beverage company was Quaker in the mid-'90s bought Snapple and tried to basically create a beverage business combining Gatorade and Snapple.

Of course, that didn't work, and they sold Snapple a few years later at a tremendous loss. By the time PepsiCo bought it in 2000, Gatorade was already known to be a big, powerful and growing brand and thought to be very much a future major player in the North American beverage business.

BD:

For a long time, we've had a two horse race in the Sports Drink category in the US. It's been Gatorade, Powerade. Powerade has always trailed in share, even though it was the next biggest competitor and the one that was well-funded enough to actually take share from Gatorade. That went on for a very long time. Was there ever a time when Powerade seemed to be in a position to even one day overtake Gatorade, or was that never really in the cards necessarily?

JS:

Look, I think Coke tried periodically to use things like the Olympics to promote Powerade and to try to dent Gatorade share. It never really worked. And as you said, for many years it was a two brand category. Keurig Dr Pepper, then known as Dr Pepper/Seven Up, tried a Sports Drink called Accelerade. PepsiCo had a sports ring called All Sport before they bought a Quaker and had to divest it to a company called Monarch. Monarch tried to basically build All Sport, but Gatorade and Powerade together back in those years were too powerful and no one could break into the category.

BD:

You had a lot of competitors trying, a lot of people trying to become that third player. Didn't really work. And then sometime after 2010, in that decade, you start to see the emergence of this brand, BodyArmor, which really became the first player to be able to actually crack into that two horse race. What do you think was going on there? What was opening the door for them?

JS:

I think a couple of things. I think that the US consumer was beginning to be more interested in experimenting, and I think the BodyArmor owners and management did a very good job marketing BodyArmor as a better Sports Drink. It had premium ingredients in it like coconut water. Mike Repole, who was the primary owner, was and is a phenomenal marketer. It began to gain some share. And as you said, that opened the flood gates. Beyond Gatorade and Powerade, we have several real competitors in that category.

BD:

I mean, I've always felt, and I think you'd probably agree with this, but they also were able to capitalize on this zeitgeist at the time where there was this backlash against sugar. Gatorade during this period was pressured and held off for so long on doing a zero calorie. They finally did a zero calorie. There was all this thought about better for you ingredients and cleaner ingredient profiles, and BodyArmor really used that to their advantage. It was almost like jujitsu where they used that momentum to their advantage to talk about a better for you Sports Drink. Even the ingredients weren't necessarily tremendously different, but they offered that promise. That was artful, was it not?

JS:

It was indeed. And again, I don't think anybody can discount the marketing prowess of Mike Repole, who is the primary owner of BodyArmor. I mean, whether it's packaging, whether it's advertising, I mean, they signed up an incredible group of athletes to help promote the brand. They put a great deal of money into marketing BodyArmor and growing it, and the results paid off. BodyArmor today is much, much smaller than Gatorade, but is a brand of some significance in the Sports Drink category.

BD:

Coca-Cola bought BodyArmor at the end of 2021. They spent all last year integrating it. Of course, we've seen some fairly significant deceleration of the volume gains that they were achieving before. Federico Muyshondt has talked about some plans for BodyArmor, but they've also integrated Powerade into that operation. And as we wrote about in last week's issue, they seem to be coming strong this year with almost trying to regain some of that ground that they had for so long against Gatorade. They've even said between the two brands, they want to overtake Gatorade as the sports strength leader. Do you think they can do this? I mean, is that in the cards?

JS:

One word answer, no, but I think basically they can gain some share if they're very good at executing their strategy against Gatorade. But remember something, Gatorade's not going to sit still and sit back and say, "Oh, we're not going to do anything. We're just going to watch BodyArmor." Coke put more money and effort behind Powerade and BodyArmor. PepsiCo is going to innovate. They're going to market. They know that Gatorade is one of their two or three most important brands, and they're going to fight the dickens to hold the significant share gains they have.

BD:

I mean, I think if you're Coke, you have to at least create the mindset within the organization that you can go after that supremacy, even if it's with the two brands. Now, whether you can get there, I mean, I agree, it's a tall hurdle. But certainly if you've got that as a goal, then it should be very interesting to see the extent to which they could take even more market share than they potentially have before. But all of this comes down to investment, right? Is the current iteration of Coca-Cola going to invest the kind of money you need to act to to achieve that goal in the five years or whatever they're trying to achieve? I mean, is this the kind of environment where you can really do that?

JS:

I think it depends. I mean, there are several brands in the North American beverage business that have maintained huge market shares in their categories or segments, Gatorade in the Sports Drink category, Mountain Dew in the citrus category, and Dr. Pepper in the spicy cherry category. No one has been able to make a real dent against those brands in their segments or categories. Coke has got lots of money. They've got lots of marketing expertise. I think it's going to depend, Duane, if they basically are willing to invest a lot, stay with it.

