Food & Beverage

The beverage industry's big problem—consumers ditch diet

Migration away from diet cola: Report
Migration away from diet cola: Report

Diet drinks are passe.

After years of powering growth for the Coca-Colas and Pepsis of the world, a new report released on Monday by John Sicher, Beverage Digest editor, showed that diet is now a drag on beverage sales, as all the major sodas (Coke, Pepsi, Mountain Dew) outperformed their diet versions in 2013.

It's a big problem for the beverage industry, because while carbonated beverage sales have been falling for years in the U.S., the steep decline in diet drinks is a fairly recent phenomenon.

Carbonated soft drink volumes in 2013 were down for a ninth straight year, and the rate of decline is increasing. Last year, volumes fell 3 percent in the U.S.—worse than the 1.2 percent decline in 2012, and bringing the industry back to levels last seen in 1995, according to Beverage Digest.

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There are increasing health concerns surrounding diet beverages, in particular. A widely discussed study released over the weekend from the University of Iowa, presented at a American College of Cardiology meeting, found that women who drank two or more diet drinks a day were 30 percent more likely to have a heart attack or other cardiovascular "event." They were 50 percent more likely to die compared with women who never or rarely drink diet drinks.

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The industry group, the American Beverage Association, disputed the findings, saying in a statement that the study is "observational" and "cannot establish causation. In fact the lead author of this research acknowledges this fact in a news release promoting his findings where he states, 'We can't say that diet drinks cause these problems.'"

While the study is up for debate, the consumer attitude toward diet is crystal clear; they're falling out of love. Beyond health concerns, consumers are choosing healthier and more all-natural options, and millennial consumers are increasingly opting for energy drinks.

The latest Nielsen data showed dollar sales for diet drinks in the four weeks to March 15 plunged 7.3 percent. Regular soda actually showed growth in the same period, but not nearly the strong numbers seen in energy drinks (up 8.3 percent) or sparkling water (up 26.2 percent).

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The industry has recognized the shift in consumer habits. Indra Nooyi, CEO of PepsiCo, said during the company's third-quarter earnings call last year that people are increasingly demanding natural sweeteners instead of artificial sweeteners, calling it "a fundamental shift."

Coca-Cola CEO Muhtar Kent blamed the dip in overall carbonated beverage sales last quarter largely to "softer Diet Coke volumes."

As the industry, yet again, finds itself trying to adapt to the fast-changing consumer habits, there's a new wave of beverage innovation underway—one in which manufacturers are searching for new ingredients and formulas to sweeten drinks and appeal to today's consumer.

Read MoreDiet drinks linked to heart disease, death

Bonnie Herzog, a beverage industry analyst at Wells Fargo, said Coca-Cola is in the strongest position for navigating the slump in diet drinks, even though it has the most to lose. Coke has the highest percentage of its carbonated soft drinks portfolio volume in diet drinks; however Herzog said the strength of its regular soda drinks and huge international footprint should help offset the diet slowdown.

Herzog and other analysts predict 2014 will be a year of innovation for the industry. In Argentina, Coke has already launched Coke Life, which uses stevia as the primary sweetener, and may expand sales to other markets soon. PepsiCo is selling Pepsi Next with stevia in Australia and France, and industry watchers expect it to come to the U.S. Both companies have spoken optimistically about early indications and sales of the new drinks in their test markets.

So while the decline in diet drinks is a headwind for the major beverage companies in an already challenging time for soda sales, it could ultimately have a silver lining. That is, if companies can quickly adapt, innovate and launch exciting new products that entice the modern consumer.