The following is transcript of Beverage Digest's podcast, The Breeze, Episode 2. Duane Stanford invites beverage industry expert (and former Beverage Digest publisher) John Sicher to discuss the lemon-lime category's past, present and future.

DS:

Hello and welcome back to The Breeze with Beverage Digest. I'm your host, Duane Stanford. This is where we talk beverage industry shop, and bring you into the kinds of conversations that we have here. Every day at Beverage Digest, we dissect what's happening, connect dots and ask the most important question, what does this mean. Today, I'm welcoming back John Sicher this time to discuss the lemon-lime soda category. John, as you may remember from last episode, is covered the 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's served as an expert witness in beverage related court cases. John, welcome back to the breeze.

JS:

Happy to be here, Duane. Thank you.

DS:

So the big dog in the lemon-lime market initially for a very long time was 7UP. It was founded in the late '20s, and you'll remember maybe back in the '80s, the whole crisping clean with no caffeine commercials that were so famous. Well, 7UP began a decline in about the 1990s as Sprite began to take over, and Sprite had been around since the 1960s by this point, but in the '90s it did something really smart and opportunistic. And that was by celebrating the hip hop community and really figuring out a way to work itself into that community. They became sort of the official soft drink of rap.

Kurtis Blow, you may remember that a famous commercial with some rap lyrics where he dissed 7UP in favor of Sprite. The brand also at this time tapped into the NBA. At this point, Coke had been the NBA's soda partner for a number of years. And in 1994, Sprite became the basketball league's official soda partner and the official soda brand of the NBA.

Sales grew and the brand at this point was by far the lemon-lime leader in the US. 7UP was taking a backseat as you'll recall. So in 2003, the brand also signed an endorsement with LeBron James, and LeBron James was one of the biggest superstars in basketball. So this elevated Sprite among this community, the NBA, even further. Fast-forward to 1999, PepsiCo launched Sierra Mist because they wanted to figure out a way to get some kind of share back in this category. This brand was never really able to penetrate Sprite's dominance. It was always a bit of an also ran. It went through formula changes. In recent years, it even changed its name. It went all natural for a time.

All through this period it was never really able to break significantly into Sprite's market share. And so Sprite just continued to rule the day. So that brings us to today and fed up with Sierra Mist perhaps, PepsiCo decided they would just start from scratch and they would create a whole new lemon-lime soda and they call it Starry. You may have seen it in stores now. It's in all the major supermarkets at sea stores. It's targeted primarily to generation Z. That's the target audience they're shooting for.

Of course a lot of this is with the branding, the packaging look. It'll have a very heavy social media presence. That's what they're going for to see if they can go after Sprite. They're clearly putting some investment behind this as well. Now, what's interesting is that PepsiCo actually took over the NBA sponsorship from Coke in 2015. Coke had 28 years, the league had been with Coke. 2015 PepsiCo takes it over and Mountain Dew became the official soft drink at that time pushing Sprite out.

But this year, PepsiCo has announced that Starry will now take on that official role as the soft drink of the NBA. So this has become really quite an interesting battle again when it comes to lemon-lime, John. And I'm wondering, do you think we have a legitimate lemon-lime war again?

JS:

Regarding Starry, one has to remember that PepsiCo for quite a long time has been making runs at the lemon-lime category. Back in the '60s it had a lemon-lime soft drink called team and then I think in the '80s introduced a product called Slice. Then in the late '90s it tested a product in a bunch of markets called Storm. Storm, never got beyond the test markets. Then as you said, it launched Sierra Mist and now Starry.

So I think Pepsi basically... As we talked about in the last podcast, there are some brands in this business that are very hard to penetrate their huge market share. Gatorade is one. Mountain Dew is one, Dr. Pepper is one, and certainly Sprite. Sprite, my guess is probably close to an 80 share of lemon-lime category. I'm glad to see Pepsi basically mixing up again with Starry. I think competition is great, but it's not going to be simple to gain share against Sprite.

DS:

So team sly Storm. You saw a lot of these iterations. What is it that's been so... Or why has it been so challenging for PepsiCo to figure out a lemon-lime player that can really compete with the likes of Sprite, do you think?

JS:

Duane, it's really an interesting question. In this business, there seems to be certain brands that have very substantial dominant market shares and are hard to dislodge. Coke for many years tried to come up with a competitor from Mountain Dew and really never succeeded. Coke for many years used Powerade to try to dent Gatorade's dominant market share. I think Sprite has a couple of advantages. It's been very well marketed for many years. As you've said, it has the advantage of being in the powerful Coke system. It has the advantage of being in almost all Coke fountain accounts, restaurant accounts, and Sprite has just basically been a very, very strong dominant brand in the lemon-lime category for a long time.

