Pepsi, Coke: We Satisfy Your 'Need States'

As Soda Reels, Beverage Behemoths Jump Into Functional-Drink Market

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CHICAGO (AdAge.com) -- People once drank because they were thirsty. Now they drink to hydrate, boost energy, relax, refresh or beautify.

Beverages "used to be an accessory" to food, said Larry Light, chairman-CEO of brand consultant Arcature, but no more. "Now beverages are on the leading edge of a changing world. It's a huge social mind-set change."

Call it clever or marketing gone wild, but the paradigm has shifted as small, nimble companies rack up big sales by creating products to satisfy a wide range of "need states" some consumers never realized they had.

Belatedly, the beverage behemoths are also heeding the call, finally bringing their A game to functional beverages as sales in the $68 billion soft-drink segment slide and upstarts such as Energy Brands' Glaceau, Jones Soda and Red Bull prove they can go the distance.

A year ago Coke overhauled its beverage portfolio around 17 "need states"-including refreshment, relaxation, hydration, energy boost, weight management, heart health, etc.-with a particular focus on 10 of them. And on Oct. 30, No. 3 Cadbury Schweppes Americas Beverages announced to investors its strategy to boost the health quotient of its portfolio.

But it's No. 2 PepsiCo that seems to be blazing a trail. Last month it responded with more than a dozen products aimed at satisfying eight yens of consumers, while also restaging its flagging fizzy-drink portfolio with new packaging, tastes and sweeteners (see chart). "Carbonated soft drinks used to answer all need states," said Pepsi-Cola North America CEO Dawn Hudson in an Oct. 23 meeting with investors. But Pepsi's core soft-drink brands are "losing frequency to other beverages," she said.

No doubt about it, soft-drinks still compose the bulk of the $100 billion beverage refreshment category in the U.S. But sales of bubbly drinks are down 1% to 2% while bottled water grew 22%, sports drinks grew 23% and teas grew 15%. Research from Euromonitor International predicts the $138 billion global health-and-wellness soft-drink segment will expand another $38 billion within four years.

Consumer attitudes about beverages forecast more of the same. About half of consumers polled exclusively for Advertising Age by Synovate in its weekly ENation poll said they are more likely to consider a beverage's nutritional value, and 63% said they are careful to avoid beverages that may have ingredients harmful to their health.

None of this is lost on Pepsi, which is expanding its bottled-water line with Aquafina Alive, which boasts a splash of juice and antioxidant vitamins to "cleanse and replenish." Since its Gatorade and Propel brands capture just 14% of the so-called active-hydration market and are consumed only one out of five times those consumers drink a beverage, the marketer is launching Gatorade AM, a lighter, blended formula with traditional morning flavors aimed at morning exercisers. It also is launching Propel powder packets for use with bottled water to create "point of sweat" availability and portability.

Then there's Ocean Spray Refreshers, an all-natural juice line, and its Brisk beverage line, which will get green-tea and diet formulas for 2007 as part of a relaunch with new graphics. The marketer will reformulate Lipton Originals with cane sugar and rebrand it Lipton Pure Leaf. Similar transformations are planned for Dole and Sobe.

Looking for more heart health? Try Pepsi's Tropicana Essentials variety with Omega 3, which will hit shelves alongside Tropicana Organic juices and Tropicana Pure 100% juice blends fortified with antioxidants.

An indication of how soft drinks are thrust into a much larger competitive set can be found in the remarks of Randy Gier, chief consumer officer for the Cadbury Schweppes Americas Beverages, who on a recent analyst call outlined his strategy to capture a bigger "share of bladder." Not only are they going up against other beverages, he said, but soft drinks are now rivals to what used to be an old companion: food. In noting how functional beverages are driving the market's growth, he said: "Consumers are increasingly looking to beverages to supplant food for a variety of caloric and nutritional needs."

Cadbury is developing a formula for its diet version of 7Up with a new sweetener to launch later this month. With its Snapple brand still struggling amid scores of higher- and lower-price competitors, it will also continue to roll out a superpremium version of Snapple. Its white-tea variety has been out since April; its green variety, which claims to have the highest level of calorie-burning extract EGCG, has just launched; and its immune-boosting red version is coming out by the end of the fourth quarter.

The company will partner with Hansen Natural, marketer of Monster energy drink, and Energy Brands, Glaceau's marketer, to develop products in the fast-growing energy and functional-waters businesses. Mr. Gier didn't discuss specifics in its plans to enter the sports-drink segment, although in April Cadbury Schweppes, through its Mott's subsidiary bought the Accelerade and Endurox sports-drink brands from PacificHealth Laboratories for $4 million plus royalties. Accelerade has a 4-to-1 ratio of protein to PepsiCo's Gatorade, which is said to provide advantages in endurance and muscle repair.

The beverage bigs are late to the wellness party, and are at a disadvantage to upstarts because their customers and shareholders have higher expectations and a "low appetite for risk," said Peter Murane, president of Brandjuice, which helped develop whey-based energy drink Fuelosophy for Pepsi. Moreover, the product-development cycle can last five years or more and the failure rate for products is high. So in launching so many products at once, Pepsi "is making a diversified bet that a few of these products will achieve scale," he said. "They understand they have to take multiple shots to make one successful."

All these moves have observers believing Pepsi has further established its health lead against rival Coke. Coke vowed an additional $400 million annually last year toward innovation and so far this year was invested heavily to improve relevance for its core soft-drink business with the "Coke side of life" campaign and new products such as coffee-flavor Coke Blak. Observers now speculate how the category leader will react to rivals' newly pumped non-soft-drink pipelines.

Since Coke President-Marketing, Strategy and Innovation Mary Minnick unveiled her need-states plan last December, industry watchers have anticipated the arrival of brands Ms. Minnick launched in Asia. Moreover, Coke has trademarked a variety of beverages yet to be confirmed despite media reports, including U Be, a fortified fruit drink, and Diet Coke Plus, a zero-calorie, energy-enhanced version of its flagship cola.

"We'll see how Coke follows up and whether they're too late if Pepsi filled the holes in the market," said Kenneth Herbst, assistant professor-marketing, Mason School of Business, College of William and Mary.

Meanwhile, in a push to reinvigorate its soft-drink cash cow, Pepsi will get a massive makeover with a splashy "Feel the Pepsi" campaign and packaging graphics themed by music, car culture, fashion and sports that change 35 times in a year. Each can theme will refer to a corresponding PepsiCo microsite with specialized content. Similarly, Diet Pepsi will get a new look, and energy/soft-drink hybrid Mountain Dew MDX will be recast as a carbonated soft drink with more focused energy.

The marketer also plans to improve its soft-drink line with new sweeteners and juices, mainly in premium beverages including Tava, a boomer-targeted premium carbonated sparkling drink with zero calories or caffeine and with chromium for a calorie-burning boost.

Stay tuned as other need states emerge.
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