ChangeLab-Beverage Industry Report-FINAL (CLS-20120530) 201109

8/12/2019 ChangeLab-Beverage Industry Report-FINAL (CLS-20120530) 201109

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ACKNOWLEDGMENTS

This report was developed to provide a detailed understanding o howthe sof drink industry works, outlining the steps involved in producing,distributing, and marketing sof drinks and exploring how the industry hasresponded to recent efforts to impose taxes on sugar-sweetened beveragesin particular.

The report was prepared by Sierra Services, Inc., in collaboration with theSupply Chain Management Center (SCMC) at Rutgers University Newarkand New Brunswick. The authors wish to thank Kristen Condrat or heroutstanding support in all phases o preparing this report, includingliterature review and identi ying source documents, writing, data analysis,editing, and nal review. Special thanks also goes to Susanne Viscarra, whoprovided copyediting services.

Christine Fry, Carrie Spector, Kim Arroyo Williamson, and Ayela Mujeebo ChangeLab Solutions prepared the report or publication. ChangeLabSolutions would like to thank Roberta Friedman o the Yale Rudd Center or

Food Policy and Obesity or expert review.

For questions or comments regarding this report, please contact thesupervising pro essors:

Jerome D. Williams, PhDPrudential Chair in Business and Research Director The Center or UrbanEntrepreneurship & Economic Development (CUEED), Rutgers BusinessSchool Newark and New Brunswick, Management and Global BusinessDepartment1 Washington Park Room 1040Newark, NJ 07102Phone: 973-353-3682Fax: [email protected] www.business.rutgers.edu/CUEED

Paul GoldsworthySenior Industry Project ManagerDepartment o Supply Chain Management & Marketing SciencesRutgers Business SchoolPhone: [email protected]

Design: Karen Parry | Black Graphics

The National Policy & Legal Analysis Network to Prevent Childhood Obesity (NPLAN) isa project o ChangeLab Solutions. ChangeLab Solutions is a nonprot organization thatprovides legal in ormation on matters relating to public health. The legal in ormation inthis document does not constitute legal advice or legal representation. For legal advice,readers should consult a lawyer in their state.

ChangeLab Solutions ormerly existed under the name Public Health Law & Policy(PHLP). Any re erences to PHLP in this publication should now be understood to re er toChangeLab Solutions.

Support or this document was provided by a grant rom theRobert Wood Johnson Foundation.

2012 ChangeLab Solutions
mailto:[email protected]://www.business.rutgers.edu/CUEEDmailto:[email protected]:[email protected]://www.business.rutgers.edu/CUEEDmailto:[email protected]


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EXECUTIVE SUMMARY Market Leaders 7

SOFT DRINK INDUSTRY OVERVIEW Earnings 8Product Segments and Major Market Brands 8Major Markets 9Future Outlook 10Demand Determinates 11

OVERVIEW OF THE THREE MAJOR PLAYERS The Coca-Cola Company 12PepsiCo, Inc. 12Dr Pepper Snapple Group 13

SUPPLY CHAIN OVERVIEW Operating Model 15Syrup Producers 18Bottlers 19Distribution Channels 20

MARKETING OVERVIEW 2008 Federal Trade Commission Study 22Childrens Food and Beverage Advertising Initiative 28Marketing Strategies 32

POLICY AND LEGISLATIVE ACTIONS IN RESPONSE TO THE SSB TAX Current Events Regarding SSB Taxes 73Public Support or SSB Taxes 75Sof Drink Industrys Internal and External Responses

to SSB Taxes 75

CONCLUSION

TABLE OFCONTENTS

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APPENDIX Appendix 1: Coca-Cola North Americas CBBB Pledge 82 Appendix 2: PepsiCos CBBB Pledge 86 Appendix 3: Product and Brand List or the Sof Drink Industry

Leaders and Top Three Private-Label Brands 90 Appendix 4: Incidence o Purchasing Sof Drinks by

Promotion Type, by Age 92

ENDNOTES

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This report was developed to give public health advocates a window intothe sof drink industry and reveal opportunities or intervention at variouspoints o the supply chain, rom production and distribution to marketingand sales. The report covers the main product lines o the industry:carbonated sof drinks, ruit beverages, bottled water, so-called unctionalbeverages (including energy drinks and ready-to-drink teas and coffees),and sports drinks, across such power ul brands as Coke, Pepsi, Gatorade,and Snapple. We ocus much o the discussion on the products that containcaloric sweetener known as nondiet beverages in the industry as theseproducts are o particular concern to the public health community.

The sof drink industry is actually made up o two major manu acturingsystems that, taken together, bring sof drinks to the market. These twosystems all into distinct categories: (1) lavoring syrup and concentrate manu acturing and (2) sof drink manu acturing. The supply chain is largelydependent on the syrup producer, as this is the driver or most downstreamoperations. The majority o the bottled sof drinks ollow a similar productli e cycle, moving rom syrup producer, to bottler, to distributor (i used),to merchant, to nal consumer. The locations o the syrup manu acturersand the bottlers are closely linked to both the locations o strategic rawmaterials and major population centers in the United States and/or areasthat see above-average temperatures, where demand or the sof drinkstends to be highest. Once sof drinks are bottled and ready or distribution,a variety o distribution channels are leveraged to get the nal product to theend consumer.

The industry as a whole aces challenges as a result o the slumping economy and changes in consumers consumption patterns due to increased healthconsciousness. Marketing is an important component o the industry chain,used to generate demand and build consumer loyalty. It has undergonea number o changes over the last ve years due to efforts to reduceadvertising directed at children, to introduce new types o media, andto update marketing messages or consumers who are looking or morehealth ul alternatives.

Areas o growing interest or all industry players are the A rican-Americanand Hispanic markets, which have been identied as key consumers andgrowth markets. While the industry adapts to changes in consumption

EXECUTIVESUMMARY

The Sof DrinkSupply Chain

Consumer

Bottler

Syrup Producer

Distributor

Merchant



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patterns and new orms o media, researchers are investigating the impactmarketing practices and pricing tactics have on consumers consumptionpatterns. Research shows that marketing or any product plays a signicantrole in setting norms and encouraging behavior among children, and thatyoung children and economically disadvantaged consumers are the mostvulnerable to ood and beverage advertising. In addition, research hasound that when it comes to discouraging consumption o sugar-sweetenedbeverages (SSBs), a price increase is more effective than educationinterventions.

The sof drink industry is also in the middle o a growing policy debate in theUnited States regarding the taxation o sugar-sweetened beverages. Surveysshow mixed eelings about an SSB tax; a poll in New York City indicatedmore support i the proceeds went toward health-related initiatives.Meanwhile, the sof drink industry has responded strongly to proposedSSB taxes. Internally, the sof drink industry is responding with effortsto in luence consumer behavior by introducing smaller-size packaging,encouraging active li estyles, and looking into alternative, noncaloricsweeteners. Externally, lobbyist and other activist groups have success ullygathered support to de eat many o the proposed SSB taxes.

