Look out, Coca-Cola
The parallels between craft beer and craft soda are numerous. Like big beer, big soda mass-produces its products using cheap, low-quality ingredients that enable companies to maximize production quantities and sell the products at a high margin. Like craft brewers, craft soda makers improve upon the mass-produced product by mixing in high-quality ingredients in a carefully controlled process, thereby producing a better-tasting alternative.
Reed’s is just one among many small players in the craft soda market, with much of the market composed of local producers that do not have nationwide distribution agreements. However, the fragmented nature of the craft soda market is not enough to keep it from posing a real threat to the soda giants.
Sensing a growing threat, PepsiCo, Inc. (NYSE:PEP) introduced Sierra Mist Natural, among other natural alternatives to its soda line-up. However, while the products lack the much-maligned high fructose corn syrup, the “natural” sugar actually comes from genetically modified sugar beets — a deal-breaker for many potential customers.
PepsiCo, Inc. (NYSE:PEP) recently settled a lawsuit regarding its use of the phrase “all natural” to describe Naked Juice, the company’s line of fruit juices. It turns out that the fiber and many of the vitamins included in the drinks are actually synthetic versions of the real thing. Naked Juice is the primary competitor of The Coca-Cola Company (NYSE:KO)’s Odwalla line of beverages, which is marketed as having “fresh-sourced” fruits and vegetables in its drinks. But while some of Odwalla’s juices are pure fruit juice, others contain synthetic ingredients.
Despite their shortcomings, The Coca-Cola Company (NYSE:KO) and PepsiCo have good reason to be interested in the growing market for healthy alternatives to mass-produced soda. Consumers increasingly view synthetic ingredients as unhealthy. This perception caused an 11% decline in the use of high fructose corn syrup from 2003 to 2008. The fast growth of companies like Reed’s, Whole Foods, and The Fresh Market Inc (NASDAQ:TFM) are further indications of the American public’s shift toward healthy alternatives — even if they have to pay a premium.
Bottom line
The synthetic products and ingredients that emerged when the baby boomer generation reached adulthood are now giving way to the natural products demanded by Millennials. Therefore, big soda companies need to reposition themselves for Millennials to avoid getting caught flat-footed like big beer.
The article Will Craft Soda Erupt Like Craft Beer? originally appeared on Fool.com and is written by Ted Cooper.
Ted Cooper has no position in any stocks mentioned. The Motley Fool recommends Boston Beer, Coca-Cola, PepsiCo, Starbucks, The Fresh Market, and Whole Foods Market. The Motley Fool owns shares of Boston Beer, PepsiCo, Starbucks, and Whole Foods Market.
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