DS:

You touched on something that's I think pretty important and that's the role of Sprite fountain. I mean, Coca-Cola is the dominant player in the US fountain industry. I mean they've got their soft drinks and McDonald's of course on a handshake agreement that goes way back. They have somewhere around 70% of the fountain market. PepsiCo's pushed really hard in recent years to try to make some ground up in that area. But that probably has helped in a large way to keep Sprite on top and to create trial with young people as well, I would think.

JS:

Definitely. And to your point, Duane, I think PepsiCo is probably in the next year or two going to once again make a run at trying to do dislodge some of Coke's dominant market share and the fountain business. But to succeed in fountain, you have to have a lemon-lime. You have to have a credible lemon-lime soft drink because of the importance for lemon-limes, lemon lime soda for kids. So Sierra Mist really never resonated in a major way. I think what Pepsi is saying is we need to compete in lemon-lime. If we're going to compete in fountain, we have to have a lemon-lime and I think they're going to make a run at it with Starry.

DS:

So do you think that fountain, in terms of this drink being able to truly break into Sprite's dominance, does that mean necessarily that they are going to have to continue to grow their presence in Fountain or is it as simple as getting it into their accounts that they have now and just making sure it's very front and center? Are you always going to have a situation where Sprite is going to lead this market in large part because of that huge fountain presence?

JS:

I think Sprite is going to be the dominant lemon-lime for a very long time to come and probably forever. But I think to your point, I think that my guess is Pepsi's fountain customers want a well-marketed lemon-lime soda. And I think if Pepsi wants to basically try to gain some share in the fountain business, they're going to have to go into a fountain accounts with a portfolio which just includes not just Pepsi, diet Pepsi and Mountain Dew, but also a well marketed credible lemon-lime. I think my guess is that's part of the motivation behind Starry.

DS:

It's a great point. It's almost as if you're PepsiCo, you don't actually have to beat Sprite at retail for this to work. You just have to make sure as you said that your fountain customers, the restaurants out there that you have have that credible lemon-lime and have something that can be competitive with the restaurant down the street that has Sprite basically.

JS:

Right, exactly. I mean think Sprite's dominance is safe. As I said, I think they probably have close to an 80 market share in lemon-lime. If PepsiCo can use Starry to get five or six share points, seven or eight share points even, it would be a very big success. But Sprite's dominance is going to continue.

DS:

Yeah. It's almost like you need Starry. If you're PepsiCo, you need Starry to be able to go in and win some more accounts from Coke because if you're able to have that credible lemon-lime that you talked about, you have a better chance of doing that, especially in accounts that are really important with multicultural demographics, that's important. But then if you can also take a few share points on the retail side, then that's obviously always a good thing. It helps your cash flow. It takes investment resources away from your competitor and that's kind of a lot of what these companies are trying to do. Just limit the amount of investment that the other guy has.

JS:

That's exactly right. I remember for many, many, many years, I think last year was an exception because of coming out of COVID. But for many, many years, probably two decades, there has not been volume growth in the carbonated soft drink category. So it's become a game of winning sheer from your opponent. So if Pepsi does a great job executing Starry and they can win some sheer points from Sprite, that translates into growth. I think that's also part of their motivation.

DS:

Again, these companies are constantly trying to figure out how to allocate resources though. I mean that's obviously very important, but the more that you could take some share points and create more resources for you, I mean that could translate into how decisions you make in other major brands as well in terms of how you allocate that investment.

JS:

Exactly, right. It's interesting you mentioned it in your introduction, but we haven't mentioned 7UP or I haven't mentioned 7UP. I mean back in the stone age when I bought Beverage Digest, 7UP was a much bigger brand. 7UP once upon a time was a Top 10 brand. It was probably over close to 250 million cases about the size of Coke Zero today and 7UP has gone through a long, long period of decline for a couple of reasons. I mean, a lot of people don't remember this, but some Coke bottlers before Sprite was introduced, some Coke bottlers handled 7UP. A lot of Pepsi bottles handled 7UP and as time went on and Coke and Pepsi wanted to basically only handle... Their bottlers to handle their own brands, 7UP slipped out of the cola systems and it's in the white system now, the independent system, which does a very good job at retail but does not have the reach of the Coke and Pepsi systems. And that over the years has caused... Probably the main thing that's caused the decline in 7UP.

DS:

That's interesting. So a lot of times some of this competition comes down to the distribution systems obviously and what sort of capacity do you have to get it in front of customers?

JS:

Exactly, exactly. I mean, the reach that the Coke and Pepsi system have. The independent system does a very good job in supermarkets, but in terms of reach into the sea stores, vending machines and the Coke and Pepsi system simply have more reach. As I said 7UP is a great brand, but not having access to a Cola system has been the primary reason for the decline in 7UP over the years.