Sof Drink TermsThere are many overlapping terms used to describe sof drinks. In this report, we tried to remain precise and

consistent with our terminology. In gures and tables, we occasionally deviate rom these terms due to theterminology used by the original data sources. Here are some o the most common terms:

Sof drink: any type o nonalcoholic beverageproduced by a sof drink manu acturer; includesbottled water, but not tap water

Sugar-sweetened beverage (SSB): term used by public health advocates to describe a sof drink containingcaloric sweetener (e.g., sugar, high- ructose corn syrup)

Nondiet: re ers to beverages that contain calories,usually rom an added sweetener

Diet: re ers to beverages with zero calories andusually sweetened with noncaloric sweeteners

Carbonated sof drink (CSD): type o sof drink that iscarbonated; includes both nondiet and diet sof drinks

Fruit beverage: type o sof drink that either containsruit juice or is ruit- lavored

Juice drink: sof drink that contains juice and otheringredients

Fruit- lavored drink: sof drink that is lavored to tastelike ruit but does not contain juice

Bottled: re ers to beverages that are packaged inbottles or cans

Fountain: re ers to beverages that are produced ondemand at a dispenser

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The U.S. sof drink industry is composed o two distinct subindustries,by classication standards, under the manu acturing industry title (NorthAmerican Industry Classication System: 3133). The rst industry is theFlavoring Syrup and Concentrate Manu acturing Industry (NAICS: 311930),and the second is the Sof Drink Manu acturing Industry (NAICS: 312111).

Flavoring Syrup and Concentrate Manu acturing IndustryAs o 2010, there were 151 companies in the U.S. sof drink industry thatmanu acture lavoring syrup concentrates, powdered concentrates, andrelated products or use in soda ountains or or manu acturing sof drinks. 1 Their products are sold primarily to sof drink producers and grocerywholesalers.

Sof Drink Manu acturing IndustryAs o 2010, there were 1,209 companies in the U.S. sof drink industrythat blend ingredients such as water, liquid beverage bases/syrup, andsweeteners, and then package and distribute these beverages or sale. 2 Excluded rom this industry grouping are alcoholic beverage producers andcompanies that only produce beverage ingredients or distribute beverages.

Market Leaders

Flavoring Syrup and Concentrate Manu acturing IndustryThe U.S. lavoring syrup and concentrate manu acturing market (see Figure 1)is dominated by two main players, who made up 73% o the total U.S. market share in 2010: the Coca-Cola Company (40%) and PepsiCo, Inc. (33%). 3 Theremaining 27% o the market is composed o a variety o smaller companies.

Sof Drink Manu acturing IndustryThe Sof Drink Manu acturing market in the United States is dominated bythree players, who accounted or 66% o the total market share in 2010: theCoca-Cola Company (286%), PepsiCo, Inc. (268%), and the Dr Pepper Snapple Group (86%).4 The remaining 36% o the market includes many small sofdrink manu acturing companies (see Figure 2). Among the other companies:

J Cott Corporation (3 3% market share) This Toronto-based companyis the worlds largest manu acturer o retailer-brand (private-label) sof

Figure 1: Market Leaders in theFlavoring Syrup and ConcentrateManu acturing Industry

DATA SOURCE: WWW.IBISWORLD.COM

PepsiCo, Inc. 33%

Other 27%

The Coca-ColaCompany 40%

SOFT DRINK INDUSTRYOVERVIEW



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drinks and the ourth largest sof drink maker in the world. Customersinclude Sa eway, J Sainsbury, and Wal-Mart (until 2012, when thedistribution agreement is expected to be terminated). 5

J National Beverage Corporation (13%) This Florida-based companyis a holding company that ocuses on holding and developing strongregional brands, especially within the carbonated sof drink (CSD)segment. Its managed subsidiaries include Faygo Beverages, LacroixWater, Ever resh Beverages, and Shasta Beverages. 6

Earnings

Flavoring Syrup and Concentrate Manu acturing IndustryFlavoring syrup and concentrate manu acturing is an $8 billion industry inthe United States based on revenue. It was orecast to generate a prot o$14 billion in 2010. The industrys annual growth rate declined by 1 4%rom 2005 to 2010, but is expected to increase 08% rom 2010 to 2015. 7

Sof Drink Manu acturing IndustrySof drink manu acturing is a $47 2 billion industry in the United Statesbased on revenue. It was orecast to generate a prot o $1 7 billion in2010. The industrys annual growth was 18% rom 2005 to 2010, and it isexpected to maintain this growth rate between 2010 and 2015. 8

Product Segments and Major Market Brands

Products produced in this industry are broadly re erred to as sof drinks butcan be urther divided into six main segments based on industry revenue: 9

Carbonated Sof Drinks (CSDs) J 45% o industry revenue J Includes well-known brands and lesser-known household and private-

label brands sold in supermarkets and discount chains J Top brands: Coke (Coca-Cola), Pepsi (PepsiCo), Mountain Dew (PepsiCo),and Dr Pepper (Dr Pepper Snapple Group)

J Accounts or 33% o the total volume o liquid sof drink produced in theAmericas during 2009

Fruit Beverages J 152% o industry revenue J Includes 100% ruit juices, juice drinks (which contain less than 100%

juice), and ruit- lavored drinks with no juice J Top brands: Tropicana (PepsiCo) and Minute Maid (Coca-Cola)

Figure 2: Market Leaders in the Sof DrinkManu acturing Industry

DATA SOURCE: WWW.IBISWORLD.COM

Dr Pepper Snapple

Group, Inc. 8.6%

PepsiCo, Inc. 26.8%

The Coca-ColaCompany 28.6%

Other 36%



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Bottled Waters J 126% o industry revenue J Includes bottled spring and ltered water along with lavored waters and

waters enhanced with vitamins and minerals J Top brands o enhanced waters: Glacau Vitaminwater (Coca-Cola) and

Propel (PepsiCo)

Functional Beverages J 113% o industry revenue J Includes energy drinks, relaxation drinks, and ready-to-drink (RTD) teasand coffees

J Top brands o energy drinks: Red Bull (Red Bull) and Monster Energy(Hansen Natural)

J Top brands o RTDs: Arizona (Hornell Brewing), Lipton (PepsiCo), Snapple(Dr Pepper Snapple Group), and Nestea (Coca-Cola)

Sports Drinks J 87% o industry revenue J Includes both liquid and powdered sports ormulas J Top brand: Gatorade (PepsiCo)

Other J 72% o industry revenue J Includes ice manu acturing, dairy-based drinks, and soy-based drinks

Major Markets

The nal products o sof drink production are distributed to six mainsegments. Supermarkets and general merchandisers (such as Wal-Martand Target) represent the largest channel the ultimate consumer utilizes topurchase sof drinks, accounting or 48% o the market. The remaining vesegments included in the sof drink market are: 10

Food Service and Drinking Places J 20% o market J Includes ast- ood outlets, takeout outlets, ull-service restaurants, and

bars

Convenience Stores and Gas Stations J 12% o market J Includes stand-alone convenience stores and stores attached to gasstations

