Pepsi's Innovative Ingredients? Protein, Coconut Water

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Mark Lennihan/AP
By Brian Sozzi

PepsiCo (PEP) thinks that protein drinks and low-calorie sparkling beverages to counter the slow growth of the U.S. carbonated beverage industry.

"Expect to see from us an interesting number of mid- to low-calorie sparkling beverage platforms," in 2015 said Simon Lowden, Pepsi's chief marketing officer of Pepsi Beverages North America, in an interview with TheStreet. Lowden said that "Tropicana will see news around sparkling juices and waters," while "you will see protein as an ingredient come in across more and more beverages."

Protein could be added to Gatorade, which will come out with more energy chews and bars. Year-to-date volume for Gatorade sports drinks have increased by a mid-single digit percentage.

Coconut water, an industry that ballooned to $400 million in U.S. sales last year, according to research firm Euromonitor, is being targeted in a larger way by Pepsi aside from it leveraging its majority stake in O.N.E. coconut water. O.N.E was third in terms of 2013 annual sales in the coconut water category, behind the privately held Vita Coco and Zico, which is owned by Coca-Cola (KO). "You will see more news from us on coconut water next year as an ingredient across brands like Mountain Dew," said Lowden.

A Focus on Health

The healthy theme that underlies Pepsi's innovation push next year, and also recently at Coca-Cola with its Life product that has 35 percent fewer calories than a typical cola, is meant to counteract demand shifts in the carbonated soda industry. "In the last 18 months, the conversation in the U.S. has gone from 'How many calories am I taking in?' to 'Is it artificial?' "

Pepsi has jumped ahead of Coca-Cola in the race to reignite consumer interest in soda by entering the emerging craft soda industry with its new brand Caleb's Kola.

The naturally sweetened soda in a brown glass bottle is named after Pepsi's founder, Caleb Bradham. Available at Costco (COST) locations in Maryland, New York, Virginia and Washington, the eventual wider rollout of the premium product will help Pepsi boost revenue in its carbonated drinks portfolio, which has been hurt by the commodities businesses of regular and diet colas.

A Few Cases of Craft Sodas

Craft sodas are traditionally made in smaller batches, and feature unique flavor combos like green apple and berry lemonade. "We are finding millennials, in particular, that this authenticity, and its ingredient history, is so important with them, they believe in stories," remarked Lowden. "I think you would be surprised it comes from PepsiCo."

Caleb's Kola will be competing with industry stalwarts Boylan's Soda and offerings from Jones Soda (JSDA). Beverage Digest estimated that craft sodas, although a long-term sales opportunity for PepsiCo and likely Coca-Cola, only have 1 percent share of the roughly 9 billion-case U.S. soda market. The small market share of craft soda highlights the uphill battle for Pepsi's marketing team in trying to get consumers to pay more for a soda that looks the same as others found in glass bottles on retail shelves.

Both Pepsi and Coca-Cola need of whatever innovation -- ingredient or packaging -- their respective R&D teams can cook up to bring sustainable growth back to their U.S. carbonated soft drink portfolios. Overall soda volumes fell an estimated 3 percent in 2013, the ninth straight yearly contraction, according to the latest data from Beverage Digest. Further, estimated U.S. retail sales of carbonated soft drinks declined 1 percent to $76.3 billion, the first downturn in dollar terms in at least 15 years, underscoring the need to boost volumes amid limited pricing power.

In the third quarter, Pepsi's North America non-carbonated beverage volume grew slightly and its carbonated soft drink volume fell 1.5 percent. At Coca-Cola, sparkling and still beverage volume in the Americas each declined 1 percent. Coca-Cola didn't respond to requests for comment.
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