Reflecting on a ‘Beverage Buzz’ conference call she organized with Paddy Spence, CEO of all-natural soda Zevia ($60m retail sales in 2013) Bonnie Herzog from Wells Fargo Securities said the drink had captured the public imagination.
“It appears to be bucking overall CSD category trends and provide an important source of growth to the overall industry,” Herzog said of the brand, which offers everything from cola to ginger root beer and cherry cola.
Can Coke and Pepsi crash the all-natural soda party?
But she questioned whether major manufacturers will participate meaningfully in this growth, without cannibalizing their existing brands, or suffering diet soda in particular to lose share to new entrants like Zevia.
Zevia has zero calories, no artificial sweeteners and familiar flavors/pack sizes, and Herzog said she believed that such products could offset negative CSD category trends in the US.
“However, we question whether the major manufacturers will participate meaningfully in this growth (without cannibalizing their existing brands), or continue to lose share to new entrants like Zevia,” Herzog said.
Spence said on the call that the major challenge for major manufacturers – and potentially the reason why there has not yet been a major sweetener breakthrough – may not be R&D related but more due to challenges regarding product marketing and price.
“In other words, how does Coca-Cola, for example, market and price all-natural/zero-calorie Coke without undermining or cannibalizing both Diet Coke and Coke Zero,” Herzog said.
“Bottom line – the development of an all-naturally sweetened CSD remains a priority for the major manufacturers, but we remain skeptical about whether it will be enough to reinvigorate their CSD volume growth, or if they will continue to lose share to other brands or categories,” she added.
Zevia and peers pose real threat to 'Tier 2' Dr Pepper brands - analyst
Turning back to Zevia, Spence said it was predominantly stealing shelf space from the ‘Tier 2’ CSD brands made by major manufacturers, and Herzog said she expected this trend to continue.
“We believe Coke and PepsiCo to a lesser extent, are well-positioned to maintain shelf space while Dr Pepper Snapple (DPS) has the most risk of losing shelf space given its over-exposure to second-tier brands,” he added.
Herzog said Wells Fargo’s analysis of sales growth for the US ‘Big 3’s’ Top 5 (Tier 1) brands in 2013 versus 2012, and all other their brands (Tier 2).
“Based on our analysis…Coke has strong core Tier 1 brands that have outperformed the broader CSD market, and Coke and Pepsi generate 80%+ sales from Top 5 brands,” the analyst said.
But DPS’s strong Tier 1 brand are a relatively small portion of its mix, Herzog warned, which means the firm is susceptible to retailers reallocating shelf space from its Tier 2 brands to new entrants like Zevia.