DS:

Would there ever have been a time that PepsiCo could have struck some sort of deal similar to how they handled Dr. Pepper, struck some sort of deal with Keurig Dr. Pepper, which owns 7UP of course to distribute 7UP and fountain accounts, or what would be the barriers to that kind of thinking? Or is it just simply Pepsi is going to want to build their own brand because they want that as much of that profit pool for themselves as possible?

JS:

It's an interesting question. I think Pepsi wanted to build their own brand. There's a fascinating history to this and I'll just take a few seconds to basically talk about it. Back in the 1980s, Coke tried to buy Dr. Pepper and PepsiCo tried to buy 7UP. The US antitrust authorities blocked those deals. So we have a situation today where PepsiCo owns 7UP almost every place in the world outside the US and Keurig Dr. Pepper owns 7UP in the US.

So neither a company has been able to basically build a global brand and 7UP. 7UP is a terrific brand. Keurig Dr. Pepper has done a great job with it, but I think that's another point that it can't be a global brand because its ownership is split between PepsiCo and Keurig Dr. Pepper.

DS:

Yeah, excellent point. In fact, 7UP just rebranded, kind of a very modern rebranding approach overseas, internationally, and of course that was PepsiCo doing that, that owns those brand rights there. I don't expect to see that anytime soon here in the US. You never know. But that does create a really interesting bifurcation of that brand. And Sprite, of course through this period of dominance also is a global brand and that's very important, especially these days for a company Coca-Cola is looking to consolidate, have more of a centralized playbook that's then localized to have a big global brand like Sprite that you can get those kind of synergies and economies of scale with when it comes to marketing, advertising, even communications. That's been pretty important lately.

Of course, you've seen what they've done now with an entire rebrand of spite Sprite Zero Sugar globally as well. So that really to your point, really wouldn't work with a brand like 7UP, which is probably going to put it at a continued disadvantage to these other brands.

JS:

Exactly. As we talked about last week when we're talking about sports drinks, PepsiCo has done a really good job with Gatorade. Coke does a really good job with Sprite and Coke and the Coke bottlers are very competitive. They're going to try to basically prevent Starry from making much of an inroad. I think they'll largely be successful. I don't discount PepsiCo's execution ability or marketing ability, but the Coke bottlers and Coke are going to be very protective of Sprite.

DS:

Yeah. What are some of the tactics you would expect to see? That will be quite interesting. Because that's happened many times. I mean these companies get pretty good at figuring how to stymie people's launches, right?

JS:

I'll tell you a little story. Back in the late 1990s, PepsiCo decided to launch a new lemon-lime called Storm. Storm was differentiated from Sprite and 7UP and that it was a lemon-lime with caffeine and PepsiCo decided to basically launch Storm in a bunch of test markets. A Coke bottler who shall remain nameless in one of those test markets told me whether... I asked them how they were going to compete with PepsiCo's launch of Storm in his market and he chuckled and said to me the day they launched Storm, Sprite will be free. Well, Sprite wasn't free, but what Coke did, everything they needed to do with advertising, marketing, and promotional pricing to be sure that Storm did not make much of an inroad. Storm basically was taken out of the market before it ever became a national brand.

DS:

Do you foresee Sprite and Coke using that kind of a pricing lever now, especially given the very rational pricing environment that we're in, a pricing environment where they're meeting their higher inflationary costs on input costs by raising prices to try to cover that? You've got a situation where prices are going up on soft drinks. Consumers seem to continue to pay them. The elasticity models are not doing what they had expected. Do you think you still have an environment where you can, if your Sprite, pull that pricing level when it comes to Starry and try to slow down that launch and slow down what they can do at launch?

JS:

Rather than speculate what Coke will do, I think if I were sitting in Coke's headquarters in Atlanta, I'd be watching very carefully what kind of deals PepsiCo is lining up with retailers for Starry for the summer holiday weekends. I'd be doing intelligence and what kind of pricing PepsiCo and its bottlers are looking at it for Starry and I'd be very sure that I had aggressive promotions ready to go with Sprite depending upon what it looked like PepsiCo and its bottlers are going to do with Starry late this spring and over the summer.

DS:

PepsiCo is clearly investing in this launch of course as they will do with major launches. They did it with LIFEWTR. I mean you see a pretty high ACB pretty quickly across, especially large format. You've seen the displays pop up at the grocery stores. Incremental floor displays. They're going all out. That'll of course create some excitement and lift early on. We've seen before that'll launches like that eventually level off and sometimes I think as you used to call it boom-splat sort of scenarios. What do you expect will happen in this situation?