Vending Machine Operations J 11% o market J Includes vending machines in transportation outlets or other areaso convenience



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Other J 8% o market J Includes smaller outlets such as drug stores, community centers, andprivate clubs

Exports J 1% o market J Includes exports to Canada, Japan, and Mexico

Future Outlook

Flavoring Syrup and Concentrate Manu acturing IndustryWhile the prospects or the lavoring syrup and concentrate industry in theUnited States are closely tied to the success o the sof drink manu acturingindustry, it is projected to are somewhat more avorably than themanu acturing industry rom a prot perspective. The reason or this is thattwo highly recognizable companies dominate the industry: Coca-Cola andPepsiCo. This power allows the lavoring syrup and concentrate producers topass on increases in input cost and sustain high margins. 11

In 2010, revenue was expected to grow 05% to $8 billion. Over the nextseveral years, the industry revenue is expected to grow 08% annually to$83 billion in 2015. This modest but slow growth can be attributed to thedecreased demand or CSDs and consumers increasing interest in healthyoods. These negative consumer trends are tempered by a growing demandor unctional beverages, sports drinks, and juice drinks with less than 100%juice.12

Sof Drink Manu acturing IndustryForecasts or the sof drink industry are made using volume (in gallons) andrevenue (in dollars). The outlook or the sof drink manu acturing industryin the United States has dimmed, showing signs o stress as a result ochanges in consumer behavior. That said, according to Freedonia Group, aninternational industry research rm, the volume o sof drink production isexpected to increase 14% per year to 221 billion gallons in 2014. 13 From arevenue point o view, the sof drink production industry is a $472 billionindustry with an average annualized growth rate o 18%. 14

Protability is expected to increase rom approximately 35% in 2010 toabout 45% in 2015. While it is anticipated that the CSD demand will sofenas consumers become more health conscious, this consciousness will causea change in behavior that leads more consumers to unctional beveragesand bottled water, resulting in the orecasted increase in protability. 15

Consumption rom a volume perspective is expected to increase as a resulto an anticipated increase in consumer spending as the recession ends,above-average expansion o the 55-and-older age groups, aster-pacedli estyles that demand convenience products, and rising demand orunctional beverages. 16



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While the industry is expected to experience modest growth driven bymore innovative products and the changing demographic trends, theactual industry growth rate is expected to lag behind GDP growth. 17 Growthis expected to be slow in this post-recession economy, existing demandpatterns are expected to change as consumers become more healthconscious (switching rom SSBs to diet drinks or unctional beverages), andcompetition among the industry leaders is expected to remain intense andcut urther into margins.

Demand Determinates

Flavoring Syrup and Concentrate Manu acturing IndustryAs previously mentioned, demand or syrup and concentrates is heavilydependent on the demand or sof drinks. This is due to the act that bottlersare legally tied to a manu acturer and must purchase all the syrup necessaryto meet their downstream demand rom the syrup/concentrate producer. Asa result o this strong correlation, the demand determinates o the lavoringsyrup and concentrate manu acturing industry in the United States arethe same as the demand determinates described below or the sof drinkmanu acturing industry.

Sof Drink Manu acturing IndustryA number o actors determine demand or sof drinks. The rst determinantis price, as the demand or sof drinks is relatively price-elastic. This meansthat as the price o sof drinks increases, the demand decreases to a greaterdegree, relative to the price change. Demand or sof drinks is also relativelyincome-elastic, meaning that as consumers incomes decrease, the demandor sof drinks decreases to a greater degree, relative to the income change,and vice versa.

Consumer li estyles and tastes also affect demand or sof drinks. Thereduced emphasis on amily meals and the increased desire or convenienceood and takeaway products may increase demand or sof drinks, especiallyRTD products, as they are packaged to meet this grab-and-go li estyle. Alongthe same lines, as people become busier, they look or sof drinks to provideenergy and rejuvenation, thereby spurring growth in the unctional beveragecategories. While this presents an opportunity, it is not expected to overridethe other actors that are negatively impacting demand or sof drinks atthis time. 18

Health issues are a hot topic with many consumers and, as a result, aredriving demand in both directions. Sof drinks developed to be low-calorie,low-sugar, and preservative- ree are in line with consumers healthconsciousness, and demand or these products is increasing. At the sametime, the public debate about nutrition, and specically about SSBs, hasreduced demand or nondiet CSDs or shifed demand to diet CSDs. 19



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This section brie ly outlines the major players in the U.S. sof drinkmanu acturing industry and the lavoring syrup and concentratemanu acturing industry. Emphasis is placed on dening the differentoperational structures the three major players (Coca-Cola, PepsiCo, and DrPepper Snapple Group) have in place, in addition to looking at uture growthopportunities and recent acquisitions.

The Coca-Cola Company

Coca-Cola is a leading manu acturer, distributor, and marketer o sofdrink concentrates and syrups. 20 It owns or licenses more than 500 brandsacross all categories o sof drinks. The company is headquartered inAtlanta, Georgia.

Until 2010, Coca-Cola sold its syrups and concentrates to a number ocontracted independent bottlers that would produce, bottle, and distributethe nal product. In February 2010, Coca-Cola bought out the remaininginterests in Coca-Cola Enterprises, the main contracted bottler, giving theCoca-Cola Company control over 90% o the North American volume. 21

The North American business segment consists o the companys operationsin the United States, Canada, Puerto Rico, the Virgin Islands, and theCayman Islands. The segment operates three business units: sparklingbeverages, still beverages, and emerging brands. The North Americanbusiness segment owns and operates nine still beverage productionacilities, 10 principal beverage concentrate and/or syrup manu acturingplants, and our bottled water acilities; leases one bottled water acility;and owns a acility that manu actures juice concentrates. 22

PepsiCo, Inc.

PepsiCo is one o the largest ood and beverage companies in the world. Itsproducts include a variety o salty, sweet, and grain-based snacks as wellas CSDs and non-CSDs. The company is responsible or the manu acturing,marketing, and sales o these goods. It has 18 brands in its port olio and isheadquartered in New York. 23

OVERVIEW OF THETHREE MAJOR PLAY



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PepsiCo is divided into three business units: PepsiCo Americas Foods (PAF),PepsiCo Americas Beverages (PAB), and PepsiCo International (PI). Thesethree business units are urther divided into six reportable segments:Frito-Lay North America (FLNA); Quaker Foods North America (QFNA); theLatin American ood and snack businesses (LAF); PAB; Europe; and Asia,Middle East, and A rica (AMEA).24

FLNA is responsible or marketing the companys branded snacks. QFNAis responsible or the manu acturing, marketing, and distribution ocereals, rice, pasta, and other branded products. LAF is responsible orthe marketing and distribution o branded snacks in Latin America. PAB isresponsible or selling beverage concentrates, ountain syrups, and nishedgoods under various Pepsi brand names. PAB also manu actures or usescontract manu acturers to market and sell RTD beverages and water.