If they're able to execute a two brand strategy using Powerade at a lower price point and BodyArmor at a premium price point, if they can do that effectively and their marketing and execution is great, they can probably over a period of time gain some share against Gatorade. I personally don't think Gatorade is going to lose its dominant market share in the Sports Drink category anytime soon or ever.

BD:

One of the things Powerade is doing is using this 50% more electrolytes. I mean, they're going after this on the electrolyte side, the ingredient side. I wonder the extent to which consumers now are thinking about and looking at how much electrolytes are in the product. Do you get a sense of that at all? I mean, is that a good way to go and attack and challenge Gatorade?

JS:

Look, Coke's a smart company. I've worked with them. I've covered them. They do their research well. They understand consumers. They understand that consumers are more concerned about and interested in ingredients than ever have been in the past. I think Coke is making smart moves with Powerade. I think it's got a great brand in BodyArmor to basically together grow their presence in that category. And as I said, I think they will gain some share. The question is, how much share will they gain?

BD:

This comes at an interesting time too, talking about electrolytes and some of the ingredients. I mean, one of the things we've seen very lately is this emergence of this super hydration, these drinks that offer much quicker rapid hydration. This brand called Electrolit. I know you follow them. I followed them for a number of years now. They actually took a few share points, which was pretty interesting in the context of this two horse race we've talked about and the difficulty of brands breaking into this category. They actually took some share with this rapid hydration as sort of a Pedialyte for athletes.

Actually this category was kind of created by Pedialyte, and then Electrolit came along and figured out a way to market it directly to athletes and position it for them. Now you've got Gatorade, they followed suit now with their Gatorlyte product. You've got other pharmaceutical type companies from Mexico like Pisa that owns Electrolyte bringing in these rapid hydration products using a little science to really talk about the absorption of these products into the body. It's not just about more electrolytes, but how well they absorb into the body.

You've got this whole new category now or segment of this category that's emerging right now, and that is going to make this whole competition between Powerade and Gatorade even... It's going to create a whole new spin for that, because not only are they fighting each other, they've got to now concern themselves with this emerging category that's really popular, by the way, with multicultural communities in the US. We've got a demographic shift that people are paying attention to because there's a lot of consumer spending by these groups. We've got a whole new game forming here, so to speak. What are your thoughts on how all that might shape up?

JS:

I think you've got to go back to what you said earlier about BodyArmor. BodyArmor established in consumer's minds a credible point of difference between itself and Gatorade and Powerade. I think what you've just been talking about shows that this category is now open for more innovation, more brands to come in. I think that the competition for decades between Powerade and Gatorade showed, Duane, that unless you establish a point of difference in the Sports Drink category, Gatorade reign supreme. I think if new competitors can establish points of difference that consumers believe in, the category gets more competitive and more interesting in the near future.

BD:

Why has Gatorade... I mean, you got to hand it to them. They've been quite successful in fending off some of these challenges, or at least holding their own over time, even if for a while, BodyArmor really took some share points. How is it that Gatorade has been able to answer the call so often? They've got the Gatorlyte product now to fend off that electrolyte challenge. They did the Zero offering even though for years they held back on that.

What is it in the DNA of that brand or just their willingness to spend, do you think, that has allowed them to not lose this dominant position? That's pretty remarkable. I mean, it reminds me of just what Coca-Cola has done with red can brand Coke over all of these years.

JS:

I think it has a lot to do with one word, which is commitment. I think that for many, many, many years, going back to the Quaker days of owning Gatorade and right through to the PepsiCo days, they really understand that brand. They understand the brand's consumers, and they understand how to market that brand. They've been willing to spend a lot of money to do that. I think it's simply one of the best marketed and managed brands probably in the entire consumer products universe, and it's made it very hard to dent it.

BD:

We've seen this with energy drinks, as we've mentioned, just various competitors coming in with these unique propositions, whether it be performance energy, targeting Celsius, for instance, to a broader set of energy occasions, more everyday energy occasions, marketing more to women. I mean, you're seeing that really happening in Sports Drinks too, where you even got new competitors. I just recently had a conversation with the founders of Hoist. This is a product that's very heavily within the military right now.

They take issue with taking sugar out of Sports Drinks, because they believe it's important when it comes to the absorption of electrolytes and things of that nature. You're really going to have companies who are going to be challenging some of the efficacy and the science behind some of these products too, which creates a whole new dynamic. Do consumers really pay a lot of attention to that, do you think?