JS:

To answer that question we're going to have to watch and see what PepsiCo does with Starry, not just this summer, but in 2024, 2025 and 2026. When Coke Zero was launched, there was a bit of boom-splat. It gained my share and then started falling back. Coke basically decided that Coke Zero was going to be one of its main brands and they stuck with it, and stuck with it, and stuck with it. And today Coke Zero is probably a 250 million case brand.

If PepsiCo basically looks at Starry as a three or four or five-year build and keeps at it, they will gain some share. But as I said, I don't think they'll gain a lot of share. But if they can gain five or six share points and use Starry in the fountain business effectively, I think Starry will be here to stay. If they don't do that, my guess is four or five years from now, we'll be talking about the next PepsiCo lemon-lime.

DS:

So back to 7UP for just a minute. I'm kind of curious, what is the role for 7UP when it comes to KDP these days? Basically, it gives them a really good supermarket play? I mean you see plenty of 7UP on the shelves, so it's creating an option for consumers, not so much a fountain play. If you're KDP, how are you viewing 7UP? What's the role of it? Is there any room if this works to actually capitalize on that yourself, if you're KDP. If this Starry versus Sprite thing actually takes off and Starry can make up some ground, does 7UP capitalize somehow?

JS:

Again, as you said a few minutes ago, to understand this industry, you've got to look at distribution. Keurig Dr. Pepper has large and relatively large carbonated soft drink brands. The biggest is Dr. Pepper. But Dr. Pepper is largely distributed by Coke and Pepsi bottlers. So the independent system does not have much Dr. Pepper. 7UP is a lead brand for many independent bottlers who do not have Dr. Pepper. It's in a very important brand in supermarkets and in other retail channels for independent bottlers. I think that 7UP is... I think 7UP has a lot of brand loyalty.

It's not a huge brand anymore, but I think it will hold its own, maybe grow a little bit over the years, maybe not. I don't see it becoming a much bigger brand again, but it will hold its own. It has a place in the carbonated soft drink business today.

DS:

So looking at Starry now, Starry is going to be geared towards gen Z. The brand is set up in such a way that it's supposed to be inspiring for them, et cetera. I think one of the other things at play here, which PepsiCo is not actually going to be out front talking about so much, but it's clearly an element in this is the multicultural element. PepsiCo now has the NBA of course. They have a Hispanic business unit that is very good at understanding Latino and Hispanic markets, understanding the diversity within those markets, understanding how to be relevant to those markets.

So you see a situation lining up here where you almost need a Starry and you need a Starry to be positioned in the way it is to make sure you capitalize on these very important demographic trends here in the US. In that regard, if they can pull this off, this could be quite an interesting path to that five or six SharePoint, whatever it might be as you talk about.

JS:

Duane, let's go back for a minute to your December conference in New York. You had a panel of three Gen Z young adults on the panel. By the way, I got to commend you. I thought it was one of the best segments of any beverage conference I've been to in many, many years. But you asked these young Gen Z folks a bunch of questions. And if my memory is correct, they did not wax particularly enthusiastically about soft drinks, carbonated soft drinks.

So I'm curious to know what PepsiCo is going to do to try to basically create a brand that's going to appeal to Gen Z. We may have to wait to see the answer on that, but I think it's going to be a challenge.

DS:

Yeah. To the Gen Z point, I think you're right. I mean Gen Z obviously in some ways you talk about it as a monolith because that's just kind of an easy way to describe this new generation, but clearly Generation Z has plenty of variance to it. I would say that probably what Starry is doing is really homing in large part on multicultural Gen Z consumers. And that's going to be the sweet spot I think for this brand. But you've also got the zero sugar version, which is appealing to Gen Z, less sugar. So I think for all those reasons, they have a chance at making a go with this.

Now, whenever you create a new brand and you think in these marketing groups that you've kind of figured out a generation, I think it's hard to say that that's always successful and there's a certain amount of risk in that as well. And of course these days it's all about being organic and authentic and young people are quite fickle, as many consumers are. And they're on to the new next best thing. So the question is can you find a way to really be relevant to them as they shift from trend to trend two?

Can you keep that brand relevant as that Gen Z matures and moves into new sorts of trends as well? Does Starry and this brand new platform give you an ability to do that while shedding sort of the baggage of a previous brand idea? I think that's going to be clearly the key for PepsiCo here. And again, just see if they can execute against that over time.

JS:

I think that's right. I also think that PepsiCo... I mean, Sierra Mist has not been a success. So if you take away Sierra Mist, PepsiCo needs to have a brand which can access younger kids whose parents may not want them to drink a caffeinated drink. Again, if PepsiCo can have a successful Starry, accessing the younger consumers I think could be a benefit that they could achieve.

DS:

Hey, John, thanks so much. Really appreciate you joining us again today. Interesting conversation as always, and I'll look forward to more.

Speaker 4:

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