Tag: soda

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The soda market is flat, but not for Dr Pepper

The soda market is flat, but not for Dr Pepper


New York
CNN
 — 

In the pantheon of sodas, Dr Pepper is the odd one out: It doesn’t have the popularity or sales of Coca-Cola or Pepsi, you can’t use it in a standard cocktail, and it doesn’t fall neatly into a category like cola or root beer.

For decades, the peppery soda has marketed its blend of 23 flavors as a unique choice for discerning soda drinkers. Over the years Dr Pepper has found success as a quirky alternative to Coke and Pepsi.

Today, Dr Pepper is hardly a scrappy underdog — it’s the hero brand in Keurig Dr Pepper

(KDP) which, along with Coca-Cola

(KO) and PepsiCo

(PEP), make up the three largest soda companies in the $37 billion US market, as measured by NielsenIQ in retail and convenience stores.

And recently, Dr Pepper has been gaining ground on its competitors, even as the overall soda market goes flat.

Keurig Dr Pepper is the third-largest soda maker in the country.

Dr Pepper soda grew its dollar share by 9{cfdf3f5372635aeb15fd3e2aecc7cb5d7150695e02bd72e0a44f1581164ad809} from 2003 to 2021, compared to a 26{cfdf3f5372635aeb15fd3e2aecc7cb5d7150695e02bd72e0a44f1581164ad809} drop in the carbonated soft drinks category overall, according to Keurig Dr Pepper, citing IRI and the Beverage Digest factbook. Today, Dr Pepper is the fourth most popular soda in the country after Coke, Pepsi and Mountain Dew.

“Over the past 20 years, carbonated soft drinks have been declining in volume,” said Duane Stanford, editor of Beverage Digest. “One of the bright spots … has been Dr Pepper.”

Founded in 1885 in Waco, Texas, Dr Pepper was the first in a wave of 19th-century upstart soda companies. (It dropped the period in the 1950s for design reasons.) The little brand rose to prominence in the latter half of the 20th century and helped shape the soda industry, all while cultivating its reputation as an outsider.

The drink was invented by Charles Alderton, a pharmacist at a drug store owned by Wade Morrison, who is credited with patenting the drink and naming it.

Legend has it that Morrison named the beverage after one Charles Pepper, the father of a woman he loved, hoping that the gesture would facilitate a match. That’s the tale on the Dr Pepper website. But Joy Summar-Smith, associate director of the Dr Pepper Museum in Waco, said there are several origin stories, and this one doesn’t hold up.

“By the time [Morrison] came across Dr. Pepper he was married and he had a son,” said Summar-Smith.

Coca-Cola was created in 1886. Pepsi was invented in the 1890s, but got its name in 1898.

“The soft drink industry itself, as a whole, was still really trying to figure itself out in the late 1800s, early 1900s,” Summar-Smith said. “Each town had their own soft drink manufacturing facility.”

Coca-Cola established itself most quickly, aided by its invention of the coupon, which offered free samples of its new beverage. Pepsi positioned itself as a less expensive competitor to Coke.

Ads for Dr Pepper and Coca-Cola on a store in North Carolina, in April 1938.

While Coke and Pepsi were making waves, Dr Pepper “just didn’t push it that hard,” said Tristan Donovan, author of “Fizz: How Soda Shook Up the World.”

Early in the 20th century, Dr Pepper encouraged customers to drink a Dr Pepper three times a day, at around 10 a.m., 2 p.m. and 4 p.m., to keep their energy up. While successful, the campaign never focused on the product’s unique, non-cola flavor.

In the 1950s, Dr Pepper branded itself “the friendly Pepper-Upper,” once again focusing on the rush of energy you could get from any can of soda.

Then, everything changed.

In the early 20th century, national bottlers that worked with with Coke or Pepsi shied away from Dr Pepper, fearing they would run afoul of agreements that barred them from partnering with a competitor. As a result, Dr Pepper had little national distribution, focusing primarily on Texas and nearby states.

In the 1960s, PepsiCo sued Dr Pepper for trademark infringement. Dr Pepper countered, accusing Pepsi of denying the beverage entry to its distribution platform. In 1963, a judge ruled for the bottler, opening the door to the product’s national expansion.​​

Dr Pepper “pulled off a legal coup that gave it the necessary leg up: It argued effectively in a US District Court that Dr Pepper was not a cola,” a 1984 article in D Magazine explained. Or as the Federal Trade Commission put it, “the suit opened up PepsiCo and Coca-Cola bottlers to Dr Pepper and its sales rose immediately.”

With new-found access to the whole country, the brand “started promoting [itself] much more heavily,” said Donovan, the author of “Fizz.”

Through the 1970s, Dr Pepper marketed itself to a national audience as a unique flavor, a shift that D Magazine said “fleshed out an identity for Dr Pepper that may be its most formidable asset.” In 1977, the company launched its “Be a Pepper” campaign, encouraging people to identify as Dr Pepper drinkers.