In North and South America, PAB owns or leases approximately 20 plantsand production processing acilities, and approximately 65 warehouses,distribution centers, and offices. In addition, the company has an ownershipinterest in approximately 80 bottling plants. The companys contractmanu acturers also own or lease approximately 55 plants and productionprocessing acilities, and approximately 50 warehouses and distributioncenters. In March 2010, PepsiCo completed the acquisition o its two largestbottlers, Pepsi Bottling Group and PepsiAmericas.

Dr Pepper Snapple Group

The Dr Pepper Snapple Group is a leading integrated brand owner, bottler,and distributor o sof drinks in the United States, Canada, and Mexico. 25 The company has 15 brands and is headquartered in Plano, Texas.

The company is divided into three business segments: beverage concentrates, bottled beverages, and Latin American beverages. 26 The beverage concentrate segment manu actures and sells beverage concentrates in the United Statesand Canada. The majority o the manu acturing is done at the Dr PepperSnapple plant in St. Louis, Missouri. The company uses a combination othird-party bottlers and proprietary manu acturing systems to producethe nal products. Nearly hal o the companys annual U.S. volume isdistributed by its company-owned bottling and distribution network. Theremainder is driven through third-party/licensed bottlers and distributors,including those in both the Coca-Cola and PepsiCo bottling systems, aswell as independent bottlers, brokers, and distributors. 27 In 2009, 72% o DrPepper Snapple total volumes were distributed through the ormer Coca-Cola and PepsiCo bottling partners (these bottling partners were recentlyacquired by the Coca-Cola Company and PepsiCo Inc., respectively). PepsiBottling Group, Inc. (PBG) and Coca-Cola Enterprises, Inc. (CCE) were the twolargest customers o Dr Pepper Snapples Beverage Concentrate segment,and constituted 25% and 23%, respectively, o net sales during 2009.



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The Bottled Beverages segment manu actures and distributes bottled sofdrinks and other products, including Dr Pepper Snapple brands, thirdpartyowned brands, and certain private-label sof drinks, in the UnitedStates and Canada. 28

Finally, the Latin American Beverage segment primarily manu acturesbeverages in Mexico and distributes throughout Latin America. The majorbrands contained in this segment are Peael, Squirt, Clamato, andAguael.29

As o December 2008, the company operated 24 manu acturing acilitiesacross the United States and Mexico. The groups distribution networkconsists o approximately 200 distribution centers in the United States andapproximately 25 distribution centers in Mexico. The company manages thetransportation o its products using a combination o a group-owned leet omore than 5,000 delivery trucks and third-party logistics providers. 30



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The sof drink industry supply chain is largely dependent on the syrupproducer, as this step in the process is the driver or most downstreamoperations. The majority o the RTD beverages, such as CSDs and sportsdrinks, ollow a similar product li e cycle, moving rom syrup producer tobottler to distributor (i used) to merchant to nal consumer. The locationo the syrup manu acturer is closely linked to the locations o strategic rawmaterials and major population centers in the United States and/or areaswith higher demand or the beverages. Similarly, the bottling operationsare located in close proximity to both the syrup manu acturing acilitiesand population centers. Once bottled and ready or distribution, the nalproduct gets to the end consumer through a variety o distribution channels.

Operating Model

Specic details about the operating model used by the sof drink industryare considered to be proprietary and, there ore, are not readily available.This section lays out a general overview based on secondary research andliterature reviews o the operating model or two different orms o sofdrinks: bottled CSDs and ountain beverages.

CSDsThe process o making bottled CSDs starts when the syrup manu acturerblends the raw materials such as lavorings, chemicals, and (depending onthe beverage type) the sweetener based on the recipe. While the recipe oreach CSD is different, the basic raw materials include: 31

Carbonated water : on average, 94% o a sof drinkSweetener (sugar, high- ructose corn syrup [HFCS], or noncaloricsweetener) : on average, 612% o a sof drinkOther minor ingredients, including :

J Acids (most commonly citric acid) to sharpen the background taste andenhance the thirst-quenching experience by stimulating saliva low 32

J Additives to enhance taste, mouth eel, aroma, and appearance J Emulsions (most commonly gums and pectin) to enhance appearance J Preservatives J Antioxidants (BHA, ascorbic acid, or other naturally occurring additives) to

maintain color and lavor

SUPPLY CHAINOVERVIEW



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As seen in Figure 3, the syrup or diet drinks includes the noncaloricsweeteners, whereas nondiet sof drink syrup does not include any type osweetener (HFCS, sugar, or noncaloric sweeteners). Instead, sweetenerssuch as HFCS or sugar are added by the bottler. 33 Once the syrup is prepared,it is sent to a bottler. I a nondiet sof drink is being produced, the bottlerwill then incorporate the sweetener into the syrup and mix the ingredientstogether in batch tanks. When ready, the syrup is mixed with the mainingredient, distilled water, via proportioners, which regulate the low ratesand ratios o the liquids. The proportioners ensure that correct quantitieso syrup and water are used, and then the mixture is carbonated. Oncecarbonated, the sof drink is ready or packaging into cans or bottles ovarious sizes.

The containers are immediately sealed with pressure-resistant closures,either tinplate or steel crowns with corrugated edges, twist-off lids, or pulltabs. 34 Once bottled, the sof drinks are packaged in specic quantitiesand containers (e.g., 12-can boxes, six 24-oz. bottles joined with plasticrings, plastic racks that hold six 2-liter bottles) or resale to distributorsor merchants. I sent to a distributor, the goods may be repackaged intosmaller quantities or sold directly to customers.

YES

NO

YES

NO

YES NO

Bottler

Distributor

Merchandiser/Final Customer

Blend raw materialsto orm syrup

concentrate orspecic beverage

Is thisa diet

beverage?

Is thisa diet

beverage?

Shipdirect to

merchant?

Add articialsweetnerto syrup

concentrate

Receiveproduct

Receiveproduct

Add sugar/HFCS tosyrup

Packagesyrup

concentrateor shipment

Makeavailable toconsumer

Repackagei necessary

Send tomerchantor nal

customer

Add water,carbonate, and

bottle in appropriatecontainer

Receivesyrup

concentrate

Package orshipmentand ship

Syrup Producer

Figure 3: Carbonated Sof Drink (CSD) Operating Model Overview



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Fountain BeveragesWhen making the syrup (also called post-mix or beverage base) usedwith ountain beverage dispensers, the process again starts when the syrupmanu acturer blends the raw materials, such as lavorings, chemicals, andsweeteners (similar to those described above). Unlike with bottled CSDs, thesweetener (HFCS, sugar, or noncaloric sweetener) is added into the syrupwhen it is produced.

