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Pepsi-Co Dips Its Toes Into the Sparkling Water Market

In the 1980s, the big brands battled for dominance in the cola wars.

Now, a new fight is emerging: The fizzy water wars.

On Thursday PepsiCo is introducing Bubly, a new brand of sparkling water that comes in eight flavors, including apple, strawberry and mango, in brightly colored cans with lowercase lettering and greetings on the pull tabs. ("Hey u!" "yo!")

Bubly marks the most direct attack yet on LaCroix, a brand of flavored sparkling waters that has, in recent years, seen sales soar as it developed a near cultlike devotion among millennials.

For PepsiCo, Bubly is a big bet. The beverage and snacks giant will put its formidable marketing and distribution machine behind the rollout. Bubly will land on shelves this month, and two ads will appear during the Oscars broadcast on March 4.

PepsiCo executives say Bubly, with no artificial flavors, sweeteners or calories, fits into its broader corporate initiative to offer consumers healthier snack and beverage products.

But it is also an acknowledgment that sales of carbonated soda are falling as consumers increasingly shun sugary drinks in favor of healthier options, including water. In 2016, bottled water sales by volume surpassed carbonated soda for the first time, according to Beverage Marketing Corporation's DrinkTell database. And volume sales for carbonated soft drinks declined for the 13th consecutive year in 2017.

While Europeans have consumed sparkling water for years, the product has only recently started to catch on in the United States. Sales of domestic sparkling bottled water not including imports like San Pellegrino doubled between 2015 and 2017 to $8.5 billion, according to the DrinkTell database.

One of the biggest beneficiaries of the surge in interest in fizzy water has been LaCroix. With its vivid, neon-colored cans and unique flavors like apricot, peach pear and pamplemousse (French for grapefruit), LaCroix has generated an avid following on Instagram and Twitter. Some websites have created cocktails, mixing various flavors of LaCroix with alcohol.

LaCroix, which has been around for about 35 years, was acquired in bankruptcy proceedings in the mid-1990s by National Beverage, based in Fort Lauderdale, Fla. It has muddled along for years, and in regulatory filings by National Beverage, LaCroix was often mentioned far behind two other brands, Shasta and Faygo.

But in recent years, sales of LaCroix have ballooned. National Beverage stock has more than doubled in the past two years.

"LaCroix is a fascinating story because it has been around for so long," said Gary Hemphill, the managing director of research at Beverage Marketing. "It just happened to be the right product for the right time."

LaCroix's growth surge hasn't gone unnoticed on Wall Street, where some analysts predicted that National Beverage could be an acquisition target for PepsiCo, Coca-Cola or another manufacturer looking to enter the market quickly with a well-established brand. But other analysts say Nick Caporella, the 82-year-old founder and chief executive of National Beverage, who once ran a telecom and cable company and who owns 74 percent of the company's stock, has not signaled any interest in selling.

National Beverage did not return a call seeking comment for this article.

Even though consumers continue to turn away from sugary, syrupy sodas, the stocks of PepsiCo and Coca-Cola are trading near historic highs, in part because they have been able to maintain or even increase pricing on soda. For PepsiCo, whose popular brands include Gatorade, Tropicana, Doritos, Lay's and Aquafina, North American beverages made up a significant amount of the company's $63 billion in revenues in 2016.

Recently, PepsiCo has shown a preference toward developing new products and brands in-house. Last year, the company debuted Lifewtr, a purified water with electrolytes that was a response to the success Coca-Cola has had with its Smartwater brand.

Coca-Cola acquired Smart-water as part of its acquisition of Glaceau, the maker of Vitaminwater, in 2007 for $4.1 billion. Coca-Cola also owns Dasani water, and has introduced some flavors of sparkling water.

"We're confident in our ability to innovate from within," said Todd Kaplan, the vice president of the water portfolio for Pepsi-Co North America Beverages, who oversaw the launch of Lifewtr and, now, Bubly.

While many analysts see continued strong growth for flavored sparkling water, they also note the segment will most likely get more crowded as other beverage makers and store labels fill the space.

"There is going to be a lot of competition in the space from private label," said Duane Stanford, the executive editor of Beverage Digest. "Every store brand will have its version of LaCroix."

The risk is that flavored fizzy waters could eventually face the same fate as their flat bottled siblings. There, a market that became saturated with competitors selling the same thing water resulted in sharply lower prices and profit margins for manufacturers.

But with Bubly, PepsiCo executives are betting consumers won't tire of flavored sparkling water anytime soon.

"The category really has the wind at its back right now," Mr. Hemphill of Beverage Marketing said. "There is room for at least two key players, maybe three. The fact that LaCroix has been so successful doesn't mean there can't be room for another brand."

Q1. In at least , summarize the strategic decision that has been taken by Pepsi-co; and (b) List and describe two environmental forces OR two internal factors that have caused the company to take this decision. Write about each force or factor.

Q2. (a) List and describe two (2) broad bases that Pepsi-Co can use (has used) to segment the market for its new beverage; and (b) List and describe the targeting strategy Pepsi-Co can use (has used) to market this product. Write at-least about each broad basis for segmentation and at least about the targeting strategy.

Q3. Assume that you had to classify Pepsi Co's competitive strategy related only to Bubly.

(a) EITHER: Describe two (2) of the categories used by Porter to classify competitive strategies; OR: Describe two (2) of the categories used by Miles and Snow to classify competitive strategies. Write at least in describing each category; and

(b) Describe how you would classify Pepsi Co's competitive strategy, based on the marketer/s whose classification scheme you discussed in part a. Write at-least , including evidence from the case, to support your response to part b.

Q4. (a) List and describe two (2) pricing objectives that Pepsi-Co could have set in making the pricing decision for Bubly; write at least about each objective; and

(b) Based on the discussion of internal and external factors that influence pricing decisions, list and describe two (2) factors that could have influenced the pricing of Bubly. Write at-least about each factor.