The

Today, Dr Pepper advertises itself as a treat, using a pint-sized mascot called Lil’ Sweet in its commercials. Another campaign, Fanville, is set in a fictionalized world where people are obsessed with college football and also Dr Pepper, positioning the beverage as a cult favorite.

After Dr Pepper established itself as an alternative to mainstream colas, it launched on a path that ultimately made it part of the country’s third-largest soft drink maker, Keurig Dr Pepper.

During the wave of mega-mergers in the 1980s, Coca-Cola tried to scoop up Dr Pepper.

In 1986, soon after PepsiCo announced its intention to purchase 7Up, Coca-Cola said it had agreed to acquire Dr Pepper. The plans would have made Coke and Pepsi the most formidable players in the market by far, the Los Angeles Times reported at the time.

But both Coke’s and Pepsi’s deals were blocked, as the FTC decided the beverages were similar enough to pose a possible antitrust threat.

A whirlwind series of mergers, acquisitions and spinoffs ensued. Dr Pepper and 7Up merged in the late 1980s. Over the years, Cadbury Schweppes took stakes in the combined company and, eventually, full ownership of the brands. In 2008 Cadbury spun off its North American beverage division to create the Dr Pepper Snapple Group. A decade later, Keurig Green Mountain merged with that company, creating Keurig Dr Pepper.

Bottles of Dr. Pepper move down a production line at the Swire Coca-Cola bottling plant in Utah.

Today, KDP still trails behind Coca-Cola and PepsiCo, but it’s narrowing the gap.

By volume, Coca-Cola controlled about 40{cfdf3f5372635aeb15fd3e2aecc7cb5d7150695e02bd72e0a44f1581164ad809} of the US retail market in the first nine months of 2022, followed by PepsiCo with about 29{cfdf3f5372635aeb15fd3e2aecc7cb5d7150695e02bd72e0a44f1581164ad809} and Keurig Dr Pepper with roughly 25{cfdf3f5372635aeb15fd3e2aecc7cb5d7150695e02bd72e0a44f1581164ad809}, according to Beverage Digest’s data.

Compared to the year before, PepsiCo’s share fell by 1{cfdf3f5372635aeb15fd3e2aecc7cb5d7150695e02bd72e0a44f1581164ad809}, while Keurig Dr Pepper’s ticked up. And over the years, the Dr Pepper brand has been gaining momentum while some of its competitors struggle. That might be because of consumers’ increasing interest in flavored soft drinks, said Stanford, the publication’s editor.

There are other advantages to existing outside of the cola dichotomy. Food-service providers typically have an agreement with either Coke or Pepsi for its soda fountains, and one fountain won’t feature products made by the other. But the fountains often offer Dr Pepper, making it a widely available choice.

“Dr Pepper is the number one most differentiated trademark in beverage — not just soft drinks, but in beverage,” said Derek Dabrowski, general manager of juices, mixers and sauces at KDP. People reach for Dr Pepper when they want a treat, he added. That’s “where we have been winning.”

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‘Diet’ soda is disappearing from store shelves

“Zero sugar” has replaced “diet” for many no-calorie soft drinks. Canada Dry and Schweppes ginger ales, 7Up, A&W and Sunkist, made by Keurig Dr Pepper, now label their diet drinks “zero sugar.” (One exception is the namesake Dr Pepper brand, which will still come in “diet” packaging in addition to a different zero sugar version.)

The reason for the overhaul: The word “diet” has fallen out of fashion — especially for Millennials and Gen Z-ers.

“No Gen Z wants to be on a diet these days,” he said, adding that the company is “going to continue to innovate and support that business.”

Diet 7UP is dead. Long live 7UP Zero Sugar.

But distaste for the word diet doesn’t signal an aversion to no-calorie beverages. The diet soda segment, which includes diet and zero-calorie branded drinks, has ballooned since it first hit the mainstream in the 1960s. In 2020, the US retail diet carbonated soft drink market hit $11.2 billion, according to Mintel, a market research company.

The segment is still far smaller than the market for regular carbonated soft drinks, which was $28.2 billion in 2020, but it’s growing much more quickly. Diet soda sales are up about 19.5{cfdf3f5372635aeb15fd3e2aecc7cb5d7150695e02bd72e0a44f1581164ad809} from 2018, compared to just 8.4{cfdf3f5372635aeb15fd3e2aecc7cb5d7150695e02bd72e0a44f1581164ad809} for regular soda in the same period, making it an attractive segment for soda makers seeking growth.

Evolving attitudes toward dieting as a concept mean soda makers have to de-emphasize diet branding as they steam ahead with zero-sugar offerings — even when, as in the case of those brands owned by Keurig Dr Pepper, they’re selling the same exact drink.

The tactic could help soda makers bring more consumers, especially younger ones, into the fold. The industry needs those customers if it wants to grow the soda market.

Diet sodas become popular in the 1960s.

The birth of diet colas

Diet drinks first became popular in the 1960s.

Diet Rite, a no-calorie drink from the soda maker Royal Crown Cola, was launched in 1958 “as an option for diabetics and other consumers who needed to limit their sugar intake,” wrote Emily Contois, author of “Diners, Dudes, and Diets: How Gender and Power Collide in Food Media and Culture,” in a 2020 piece for Jezebel.