As seen in Figure 4, once the syrup is prepared, it is packaged and eithersent to a ountain beverage distributor or sold directly to institutions.These syrups are packaged in a orm specically to be used in domesticor commercial ountain sof drinks. Sof drink ountains used at hometypically require a smaller bottle o liquid beverage base. Fountain beveragebases used in restaurants, pubs, and other ood service providers are soldin greater quantities, using a tting that is specic to the make o a sofdrink ountain (usually specic to the company that produces the beveragebase). 35 I the syrup is sold to ountain beverage distributors, the distributorswill then resell the ountain syrup to customers. Once at the place o naluse, the beverage base container is attached to the ountain dispenser,which mixes carbonated water with an exact amount o the beverage baseas the sof drink is dispensed in the cup just prior to being served to thenal consumer.

YES

NO

Fountain Distributor

Final Customer (Institutions, Restaurants, etc.)

Blend raw materialsto orm syrup

concentrate orspecic beverage

Add articialsweetener/sugar/HFCS

to syrup concentrate

Package syrupconcentrate or

shipment

Ship directto nal

customer

Receiveproduct

Receiveproduct

Attach toountain

Fountain dilutesconcentrate withcarbonated waterwhen dispensed

Send tomerchant or

nal customer

Makeavailable to

consumer

Concentrate Producer

Figure 4: Fountain Beverage Operating Model Overview



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Syrup Producers

The geographic distribution o companies that primarily manu acture sofdrink syrup and concentrate products has generally ollowed sof drinkestablishments, such as bottlers, that have mainly been located near majorpopulation centers and in areas that commonly experience prolongedperiods o hot weather. However, since 2002, there has been a signicantshif, as companies that primarily manu acture sof drink syrup and concentrate products have moved to areas where key raw materials, such as sugar, aremore easily accessible. 37

Figure 5 shows estimates o how many syrup producers operate in eachstate in the country. As the map indicates, Cali ornia is the state with thegreatest number o syrup manu acturers, and the Southeast region holds19% o the total market. This high concentration in the Southeast is due inpart to the regions proximity to raw materials and the high demand patternsgenerated by the warm climate. The Mid-Atlantic region has another 20% othe total syrup manu acturing acilities, which is mainly to serve the denselypopulated Northeast. The Great Lakes region holds 16% o the total syrupmanu acturing operations due to its proximity to the heartland o the nation,which produces corn or HFCS, one o the main raw materials needed orsyrup production. The last signicant geographic area is the Southwest,where Texas alone accounts or 10% o the total syrup manu acturingacilities in the United States. The syrup manu acturing presence in Texasis driven by the large number o CSD processing plants in that state and theproximity to raw materials such as corn and sugar rom southern plantationsand seaports. 38

Figure 5: Estimated Number o Syrup and Concentrate Manu acturing Facilities in Each State 36

1

5

3

7

2

6

4

8

9

5

6

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REPORTED BY IBIS.



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Bottlers

Bottlers are the next signicant players in the li e o a CSD. The bottlersmain job is to mix the syrup produced by the syrup manu acturers with theappropriate ingredients, and bottle the sof drink in a variety o containersbe ore packaging it or distribution. Figure 6 shows that the estimatedlocations o the bottlers ollow a similar pattern to the locations o the syrupmanu acturers; they are concentrated in areas o high population densityand areas that have warm climates. More than a quarter (27%) o all U.S.bottling establishments are located in the Southeast, ollowed by the West,which makes up 17% o the U.S. production. The production in the Westregion is mainly concentrated in Cali ornia, similar to the trend seen withsyrup production. The industry sees much growth potential in the West overthe next ew years because it is an area poised or population growth, and ithas strong year-round demand conditions due to warm climates (Hawaii,Cali ornia, and Nevada). 40 The next largest concentration is ound in theGreat Lakes region, which accounts or 14% o the bottlers. The productionin this region is evenly distributed among the states.

A state-by-state analysis by an industry research group reveals thatCali ornia, Texas, New York, and Florida have the largest number o bottlingestablishments. With the exception o New York, these states have highaverage temperatures, which increase demand or sof drinks, but this is justone actor explaining the signicant presence o bottling establishmentsin these states. Another actor is population density; according to the U.S.Census Bureau, Cali ornia is the most populous state, ollowed by Texas,New York, and Florida the same order o ranking or bottling acilities, theanalysis reports. 41

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Distribution Channels

Once bottled, sof drinks may be distributed through a variety o differentchannels be ore making it into the hands o the nal consumer. While aportion o the sof drinks are sent rom the bottler to distributors, whoserve as middlemen acilitating urther distribution and warehousing, themajority o sof drinks are sold directly to merchants. The most signicantdistribution channels or sof drinks are depicted in Figure 7.

Supermarkets and general merchandisers such as Wal-Mart and Targetaccount or almost hal the total volume, making up the largest single marketor the sale o sof drinks and bottled water. This channel is by ar the mostreliable source o sales or sof drink producers in the industry.

The next largest market is the ood service and drinking place channel,which includes ast ood and takeout outlets, diners, ull-service restaurants,and bars. As a result o the economic downturn, sales via this channel havedecreased as ewer people are dining out. The next channel is conveniencestores, which include stand-alone convenience stores and stores attachedto gas stations. These are key and growing markets due to their typical24-hours-a-day, seven-days-a-week operating schedules, which increasesales volume and target the growing population o consumers who are onthe go. The vending machine channel is an important outlet or impulsepurchases made at places like rail or bus stations, where ew alternativesexist; this channel accounts or 11% o the total volume. Rounding out thechannels are other minor markets such as drug stores, private clubs, andrecreation centers, which make up 8% o the total channel volume.

Finally, exports o nished goods made in the United States to Canada,Japan, and Mexico only account or 1% o the total channel volume. Althoughmany o the larger brands are very popular in these and other oreigncountries, the brand owners typically license manu acturers within the othercountries to produce the sof drinks instead o exporting them rom theUnited States.

Figure 7: Main Distribution Channels or Sof Drinks 42

BASED ON DATA FROMIBISWORLD INDUSTRY REPORT , SODA DRINK PRODUCTION IN THE US. WWW.IBISWORLD.COM

Food Service andDrinking Places 20%

Convenience Storesand Gas Stations 12%

Vending Machine Operators 11%Other 8%

Exports 1%

Supermarketsand GeneralMerchandisers 48%



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Marketing in the sof drink industry has undergone a number o substantialchanges over the last ve years. One challenge is growing pressure romgovernment and advocates to limit or eliminate advertising directed towardchildren under age 12. Numerous government-led studies and initiativeshave looked at the activities and spending associated with advertising tochildren and, along with some o the largest ood and beverage companies,the sof drink industry agreed to limit advertising voluntarily. While somecompanies still direct a portion o advertising to children, these companieshave agreed to promote more health ul messages in their advertising. It isbeyond the scope o this report to evaluate whether these companies aresticking to their pledges, but in ormation is available rom advocacy groupsmonitoring compliance with the pledges.

The second signicant challenge acing the sof drink industry is guring outhow to address the American publics concerns with diet and overall healthand wellness. With a growing majority o the American public concernedwith these issues, there is a rising demand or products that addressthese needs and or marketing messages that convey the benets o theseproducts to consumers. All segments o the sof drink industry have beenworking to develop products to meet these needs and differentiate theirbrands rom the competition.

