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03.15.2006

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The Death Of Soda

"I think we should see other people": the consumer's fickle relationship with CSDs

Last Thursday (3.9.06) was something of a watershed moment for those of us with ties to the CPG business. I'm referring, of course, to the much-publicized announcement that CSD sales were down for the first time in over 20 years. Everywhere you turned that day - from CNN to NPR to the venerable New York Times - the news seemed to turn to soda.

Taking media reports at face value, you might surmise that the growing consumer disdain for soda stems from our recent national obsession with obesity and represents a positive step forward for the increasing number of health-conscious consumers. Of course this is the challenge with media reports, they always portray straightforward cause and effect scenarios, which prove much too simplistic when compared to the chaos that is everyday life.

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And while those commenting in the analytic community offer slightly more nuanced explanations of this apparent trend ("Consumers want new and exciting beverages," "Consumers are swapping water for soda"), there are still many questions and details left unaddressed. How long will this trend continue? Will interest in traditional CSD brands return? Can we counter this trend by fortifying traditional CSDs?

So I thought this would be an appropriate time to summarize our consumer learnings with regard to CSDs and other beverages in the past few years. We'll start with the single most frequent question we receive - "Is this a long-term trend?" - and work our way down to specific details of consumer behavior.

Item #1: The recent trend toward declining CSD-consumption reflects a permanent, long-term shift.

Simply put, we do not foresee a day in the near future in which consumers will be consuming higher levels of carbonated soft drinks - be they conventional, alternative or diet - than they have in the past 10 years. Note, however, this does not mean (a) consumers will abandon the category altogether or that (b) consumption will soon be in free-fall (more on this later). Like all macro trends, the root causes here are complex and inter-related.

Concern with sugar: Without question, the single biggest driver of out-migration in the CSD category is the consumer's overall desire to reduce the amount of sugar in their everyday diets. Note that this desire is, itself, driven by its own complex, inter-related set of concerns, which include: health, nutrition, type II diabetes, obesity, energy, ADHD, hyperactivity, mental health, depression, etc. And while some consumers continue to address this concern by opting for diet CSDs, we see this percentage shrinking in the coming years with the growing concern expressed for all manner of sugar substitutes - be they artificial or natural.
Overall concern with health: Moving beyond a singular focus on sugar, consumers also express concern that the combination of sugar and/or diet sweeteners, carbonated soda water, artificial colors and flavors, and other artificial ingredients simply cannot prove beneficial to one's long-term health prospects.
Desire to drink more water: In addition to the straightforward perception (by most consumers) that water is simply the healthiest beverage alternative, we also note that an increasingly active consumer base (exercise, fitness, walking, on-the-go, etc.) much prefers the thirst-quenching properties of water, especially when compared to traditional CSDs. As consumers frequently lament, "If you're truly thirsty, the last thing you want to drink is soda..."
Desire for more interesting flavors: This should be no surprise to anyone who has recently visited the beverage aisle of any upscale grocery retailer. Like every other consumer category, beverages are prone to ongoing trend toward specialization and differentiation (i.e., fancification) in the marketplace. Honestly, who among us would really prefer to choose Coke on every single occasion if our consideration set can be expanded from 5 to 500? Moreover, when you factor in the tendency toward playful, expressive (i.e., post-modern) consumption - in which consumer choices appear increasingly arbitrary and capricious; based on the desire to experiment as much on personal preference - it's little wonder CSD sales haven't endured larger losses.
Weight management: While it's certainly true that consumer reduction in CSD consumption is related to growing concerns with obesity and weight management, we place this factor fifth in terms of overall importance. We should also note here that weight management-conscious consumers appear to be as (if not more) concerned with overall carb counts of specific soft drinks (regular or diet) as they are calories.

Item #2: The current decline in CSD consumption DOES NOT mean consumers are abandoning CSDs.

Our research suggests that very, very few consumers are permanently abandoning CSDs. Instead, many consumers are opting to reduce their CSD consumption, especially on non-specific occasions such as in the workplace, while driving a car, while relaxing at home, or while watching TV. For most, the goal is not to avoid CSDs altogether as much as it is to avoid mindless, unnecessary over-indulgence. A common refrain here is: "I really enjoy a can of Coke now an then, but I realized I was drinking 4 or 5 cans just before lunch alone and that is simply ridiculous." We observe that much of this reduction derives from CSD consumption that would have occurred in (relative) isolation.