JS:

I think certain consumers do. Look, I think that one of the issues for Gatorade over the years has been trying to decide whether it is a product for athletes or is it a lifestyle of beverage. I think in recent years, PepsiCo has marketed it as a product for athletes. There's no doubt that some Gatorade is consumed as a lifestyle beverage. I mean, you can walk up and down Third Avenue in New York City and you can see people, they're carrying a bottle of water or a bottle of Gatorade and they're not out exercising. I think that it's a terrific category. It's a category generally lower in sugar than carbonated soft drinks.

It's a category where diet sweeteners work well. Gatorade Zero is a great tasting product, as is Powerade Zero. The diet sweeteners work better in Sports Drinks in terms of taste than they do in certain carbonated soft drinks. It's a product which has a credible functional benefit in the minds of most people, and it's a category which is going to grow. And because it's going to grow and people are getting smarter about the category and points of difference, there's going to be more competition coming into that category.

BD:

You could almost argue that over a decade ago, Gatorade over pivoted to focusing very heavily and concentrating their marketing on athletes, to the point where they were even in essence saying, "We don't care if non-athletes drink." You probably remember that. "We don't care if non-athletes drink it. We're focusing on the athletes." Part of that obviously was to create that halo that would then filter down to the broader consumer set.

Since then, and again, I think you could argue they over pivoted at the time and they pulled back, but they've done a really consistent job of really focusing on athletes, however, creating that halo, but still making the brand accessible for consumers with all kinds of workout occasions. Of course, they've added Propel and they've got extensions now. They've got a new hybrid energy Sports Drink that they've introduced into the market, started with the NFL. They're going to be distributing that widely starting this month in the US. That adds even a whole new wrinkle to this whole Sports Drink competition, right, adding this energy component for specifically athletes.

JS:

Exactly. I mean, there was a time when athletes would have a Red Bull and a Sports Drink. Now, I think the Sports Drink companies are starting to basically decide, we want to capture that inside our own brands as well. Again, this is part of that differentiation, the point of difference that we're talking about. I think it's probably pretty clear what Coke and Pepsi and Sprite are going to look like five or 10 years from now. They're going to look a lot like they are today, maybe some more flavored line extensions. I think it's very hard to predict what the Sports Drink business is going to look like. I think it's going to be far more differentiated, more competitors, much bigger than it is today.

BD:

I mean, you got to wonder, PepsiCo for a time had distributed Bang, and of course, that relationship went very sour and they ended up divorcing. Celsius has moved into that, is now being distributed by PepsiCo. But during that Bang period, Bang was all about this performance energy segment, and it was all about an energy drink for people who were working out and doing various kinds of exercise. You have to believe that through that period, Gatorade picked up some thinking and ideas around this whole athlete needing an energy occasion. I mean, I just think probably in their minds cemented some of this desire to go after this category, wouldn't you think?

JS:

Oh, I do think so. I think PepsiCo has been very good at understanding that they need to market Gatorade both to what I would call actual athletes and aspirational athletes. And that I think has become part of the Gatorade aura. I think that, as you said earlier, Gatorade is marketed mainly to athletes, but it's also marketed to people who aspire to be athletes, who aspire to be fit, who may be just working out a little bit. I think you and I probably know people who go out and jog a leisurely mile and come back and swig a Gatorade. They probably don't need a Gatorade technically, but it's part of the aspirational aura of Gatorade, and it's worked very well for them.

BD:

You play tennis. I play competitive tennis here in Georgia in the hot summer. I don't know what I'd do without Sports Drinks, honestly, when those cramps set in.

JS:

Right, exactly. We play a lot of tenants. It gets very hot up here in the summertime. My wife gets leg cramps, and she drinks and consumes a different assortment of hydration beverages and they work. As I said, I think that...

BD:

Do you try powdered and tablets and things like that too?

JS:

All of them. But again, I think that one of the things that's so exciting and has propelled the growth of both energy drinks and Sports Drinks is I think they have functional benefits that consumers believe really work. I think that's going to propel their growth, Duane, for many, many years to come.

BD:

When you look at those tablets and powders, that's been really interesting too because you can really... In terms of creating these functional benefits, you can pack all that into this very easy portable package. Consumers, some of them, don't want to use single-use bottles. They want to use their portable, reusable bottles, et cetera. It's been really interesting watching the growth of that. I do wonder if there's a ceiling on that, like how high can that really go, because package beverages are frankly just easy and simple. But do you see people around you using those more? Have you got a sense that those could actually build even more of a following? I mean, this stuff has been tried in the past.

JS:

I think two things. I think, yes, I've seen it. At the Local Health Market we go to out in Long Island in the summertime, some of those powdered and tablets products have quite significant displays. But I think that two things are going to keep a cap on that. I think that people like convenience. They just being able to take a bottle of Powerade or Gatorade or BodyArmor out of the refrigerator, open it, and drink it.