The sof drink industry is also adapting to new orms o media and promotion, utilizing the Internet and social media more than ever to communicate withtheir consumers. Almost all brands have dedicated websites that have beendeveloped with a target audience in mind. The websites are used to provideadditional in ormation, interactive opportunities, and promotions toconsumers. In addition, many brands have success ully utilized variousorms o social media, such as Facebook, MySpace, Twitter, and YouTube,or communicating with and marketing to consumers.

This section begins by examining the results and ndings pertinent to thesof drink industry in the 2008 Federal Trade Commission (FTC) studyentitled Marketing Food to Children and Adolescents: A Review o IndustryExpenditures, Activities, and Sel -Regulation , in an effort to describe thelandscape o marketing directed at children prior to 20072008. Tocomplement this, we also review the Council or Better Business Bureaus(CBBB) Childrens Food and Beverage Advertising Initiative (CFBAI), or which

MARKETINGOVERVIEW

2www.nplan.org | www.changelabsolutions.org Breaking Down the Chain: A Guide to the Sof Drink Industry


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two o the sof drink industry leaders (The Coca-Cola Company and PepsiCo)have made voluntary pledges to reduce or completely eliminate advertisingto children under the age o 12. Finally, we look at the segmentation, targeting, and positioning strategies used in the sof drink industry, and provide anoverview o the marketing mix, which includes examples o product, price,place, and promotional activities. As part o this overview, we also look atexamples o marketing directed toward A rican-American and Hispanicconsumers to illustrate how the sof drink industry is using target marketingto speak to these important consumer segments.

2008 Federal Trade Commission Study

The FTC study looked at the expenditures and activities o 44 companiesregarding ood and beverage marketing to children (ages 211) andadolescents (ages 1217) in 2006. This study was signicant because itprovided the public with the rst comprehensive overview o ood andbeverage companies marketing expenditures and tactics.

The 44 companies included sof drink manu acturers and bottlers; producerso packaged oods, prepared meals, candy, and desserts; dairy marketers;ruit and vegetable growers; and quick-serve restaurants, as these are theoods most requently marketed to children and adolescents. Included inthis study were traditional media, such as television, radio, and print, alongwith new orms o media, such as electronic media, and more subtleadvertising in the orm o packaging, in-store advertising, event sponsorship,and promotions that take place in schools. Finally, the study also examinedthe use o integrated advertising campaigns that link ood or beverages to alicensed character, movie, or television program.

The FTC obtained the data through the issuance o compulsory processorders that required companies to provide expenditure data in each o 20advertising or promotional categories related to direct marketing towardchildren, adolescents, and all audiences.

The study ound that in 2006, the 44 companies spent a total o $16 billionto promote ood and beverages to children and adolescents (see Figure 8).The study included:J The two major CSD manu acturers: The Coca-Cola Company and PepsiCo, Inc.

J The our largest CSD bottlers in 2006: The Coca-Cola Bottling Co.Consolidated, Coca-Cola Enterprises, Inc. (acquired by the Coca-ColaCompany in 2010), PepsiAmericas, Inc. (acquired by PepsiCo, Inc. in 2010),and Cadbury Schweppes American Beverages (spun off in 2008 and nowcalled Dr Pepper Snapple Group)

J Numerous juice, unctional beverage, and non-CSD companies, such asRed Bull North America, Rockstar, Inc., and Sunny Delight Beverages

Figure 8: Reported Childand Teen MarketingExpenditures in 2006

DATA SOURCE: FTC STUDY:MARKETINGFOOD TO CHILDREN AND ADOLESCENTS: A RE VIE W OF IND USTR Y EX PEND ITU RES,

ACT IVI TIE S, AND SEL F RE GUL ATIO N

Children 211

$870 million

Overlap$303 million

Teens 1217$105 billion



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Bottlers were included in the study because they are responsible or manysof drink marketing activities on a local level, such as in-school marketing,event sponsorship, and in-store promotions.

CSDs, quick-serve restaurants, and break ast cereals accounted or 63% o thetotal amount spent on youth marketing by these companies. CSD companiesspent the greatest amount o money on marketing directed at children. 43

O the $492 million spent on CSD marketing to youth, $116 million (24%)was attributed to school-based marketing, although the bulk o this was orvending machine commissions paid to schools based on sof drink sales andnot traditional marketing expenditures.

It is interesting to note that the amount spent was heavily skewed toward the 12- to 17-year-old population. As Figure 9 shows, the CSD category targetedthis group proportionally more than any other category studied. Specically,the CSD segment spent $492 million on marketing, with an overwhelming$474 million (96%) directed at adolescents in the 1217 age range.

Figure 9: Child and Teen Marketing, Ranked by Youth Expenditures in 2006

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DATA SOURCE: FTC STUDY: MARKETING FOOD TO CHILDREN AND ADOLESCEN A RE VIE W O F I NDUS TRY EXPE NDI TURE S, ACTI VIT IES, AND SELF REG ULAT I



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The report urther broke down the advertising spent across six differentcategories o promotional activity:1. Traditional measured media, consisting o television, radio, and print

advertising2. New media, consisting o company-sponsored websites and internet,

digital, word-o -mouth, and viral marketing3. Packaging and in-store marketing4. Premiums, such as toys included in kids meals5. Other traditional promotions, consisting o product placements;

movie theater, video, and video game advertising; character or cross-promotion license ees; athletic sponsorships; celebrity endorsementees; events; philanthropic activities tied to branding opportunities; and

other miscellaneous marketing expenditures6. In-school marketing

As Figure 10 shows, the bulk o the CSD promotional spending in 2006 wasocused on in-school activities, other traditional promotions, and in-store

packaging and labeling; new media, traditional measured media, and premiums made up the remainder. Here are some key points rom the promotionalanalysis o the CSDs and juice/noncarbonated beverage categories:

Television Sof drink companies reported $18 million in child-directedtelevision expenditures, representing only 03% o their total televisionadvertising expenditures or their reported brands. In contrast, they spent$99 million on adolescent-directed television advertising.

Radio The juice and noncarbonated sof drink category had expenditureso $25 million or child-directed radio advertising, while the CSD companiesspent more than $41 million on adolescent-directed radio advertising.

Print Sof drink companies spent between $1 million and $3 million onprint advertising.

New Media CSD companies spent $21 million on new media directedat the youth segment, about $5 million on company-sponsored websitesdirected toward youth o all ages, and $121 million on Internet advertisingdirected to adolescents.

Packaging and In-Store Marketing The CSD category spent $90 millionon adolescent-directed packaging and in-store marketing; thus, 67% oteen-directed expenditures ell in this category.

Other Traditional Promotional Activities CSD companies spent $117million on other traditional promotional activities; $45 million o this wasor product placement directed at adolescents. Sof drink companies spentmore than $27 million on adolescent-directed athletic sponsorships andcelebrity endorsement ees. CSD companies spent $65 million on eventsmarketing directed at adolescents, and the juice/noncarbonated segmentspent another $78 million.



