KDP Keurig Dr Pepper Inc

By Mike Esterl 

Big Soda has found a way to stem its losses: charge more for less.

U.S. store sales of soda fell in terms of volume in 2015, but dipped only 0.1% to $26.59 billion on a dollar basis for the 52 weeks ended Dec. 26. That is the best performance since 2012, when value of sales were flat, according to the data service Nielsen.

Some industry observers think dollar sales were even slightly positive in 2015.

The improved performance comes as companies increasingly market soda as a special treat, in part by steering Americans to smaller 7.5-ounce cans and 8-ounce bottles, but charging more per ounce.

"Moms want to treat their kids, but they don't want them to have too much," Sandy Douglas, North American president of Coca-Cola Co., told investors at a November conference.

The strategy shift comes after companies failed to lure back customers with price cuts through much of 2013 and 2014. Last year, volumes fell again--2.2% according to Nielsen--marking the 11th straight year of consumers cutting back over concerns about obesity and artificial sweeteners.

More than 60% of Americans polled by Gallup last July said they try to avoid soda. New U.S. dietary guidelines capped daily consumption of added sugars at about 200 calories, roughly 40 fewer calories than a 20-ounce bottle of regular Coke.

Industry leader Coke has been the most aggressive in pushing smaller sizes to consumers. The company says sales of its smaller packages--including 8-packs of 12-ounce bottles and 7.5-ounce cans--rose 15% in the first nine months of last year. Meanwhile, sales of larger bottles and cans fell to about 85% of its U.S. sales last year from 90% in 2011, even though buying Coke in larger quantities almost always costs less at the store.

Rival PepsiCo Inc. says industrywide sales of 12-ounce can packs, half-liter and 2-liter bottles--which are often heavily discounted--have fallen at an average annual rate of 2.6% since 2011. The company says sales of smaller packages, which typically hold fewer ounces, increased 1.8% annually over the same period.

At a Publix supermarket in Atlanta recently, a 12-pack of 12-ounce Coke cans was priced at $5.29, or 3.67 cents per ounce. An 8-pack of 7.5-ounce cans was priced at $3.99, or 6.65 cents per ounce.

Fast-food chains are coping with the change in customer preference by cutting prices. McDonald's Corp. and Burger King Corp. earlier this month launched deals that were, in effect, more food and soda for less money.

"You have to be careful to raise prices in this environment because consumers are pinching pennies,"' said Jack Russo, a consumer staples analyst at Edward Jones.

But so far the strategy is paying off for Coke, Pepsi and Dr Pepper Snapple Group Inc., whose combined share of the U.S. soda market tops 90%. They were able to raise soda prices 2% to 3% by various estimates over the course of 2015. Usually when that happens, cheaper private-label brands gain market share, but that wasn't the case last year. Private-labels saw sales decline by 3%, according to Morgan Stanley.

In some ways, the soda industry is returning to its early 20th century roots, when bottles were typically about 6 ounces and pop was a treat saved for a special occasion. It wasn't until 1976 that 7-Eleven Inc. launched the 32-ounce "Big Gulp"' at its convenience stores.

Now, once again, American soda drinkers "want to consume less but they still enjoy their favorite brands," said Marty Ellen, Dr Pepper's chief financial officer. Dr Pepper is rolling out 7.5-ounce cans nationally this year, replacing 8-ounce cans it launched as an alternative to 12-ounce cans. Each 7.5-ounce can holds about 95 calories, compared with 150 calories for a 12-ounce can.

Mr. Ellen represents the current thinking that charging consumers more for less is sustainable "for the foreseeable future," he says, because even at higher prices, soda is still a "cheap treat."

The strategy also buys soda makers time to diversify further into smaller but faster-growing categories like bottled water, tea and energy drinks. PepsiCo derives half its sales from snacks and is the market leader in sports drinks and teas. Last year, Coke bought a stake in energy drink maker Monster Beverage Corp. while Dr Pepper Snapple invested in Bai Brands, a coffee-fruit drink brand, and Body Armor, a sports drink by startup BA Sports Nutrition LLC.

Moms aren't the only ones willing to pay more for less. Stephen Benda, a 31-year-old engineer and longtime Coke drinker, said he has started drinking the 7.5-ounce cans instead of 12-ounce cans to lose weight.

"When I do get a 12-ounce, I can tell it's a significant amount more than I need," said Mr. Benda, who lives near Atlanta.

(END) Dow Jones Newswires

January 27, 2016 05:44 ET (10:44 GMT)

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