Is Starbucks putting Coca-Cola and Pepsi out of business?

Is Coca Cola Still a Soda Favorite?
Is Coca Cola Still a Soda Favorite?

Soda consumption is falling in the US, with the accepted reason being that Americans are turning away from sugary beverages.

But what if the reason isn't nutrition — it's because a new competitor is stealing away business?

"Starbucks has taken the [carbonated soda] occasion," said RBC analyst Nik Modi in June at Beverage Digest's Future Smarts conference, noting that many of the coffee chain's beverages are more caloric and sugar-packed than top soda brands.

"Twenty years ago, people used to wake up with a Diet Coke or a Diet Pepsi," said Modi. "At around 2 o'clock, they'd have another and take a break. Walk in front of a Starbucks at 8 a.m. and 2 p.m. and tell me how long the lines are."

In 1995, Starbucks served its first Frappuccino — a super-sugary beverage that often has more calories than a can of Coke and that has become a huge part of the coffee chain's business. At the time, the chain had 677 locations. Twenty-one years later, the chain has more than 22,000 locations around the world.

With the rise of Starbucks, the coffee industry in general has seen tremendous growth. In the last four years, coffee has gone from a $7 billion annual industry (for the 52 weeks ending June 2, 2012) to a $9 billion business (for the 52 weeks ending May 28, 2016), according to Nielsen data.

Meanwhile, soda sales in the US per capita have dropped 25% since 1998.

How has Starbucks succeeded while the biggest brands at Coca-Cola and Pepsi have fallen?

According to Modi, the coffee chain has provided customers with something that soda giants forgot — purpose.

"The beverage industry is not about health and wellness — it's about functionality and purpose," he said. "Twenty years ago, the function and purpose for Coke and Pepsi were much more wide than they are today."

Modi says that consumers still love caffeine, bubbles, and sugar. They just aren't going to Coke and Pepsi to fulfill those needs any more.

The most successful brands in the beverage industry in recent years have been able to pinpoint a purpose, and provide a solution, often related to health.

In the past 15 years, single-serve bottled-water sales grew 76% by volume. Sports drinks grew 20%, while bottled, ready-to-drink tea grew a whopping 91%. In the last four years, standouts in the soda industry have been Sprite, Wild Cherry Pepsi, Fanta, and Mello Yello — brands that aren't necessarily healthy, but that avoid the negative PR associated with Pepsi and Coke.

The success of these beverages, as well as Starbucks' drinks, such as the S'mores Frappuccino and the Pumpkin Spice Latte, prove, in Modi's opinion, that the issue isn't sugar — it's marketing.

Modi says that recent soda advertising, prior to the current Taste the Feeling campaign, cut consumers and their reasons for drinking soda out of the equation, failing the consumer.

Complicating matters is the consolidated effort of health and nutrition groups in the fight against the soda industry.

"Soda follows tobacco's playbook to the letter," Marion Nestle, a professor of nutrition, food studies, and public health at New York University, told Business Insider.

Taxes and other government regulation, efforts to prevent marketing to children, and education campaigns have focused on Pepsi and Coke to a much greater degree than Starbucks, energy drinks, or even other types of soda.

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This negative PR, combined with what Modi considers sub-par marketing, has helped drive consumers to different beverages to fulfill their morning caffeination and mid-afternoon break needs.

Starbucks is a company that is acutely aware of consumer perceptions, carefully balancing its menu with both gourmet, coffee-snob approved beverages and sweet, sugary options to appease all customers. This, combined with the company's famously progressive attitude, has helped the chain avoid much of the backlash associated with other companies selling sweet drinks.

PepsiCo and Coca-Cola seem to be taking notes from the chain when it comes to diversification of beverages.

Coke announced in April that sales of noncarbonated "still" beverages, including water and Minute Maid, had increased 7%. Its packaged-water volume increased in the double digits in the first quarter of 2016, as did other healthier, ready-to-drink options, like sports drinks (7%) and tea (2%).

PepsiCo CEO Indra Nooyi said in April that less than 25% of the company's global sales are from soda. Instead, the company is focusing on healthy snacks and noncarbonated beverages — a process the company calls "future-proofing."

Starbucks has exploded in the last 20 years — and is showing no sign of slowing. If PepsiCo and Coca-Cola want to compete, they're going to have to invest in beverages of their own that fulfill customers' needs, like bottled water, energy drinks, and tea.

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