“It was first stocked among medicines rather than soft drinks, but focus soon shifted to the growing number of weight loss dieters nationwide,” she wrote. Diet Rite was a hit, prompting Coca-Cola to introduce Tab in 1963, and Pepsi to start selling Diet Pepsi a year later.

The segment gained steam in the following years. Looking to expand beyond Tab, Coca-Cola launched Diet Coke in 1982.

At the time, Coca-Cola was facing many of the same challenges it is fighting today: It needed to reinvigorate the Coca-Cola brand, and thought adding a Coke-branded diet option could help.

Coke is changing the recipe of a popular drink. A lot could go wrong
A company blog post detailing the launch of Diet Coke noted that “colas accounted for 60{cfdf3f5372635aeb15fd3e2aecc7cb5d7150695e02bd72e0a44f1581164ad809} of all soft drink sales in the US back then, but diets were growing three times faster than the rest of the category. Diet Coke was seen as the right product for the right time.”

The company grappled with what to name the product. It considered using the moniker “sugar free” instead of diet, but “many saw it as a slur on Coca-Cola’s main ingredient,” according to the post. Ultimately, the company went with “diet” because it “was the most straightforward articulation of the promise of the brand.”

But a few decades later, Coca-Cola returned to the idea of a sugar-free-branded product. This time, it wanted to attract the demographics that seemed to be avoiding the company’s diet beverages: younger consumers and men.

Zero hits the scene

In 2005, Coca-Cola introduced Coke Zero in the United States. The Baltimore Sun explained at the time that Zero’s “marketing is geared to a demographic, such as young people and the most macho of men, who see a stigma attached to the word diet.”

Other companies also wanted a more neutral way to advertise no-sugar products.

Eliminating the word “diet” creates a “gender-free way to talk about the same topic,” said Jim Watson, senior beverage analyst at Rabobank, who told CNN Business that “diet definitely got taken over as something for women.”

But the arrival of zero-sugar drinks wasn’t just about gender: It marked a turning point for the overall popularity of diet drinks. Alex Beckett, global food and drink analyst at Mintel, said the word diet “started falling out of fashion … with the rise of zero.”

Coke Zero Sugar got a makeover this year, with new cans and an updated recipe.

Billing a drink as free of calories and sugar is also about addressing changing ideas about health, and highlighting the absence of sugar from the drink as a positive attribute in itself.

“While the diet designation may be associated with strict regimes or deprivation, the ‘zero’ designation has fewer negative connotations, corresponding with simply a cleaner profile,” according to a Mintel report from April.

For Keurig, the shift seems to be working. Recent zero sugar launches alone were responsible for one percentage point of market-share gains for the company, according to Derek Hopkins, president of cold beverages at Keurig Dr Pepper (KDP), who detailed the company’s finances during the company’s investor day in October.
Coca-Cola (KO) has also seen success with its Zero offering, which was rebranded to Coca-Cola Zero Sugar in 2017 and got another update this year. “Coca-Cola Zero Sugar’s new recipe has rolled out in more than 50 countries and has had accelerated growth in the last three months,” said Coke CEO James Quincey during an analyst call in October.

The new recipe arrived on shelves in the US this summer, and since then “we have seen that 23{cfdf3f5372635aeb15fd3e2aecc7cb5d7150695e02bd72e0a44f1581164ad809} of current Coke Zero Sugar consumers are new,” said Alex Ebanks, a spokesperson for the company, adding that Coca-Cola will continue to invest in the product next year and beyond.

Competition heats up

While big brands sharpen their focus on their zero-sugar offerings, they face competition from other categories and upstarts with novel ideas.

One major competitor, according to Mintel’s Beckett, is sparkling water.

“Many people are shifting over … from carbonated soft drinks to sparkling waters,” he said, because those drinks often have no sweeteners, no calories, and “have a more of a health healthy image.”

PepsiCo (PEP) and Coca-Cola have offered their own sparkling waters to get in on the trend. Coca-Cola owns Topo Chico and has a line of caffeinated sparkling water called Aha, while PepsiCo sells Bubly.

Beyond sparkling waters, competitors are entering the space with fresh spins on sodas. For example: Sodas that promote gut health.

Olipop, a startup that says it makes “a new kind of soda,” sells throwback flavors like classic root beer, vintage cola and others. The sodas, which range from about 35-50 calories each, are made with a mix of ingredients like Jerusalem artichoke and Cassava root that the company says support digestive health. Poppi, which also sells traditional soda flavors in addition to fruit flavors, makes a similar claim, emblazoning a “for a healthy gut” label on the front of its brightly colored cans.

“​​Consumers are voting with our wallets, and sugar is something that people definitely want less of in our lives,” said Danny Stepper, CEO of LA Libations, a beverage company incubator. “That opens the door for a lot of opportunities and categories,” he said. “Consumers want new things, so that’s opening the door to new ideas.”