Conversely, we are finding that many consumers remain quite likely to opt for CSDs during very specific, often social, occasions. Some of these occasions include visits to traditional QSR/fast-food restaurants (McDonald's, Burger King, Taco Bell, Pizza Hut), sporting events, parties, celebrations, movies and even, get this, hang-over!

All told then, we expect to see a gradual decline in overall CSD consumption, followed by an eventual leveling off, as consumers seek to reduce "unnecessary overconsumption" (for the variety of causal factors outlined above) while still participating in the category during certain occasion-specific moments.

Item #3: Because consumers prefer to consciously limit their intake of CSDs, and consume alternative beverages in addition to CSDs, "tinkering with," or other wise retooling CSDs is not the answer.

This may seem a straightforward proposition, but we continue to see evidence to the contrary at every turn.

For example, because many believe that the consumer's "problem" with CSDs is related to lingering health concerns, many assume that the best solution is to offer "more healthful" CSDs. To the uninitiated then, the recent release of 7UP's 7UP PLUS - a Splenda-based beverage featuring 10 calories, 2 grams of carbs and 10% of the RDA of calcium per eight ounce serving - might seem like the perfect answer for today's health-conscious consumer.

Yet, when examined within the context of our occasion-based learnings detailed above, such a proposition seems ill-fitted at best. As our data indicate, today's consumer generally prefers to avoid consuming any "unnecessary," or excess CSDs where possible. Note, we emphasize the word "prefers," for as consumers ourselves, we recognize we are frequently far from perfect and often fail to "walk the talk" for a host of reasons. Still, though, most prefer to avoid unnecessary CSD consumption.

And despite the best intentions and/or optimism of the 7UP marketing team, at the end of the day this product (7UP PLUS) is still a conventional carbonated soft drink. It tastes sweet, it's bubbly and fizzy, and it fills our tummy with a sweet, fruity flavor - all hallmark characteristics of a carbonated soft drink. Just because the package tells us the beverage is made from Splenda and offers 10% of the RDA of calcium doesn't change the fact that this is a CSD. As one consumer remarked,

"Most of us aren't that stupid...If I want a Sprite I'll drink a Sprite, but it's not like I'm dumb enough to believe that a 7UP with Splenda and calcium added is somehow better for me than the Sprite....they're both junk."

The consumer has grown beyond a near slavish reliance on traditional CSD offerings in their beverage consumption habits. Yes, they will always want their Pepsi or Diet Coke or Dr. Pepper on some occasions, but on many others they will be choosing alternative beverages. Masquerading your traditional CSD offerings as something other than soft drinks will only make your brand appear out of touch and risk alienating your consumer.

Item #4: Interested parties should focus on offering truly innovative beverages that make an appropriate match for emerging non-CSD occasions.

Whether it be because of a felt need to decrease traditional CSD consumption, to drink more water or to experiment with alternative beverages, consumers are increasingly demanding more innovative beverages that provide a "better fit," for their contemporary lifestyles. So why not strive to meet those needs with truly innovative products?

And while we are sensitive to the costs and risks inherent in true innovation, we would also suggest that the answers may sometimes prove more straightforward than many might imagine.

Boulder-based Izze is a perfect example of this maxim put into practice. Even though their product may appear to the uninitiated as a traditional CSD, in reality it is anything but. By focusing on beverages crafted only from 100% fruit juice and sparkling water (nothing more!), entering the marketplace at (relatively) high price points (approximately $1 per 12 oz. bottle), avoiding the traditional QSR fountain channel, and originally emphasizing distributorship in specialty grocers and fast-casual QSR, Izze has transformed what appears remarkably similar to a conventional soft drink into a sophisticated, specialty, "treat" beverage - the perfect match for an afternoon meeting at Panera, not to mention an ideal kids' treat for health-conscious moms.

Critics may complain that Izze's product is nothing more than a "CSD in sheep's clothing," and nutritionists may caution that fruit juice is capable of delivering significant sugar, but those criticisms miss the larger point. Namely, whatever Izze is in most consumers' eyes, it is not a traditional CSD. Therefore, it enters into the consideration set of the increasing number of occasions in contemporary life in which we are compelled to choose something other than a traditional CSD.

To Our Dearest Soda...

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