The second thing is, I think that these brands like Gatorade and Powerade and BodyArmor have a big headstart in brand building. I think brands are important. I think that people buy products for lots of reasons, but I think the appeal of a brand or the brand they're familiar with and trust goes a long way.

BD:

Yeah, I do think a lot of times we discount the company saying, "Look, we got to have options for consumers. If consumers are looking for powders and tablets, we got to make sure that we're providing those too." But I really do feel like there's conviction behind that these days, and it's really pretty clear from the market that that really is the strategy you have to take. You can no longer just say no to powders and tablets because it's going to hurt your ready to drink business.

You can no longer just be in a trench on that. You have to embrace those and figure out a way to work them into your portfolio in order to have it contribute to that brand that you talked about and people going to your brand for these usage occasions. I think it's going to be interesting to see these companies continue to do that and try to embrace these different formats, but at the same time protect their existing giant RTD businesses.

JS:

I agree with you. I think another aspect is that as more and more and more people buy beverages online, I think that the lower cost of shipping powders and tablets will get some value. In other words, if someone's buying a case of Powerade online, someone is paying to ship a lot of water. If someone's buying a case of tablets online, it doesn't take up much space. It doesn't take up much weight. There's a cost benefit there probably for everybody long-term. I think that that's a consideration too.

BD:

I mean, so far, by and large, beverages really have not caught on with e-commerce other than say click and collect where you go to the store and pick it up or maybe have something delivered by someone in their car. But in terms of the Amazons of the world and some of that, some direct to consumer beverages that are highly functional, it starts to make sense. But even those companies, a lot of them who started with direct to consumer strategies have fairly quickly moved to retail because that's where it's at. But that whole beverage in terms of e-commerce grocery just have not captured as much share as some other types of products.

I think you're totally right about how that's one place these powders and tablets can play. But also if you look at those displays you talked about in the store, the pricing for some of these, I mean, it is just mind-boggling sometimes when you look at a box of these functional hydration beverages in tablet or powder form, just how much they're able to charge for these things.

JS:

Right, exactly.

BD:

Because of the functionality.

JS:

Exactly, exactly. I think there's a subset of people who are going to want these products, but they're going to have to basically make the products themselves. I think that's going to put a limit on how much they're used.

BD:

I think the way to do it is to really think about it. If you're a Coke or a PepsiCo or some of these other brands that want have powdered and tablet forms, I think the way to think about it is that a specific user is going to at times want a ready to drink bottle that they can just swig as they're in the middle of a match, but they might also want the portability of those powders and tablets to have in their bag in case they run out of whatever they've brought in their bottles on a particularly hot day, or they just quickly need to rehydrate before a match and they've just not had time to go to the store.

I mean, you can see ways in which having those in your bag as a backup is also important too. You have to really think about these consumers and these need states across the board and then using these different products at different times. I think that's a great thing. I mean, that creates nice convenience for consumers. It gives them some flexibility. The notion of just having the backup in your tennis bag to your RTD, for me, I mean, that's huge. I think that you're going to see companies think about those more holistically as well. It's not an either/or.

JS:

Of course, the catch 22 is beyond the tablets or powders you have in your bag, you also have to have some water. Either you've got to carry bottles of water, or you have to take a water bottle, which you fill up someplace. You have to find a half a liter of water someplace if you're going to use those tablets and powders. If you're not at home, that's not so easy. I mean, one of the reasons you see so much use of bottled water, for example, in New York City is convenience and portability. I think that's going to be true long-term for Sports Drinks too. It's just simpler.

BD:

What's your prediction? Next five years, what are we going to see in terms of this Sports Drink landscape? Do you think these rapid hydration drinks are going to become more the lead horse in all this, or will they just be one of the arrows and the quiver of these companies to grab these consumers holistically?

JS:

I'd say arrows and quivers. I think that over the next five years, you're probably going to see energy drinks continue to be maybe the top grower. But I think Sports Drinks are going to keep growing and maybe even grow more strongly. As you mentioned, BodyArmor did not have a great year last year. It was a transitional year for Coke. But Coke spent a lot of money on that brand and they're going to basically ramp up their competitive efforts behind BodyArmor.

I think over the next few years you're going to see very, very strong and good competition between PepsiCo's Gatorade, and Coke's two brands and these smaller brands you referenced. I think that's going to help drive awareness of functional value, and it's going to help drive growth in this category.

BD:

As we wrote about in the last issue, this is definitely a pivotal year for Powerade, but also BodyArmor. Can they return to some of that growth that we saw pre-acquisition, and how does that fit into Coke's overall competitive mix on Sports Drinks? It'll be interesting to watch, and we'll be covering it closely. John, thank you so much for joining us on The Breeze today with Beverage Digest and look forward to further conversations.

JS:

Happy to be with you and thank you, Duane.