'Net Positive': PepsiCo CEO Defends Aspartame Decision

Indra Nooyi Says Company 'Did Not Anticipate' Loyalist's Love of Original Diet Pepsi Formula

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Diet Pepsi
Diet Pepsi Credit: PepsiCo

PepsiCo CEO Indra Nooyi on Thursday defended the company's decision to bring back aspartame-sweetened Diet Pepsi, while also selling an aspartame-free version. When quizzed about the recently announced move on an earnings call she predicted it would be a "net positive for us." But she also conceded that the company misread the attachment of some consumers to the aspartame version.

"When we launched Diet Pepsi aspartame-free, it's because there was a huge consumer need for that product," she said. "What we did not anticipate is that there's a group of consumers that absolutely loved the original Diet Pepsi. And in the cola category in particular, because it's been optimized over years, people get incredibly fastidious about their products and don't want to have any changes."

PepsiCo yanked aspartame from Diet Pepsi late last year amid consumer health concerns about the much-maligned sweetener. But in the wake of accelerating sales declines, the company in late June announced it is bringing back the aspartame version beginning in September. It will be marketed as Diet Pepsi "Classic Sweetener Blend," while the aspartame-free version will remain on shelves as the flagship diet cola.

Ms. Nooyi on the earnings call stood by the decision to remove aspartame. "If you go and poll consumers today and read all the social-media reports, there's still trepidation about aspartame," she said. "There's no scientific reason for that, but people are somehow worried about aspartame. And when we launched Diet Pepsi aspartame-free, it's because there was a huge consumer need for that product."

When the new strategy was announced in June, "the few people who thought aspartame-free was going away wrote me some pretty tough emails. And so there is a very loyal group that is thrilled that we have an aspartame-free following," she said.

But PepsiCo must now manage two diet versions in addition to other Pepsi products, including regular Pepsi and Pepsi Max, which is being rebranded as Pepsi Zero Sugar. Other varieties include Pepsi Cherry Vanilla; Caffeine Free Pepsi; Caffeine Free Diet Pepsi; Pepsi-Cola with real sugar; Pepsi-Cola Vanilla with real sugar; Pepsi Wild Cherry; Pepsi-Cola Wild Cherry with real sugar; Diet Pepsi Wild Cherry; Pepsi Limon with lime juice; a stevia-sweetened cola called Pepsi True; and mid-calorie Pepsi Next, which uses a combination of artificial sweeteners and sugar.

The company is also bringing back Crystal Pepsi for eight weeks this summer starting today. Also, PepsiCo earlier this year launched a new premium soda brand called 1893 that uses the Pepsi-Cola trademark.

On the earnings call, Ms. Nooyi was asked about the risk of fragmenting the diet portfolio further by bringing back the aspartame offering.

Ms. Nooyi responded by pointing to growing demand for niche products. "And that's why it was important for us to own the distribution system because once you have control over the distribution system, you can pump a lot of niche products through it. All our craft products, all of those are low-volume products. So we have to learn how to handle complexity, not walk away from it."

The expanding Pepsi line-up comes as the soda category continues to shrink. Retail sales volume for regular Pepsi fell 3.8% in the first quarter while Diet Pepsi dropped 10.6%, according to Beverage Digest. Coke volume fell 1.2%, while Diet Coke declined 5.7%. Of the 10 largest carbonated soft drink brands, only one brand grew -- Sprite -- while Dr Pepper came in flat, according to Beverage Digest.

On the earnings call, Ms. Nooyi urged analysts to look beyond soda trends and focus on the broader beverage category known within the industry as LRB, or liquid refreshment beverage.

"The sooner we can shift our frame of reference, the better it is," Ms. Nooyi said. "Because just beating a category that is in ... decline, just beating that all the time is not a game to play. That's not a game that is going to guarantee good results."

She added: "If we play this rich LRB game, multi-category, placing the bets where the growth is and where the consumer is going, I think we are better off. So my request to you and to all of you who are tracking the company in this category, expand your aperture."

The U.S. LRB market -- which includes fast-growing categories like bottled water, energy drinks and ready-to-drink coffee -- grew 2.8% in 2015 to 31.8 billion gallons, industry tracker Beverage Marketing Corporation reported in March. That is up from 2.2% growth in 2014. Among eight beverage segments, carbonated soft drinks and fruit beverages were the only ones to decline. Ready-to-drink coffee surged 16.5%, energy drinks grew 9.8% and bottled water increased 7.9%, according to Beverage Marketing Corp.

Still, the industry remains reliant on sodas. They account for five of the 10 largest beverage trademarks in 2015, Beverage Marketing Corp stated. But four bottled water brands are now in the top 10, including Nestle Pure Life, Poland Spring, Coke-owned Dasani and PepsiCo's Aquafina

Aquafina Sparkling
Aquafina Sparkling Credit: PepsiCo

Some of PepsiCo's new beverage offerings include Aquafina Sparkling, a carbonated version of the Aquafina water brand that was launched in second quarter. Flavors include black cherry dragonfruit and orange grapefruit that contain 10 calories per 12-ounce can. PepsiCo also recently debuted a line of cold-pressed juices marketed under the Naked Juice brand.

For the second quarter PepsiCo reported organic revenue growth of 1% for its North American beverage business, while volume fell 1%. Organic revenue -- which excludes foreign exchange impacts and structural changes -- grew 3.3% across all divisions.

Earnings per share rose to $1.35 a share, excluding some items, exceeding analyst estimates. PepsiCo boosted its full-year core earnings per share outlook to a 9% increase, up from 8%. Positives from the second quarter included better-than-expected revenue growth from Quaker Foods North America and better-than-expected operating profit from Quaker, Frito-Lay North America and North American Beverages, according to J.P. Morgan.

During the earnings call Ms. Nooyi was quizzed about her future aspirations. One analyst suggested investors are wondering if she has political ambitions. She responded that "in the foreseeable future, so next several years, I see myself running PepsiCo."

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