Dr Pepper Thinks 10 Is the Magic Number
It's an unusual admission from the CEO of a cola company: "There's a lot of cola fatigue out there."
But Larry Young, who runs Dr Pepper Snapple Group, has been in this business for 40 years. How to fight cola fatigue?
"Flavors are continuing to grow," he said. But there are other things the company is trying as well.
DPS went public five years ago, and in that time its stock has outperformed much larger rivals Coke and Pepsi. However, year to date, the stock is underperforming, and most analysts are neutral on its outlook. Last quarter, Dr Pepper beat the Street on earnings, but sales volume fell, especially in carbonated beverages. Coke and Pepsi reported a similar drop in the U.S.
Dr Pepper's strategy has been to bring back consumers who have sworn off soda by giving them a low-calorie beverage that still has the "mouth feel" of full-calorie cola, Young said. The result is Dr Pepper TEN, which, at ten calories, hopes to avoid the diet taste. The rollout of the soda last year was so successful the company has now come up with ten-calorie versions of its other core brands, like 7-Up, Sunkist, A&W, and Canada Dry.
Stores are providing new shelf space to the lower-calorie products, the company said.
But this may be the key. According to Young, research and feedback from retailers indicate more than half the people buying the new sodas had left the carbonated drinks category completely.
"That's a home run for us," he said.
(Watch More: Larry Young, Dr. Pepper Snapple Group)
Inside the company's R&D lab on the first floor of its headquarters in Plano, Texas, food scientists are working on new flavors and new sweeteners. There you can see a new breakfast version of Hawaiian Punch that hopes to compete with Sunny Delight. Other shelves are lined with chemical compounds, which seek to replicate flavors like wintergreen or blueberry.
Sometimes the code is tough to crack. Blueberry, in particular, is hard to replicate. "There's a ton of different compounds," said David Thomas, the head of research and development.
But the "holy grail" remains finding a low-calorie, all-natural sweetener. Stevia, which is derived from an herb, is being used by Coke, but the scientists at Dr Pepper think Stevia still leaves an aftertaste in soda.
"There are some challenges with Stevia," said Thomas. He is now working on a proprietary version of the sweetener that he hopes will eventually be put into Dr Pepper and some of the more than 50 brands under the Dr Pepper Snapple Group umbrella.
(Watch More: Inside the Dr. Pepper Snapple Labs)
To try to boost sales, the company has increased marketing spending by over $100 million, and this year the largest amount of its spending will be in the second quarter.
"We have to think differently," said Jim Trebilcock, executive vice president of marketing. "Take a little bit more risk."
Risks include the ad campaign for Dr Pepper TEN, which humorously promotes itself as "not for women."
Starting this week, the company is also bringing back "Snapple Facts"—interesting trivia found under the caps of Snapple bottles. This time around, the company is adding online videos called "Snapple 'Re-enfactments'" to take the quirkiness of the campaign one step further. "We're trying to get back to that Snapple attitude."
The CEO admits it's a tough slog. There are concerns about soda and its relationship to obesity, but Young said diet soda still makes up less than 30 percent of overall carbonated soda sales.
"Everybody is trying to say obesity is being caused by soft drinks. Well how could soft drinks be declining when obesity is climbing? It's just the opposite," he said.
(Watch More: What's Dr. Pepper's Secret Recipe?)
Young also keeps a close eye on fast food and gas station sales, and he thinks the economy is about 18 months away from returning to normal based on what he is seeing in these channels.
As for the company's new offerings, Young said it can take 10 to 15 years to change consumption habits and firmly establish new products, a very long time in a business that lacks patience.
Even so, Dr Pepper remains a distant third in the soda wars, with about $6 billion in annual sales, compared to $48 billion for Coke and $65 billion for Pepsi.
Ironically, Young also points out the two rivals are also his biggest customers, as they bottle and distribute about 80 percent of Dr Pepper products in the U.S. That doesn't diminish their competitive spirit. "Every day is like the Super Bowl," said the CEO, who got his start in the business driving a truck for Pepsi. "They talk about us being small, but being an old farm boy, I've seen a lot of fleas make a bulldog bite its butt."
CORRECTION: An earlier version of this article incorrectly said low-calorie products comprise more than 10 percent of Dr Pepper's overall carbonated beverage sales. In fact, where the company currently has distribution, low-calorie TEN products—7UP, A&W, Canada Dry, Sunkist, RC TEN—are approximately 10 percent of those brands' sales.
—By CNBC's Jane Wells; Follow her on Twitter: @janewells