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In-School Marketing The CSD and juice/noncarbonated categoriesmade up 90% o the youth-directed (ages 217) in-school expenditure($169 million out o a total o $186 million). It is o note that this gureincludes not only marketing activities in and around the schools but alsopayments made or items provided to schools under what are known as

competitive ood and beverage contracts.

Cross Promotions The CSD and noncarbonated/juices categories spenta combined $95 million on cross promotions directed at adolescents and$35 million on cross promotions aimed at children, which was signicantlyless than many other categories.

In addition to the nancials, the FTC also asked the companies to submitmarket research on marketing to youth that they either directly unded orreceived rom external sources. The research submitted by the CSD categoryocused on adolescents, attempting to determine what creative elementsappeal to them and what athletes or athletic teams they associate with. Thisresearch also showed that product placement in television shows, combinedwith traditional advertising that takes place be ore or afer the shows, wasan effective way to reach this audience. This combination increased productrecognition, ad recall, and purchase intent by adolescents.

Figure 10: Food Category Share o Total Youth Spending in 2006

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DATA SOURCE: FTC STUDY: MARKETING FOOD TO CHILDREN AND ADOLESCENTS: A RE VIEW OF INDU STRY EXPEN DIT URES, ACTI VITI ES, AND SELF REG ULAT ION



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Other research submitted by companies showed a number ointeresting ndings:

J Children liked small premiums, such as toys, included with a product,whereas older children and adolescents pre erred larger premiumsearned by entering promotion codes or UPCs on company websites orpoints toward prizes.

J Enter-to-win contests were popular with both children and adolescents.Items such as cash, electronic games, trips, or event tickets garneredthe most attention.

J In-store marketing, such as loor decals and on-shel coupons, weresuccess ul at getting the attention o children and enticing parents tobuy the product or their children.

J The products packaging was seen as a signal denoting whether aproduct was intended or a child or an adolescent through the use oparticular onts, colors, and vessels. Some o the research on packagingshowed that youth were less likely to request products that had healthymessaging on the package, because children and adolescents elt thetaste would be compromised.

The FTC also asked companies to report any promotional activityexpenditures that were directed toward youth o a specic gender, race,ethnicity, or income level. Although no companies reported targeting basedon income, 15 o them reported specic amounts spent targeting youtho particular races, ethnicities, or genders, which totaled $286 million.Specic examples in the CSD and noncarbonated/juice categories included:

J Promoting soccer events to Hispanic youth J Sampling and promotional activities at various Hispanic estivals J Raising money and eaturing branded prizes during events in communityparks or a program that reaches both English- and Spanish-speakingpreschool children

J Instructions in Spanish or sweepstakes to win toys J Providing Spanish-language book covers to Hispanic-designatedelementary schools

J Sponsoring basketball tournaments and streetball events or A rican-American youth

J Sponsoring an essay contest tied to Black History Month or elementary,middle, and high school students

J Cross-promotional advertisement or discounted admission tickets to anamusement park, generally directed to multicultural youth ages 1224

The FTC report provides insight into how the promotional activities o theood and sof drink industry specically target youth. Although the insightis use ul, it is noteworthy that the in ormation provided to the FTC wassel -reported. While no claims o misrepresentation have been made andno inconsistencies have been ound, it is important to remember, when



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reviewing these ndings, that the data were provided by the companiesthemselves and not discovered by an independent third party.

Since the studys initial publication in 2008, the FTC has directed major oodand beverage companies that market to children and adolescents to reportdata that will enable the FTC to gauge how ood marketing activities andexpenditures have changed since 2006; companies must also provide theoverall nutritional prole o those oods. 44 This time around, 48 ood andbeverage manu acturers, distributors, marketers, and quick-servicerestaurants received the compulsory orders. These companies were theoriginal 44 included in the 2006 report plus our other new producers. 45

The in ormation being sought by the FTC includes: 46 J The categories o ood marketed to children J The types o measured and unmeasured media used or marketing J The amount spent to communicate marketing messages about ood

to children J The nature o such marketing activities J Marketing based on gender, race, ethnicity, or income J Policies, initiatives, or research undertaken relating to the marketingo ood to children

The FTC also hosted a public orum in December 2009, entitled SizingUp Food Marketing and Childhood Obesity, or which the FTC assembledindustry representatives, ederal regulators, consumer groups, scienticresearchers, and legal scholars to discuss issues related to ood marketingto children. The orum discussed current research regarding the impacto ood advertising on children, the statutory and constitutional issuessurrounding governmental regulation o ood marketing, and the oodand entertainment industries progress toward sel -regulation andimplementation o the recommendations in the FTCs 2008 report. 47

It is not clear when the FTC will release its anticipated ollow-up report.The 2008 FTC report on the ndings rom its initial request or marketingin ormation in 2006, along with Michelle Obamas White House Task Forceon Childhood Obesity report released in May 2010, gave positive eedbackto the ood and sof drink industry or its efforts to sel -regulate, noting thesignicant changes it has made in how it targets children and the messagesit presents. 48 The ollow-up report will provide valuable comparison data tohelp determine i companies are adhering to sel -regulatory pledges.

The data presented in the 2008 report detailed conditions just prior to thedevelopment o sel -regulation practices in the ood and sof drink industryaimed at reducing the amount o advertising directed at children ages 12and younger. These sel -regulation practices were led by the Council orBetter Business Bureaus (CBBB) initiative, which kicked off in 2006 andreached ull implementation or some participating companies in 2007. Adescription o the initiative ollows.



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Childrens Food and Beverage Advertising Initiative

The Childrens Food and Beverage Advertising Initiative (CFBAI) waslaunched in November 2006 by the CBBB, the network o Better BusinessBureaus or the United States and Canada. 49 The CBBB strives to achieveethical marketplace standards. The goal o the initiative is to providecompanies that advertise oods and beverages to children with a transparentand accountable advertising sel -regulation mechanism. 50 The aim o themechanism is to shif the advertising messages directed at children ages 12and younger to ocus on healthier dietary and li estyle choices.

The Coca-Cola Company and PepsiCo, Inc. are two o the 17 companies thathave chosen to voluntarily comply with this initiative. By agreeing, thecompanies have promised to:

J Devote at least 50% o their advertising directed at children ages 12and younger to messages that encourage good nutrition and healthierli estyles

J Better dene nutritional criteria so that products promoted as better oryou are consistent with established scientic and government standardssuch as the USDAs Dietary Guidelines and MyPyramid, and FDA standardsor health claims

J Create an individual pledge that describes the companys commitment tothe initiative, which must be approved by the CFBAI staff

In addition, companies must also agree to: J Reduce the use o third-party licensed characters in advertising directedprimarily at children ages 12 and younger that does not meet the requiredmessaging criteria described above

J Not pay or or actively seek product placement in editorial orentertainment content that is primarily targeted toward children ages 12and younger

J Change interactive games directed to children ages 12 and younger thatinclude company brands or images to include healthy li estyle messages

Finally, participating companies must agree not to advertise ood orbeverage products in elementary schools.

With those broad principles outlined, we now take a closer look at pledgessigned by the Coca-Cola Company and PepsiCo, Inc., and review what theagreement not to advertise in schools actually entails. Finally, we examinethe results o the CBBBs initiative update or 2009 to see i the industryplayers are upholding their pledges to limit advertising to children.

The individual company pledges state the company-specic commitmentregarding child-directed advertising in measured media and company-owned websites. In addition, the pledges include in ormation concerningthe extent to which third-party licensed characters in advertising will beused. Finally, the pledges also indicate the companys specic commitments



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regarding the use o interactive games and its agreement not to seek anyproduct placement in content directed at children. Coca-Colas and PepsiCospledges are distinctly different: the Coca-Cola Company has pledged toeliminate all advertising directed at children ages 12 and younger, whereasPepsiCo has pledged to advertise only health ul messages to this age group.This difference could be attributed to the act that PepsiCo is not only asof drink producer but also carries a wide range o ood products, unlikethe Coca-Cola Company; there ore, the two companywide strategies ormarketing to children may differ.

Highlights rom the Coca-Cola Companys 2010 pledge include (re er toAppendix 1 or complete pledge): 51

J Not placing any brand marketing in television, radio, and printprogramming that is primarily directed to children ages 12 and youngerand where the audience prole is higher than 35% o children under 12

J Avoiding the use o third-party licensed characters in any orm o companyadvertising on any media that is primarily directed to children ages 12 andyounger

J Not eaturing sof drinks within editorial content o any medium that isprimarily directed to children ages 12 and younger (product placement)

J Not buying advertising on internet sites or mobile phones directlytargeted to children; where data are available, not placing marketingmessages on Internet or mobile phone programs where more than 35% othe audience is comprised o children

J Not conducting promotional efforts on interactive games that are directedprimarily to children ages 12 and younger

Highlights rom PepsiCo, Inc.s 2010 pledge include (re er to Appendix 2 orcomplete pledge): 52

J 100% o advertising (including television, radio, print, and Internetadvertising) directed primarily to children ages 12 and younger willpromote only products that meet PepsiCos Smart Spot 53 nutritionalcriteria (commitment in place as o January 1, 2008)

J Third-party licensed characters will only be used in marketing directed atchildren ages 12 and younger or Smart Spot products

J PepsiCo will not seek product placement or any PepsiCo products incontent primarily directed at children ages 12 and younger

J The company will not allow any products except Smart Spot products tobe included in interactive games with ratings such as early childhood orother games graded or labeled as being or children ages 12 and younger

J PepsiCo will not sponsor DVDs o G-rated movies directed at children ages12 and younger

The CBBB did a review o compliance six months afer the rst series opledges were signed, when the Coca-Cola Company had ully implementedits pledge and PepsiCo, Inc. had achieved partial implementation. Theresults were published in July 2008 and showed that in the rst six months,the six companies that reported they had ully implemented their pledgeswere mostly compliant, based on the sel -reported materials submitted



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to the CBBB.54 The compliance issues were relatively minor and revolvedaround content on large company websites that displayed material directedat children ages 12 and younger that did not meet the criteria or better oryou products. 55

One item to note is that the CBBB review process and published resultswere based on several pieces o in ormation. The rst piece o in ormationwas a participant-submitted report detailing advertising activities directedat children ages 12 and younger and noting how the company wascomplying with the pledges made. The second piece o in ormation camerom independent assessments conducted by the CBBB o each companyswebsite, samples o advertising, and ollow-up on any public inquiriesor complaints. Although there is no direct evidence o any alsication oin ormation or o purpose ul disregard o certain advertising, those whoread the results should keep in mind that the majority o the in ormationused in the review process was provided directly by the companies beingscrutinized.

The most recent CBBB review was published in 2009 and covered theactivities that took place in 2008. Again, the major nding was a high levelo compliance overall, with no violations on television. Minor violationsincluded one on radio, one print violation, two issues with advertisementsin an elementary school, and two issues with company-owned websites.The report did not name the specic companies responsible or thesein ractions. 56

In addition to the CBBBs own review, advocates have also been keepingtabs on the ood and beverage industrys pledges. Children Now, a nationaladvocacy group or childrens issues, commissioned an assessment oCFBAI in December 2009. The study suggested that thus ar, the nutritionalquality o the oods and beverages in ads targeted toward children has notimproved. Key ndings o the report were: 57

J From 2005 to 2009, ads or nutritionally poor oods decreased by 12%. J Ads or healthy oods such as ruits, vegetables, and whole grainsaccounted or less than 1% o total ads rom participating companies. Theother 99% o ads were or oods with low to moderate nutritional value.

J The use o licensed characters nearly doubled rom 2005 to 2009, and,despite the pledges, 49% o ads containing licensed characters were ornutritionally poor oods.

J About 29% o ood ads on television were run by companies that are notparticipating in the initiative.

Since these 2009 reviews, the CBBB has published pledges or 17participating companies in the ood and beverage industry, includingPepsiCo and Coca-Cola. Although reports were published in 2008 and 2009reviewing the prior years compliance, a copy o the 2010 review o 2009compliance could not be located. Although the CBBB published a synopsiso program participants nutritional standards in July 2010 and the betteror you product list in September 2010, the Coca-Cola Company was not



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included in either; the company stated that it does not engage in anyood and beverage advertising primarily directed at children ages 12 andyounger. 58 Meanwhile, PepsiCo has developed new global nutrition criteriaor advertising to children, as well as standards or its snack and oodproducts. PepsiCo also pledges that it will not advertise sof drinks otherthan water, ruit juice, and dairy-based products to audiences that consist omore than 50% children under the age o 12, in paid third-party media. 59

Pledges in Elementary SchoolsAlong with the pledges, the companies, including Coca-Cola and PepsiCo,have agreed not to advertise in elementary schools (grades K6), thoughthe impact o this commitment is diluted by a multitude o exceptions builtinto the agreement. Specically, companies are not permitted to promotethe sales o specic or branded ood or beverage products in materialsprepared or or directed to students in public, private, parochial, andcharter elementary schools in the 50 states and the District o Columbia.The agreement does not limit participating companies rom communicatingwith administrators, school employees, parents, or other adults.Furthermore, companies are not prohibited rom partnering with school orparent organizations that offer the products or sale or rom entering intoarrangements with the a orementioned parties that will benet students. 60 The initiative does not apply to:

J Displays o ood and beverage products or sale J Charitable undraising activities J Public-service messaging J Items provided to school administrators J Charitable donations made by participating companies to schools

Although the elementary school pledge prohibits advertisements directedat children ages 12 and younger in schools, it does not exclude brandedproducts depicted or eatured on menus, menu boards, or other ca eteriasignage that identies the products that are being served and offered orsale, as long as such signage is seen in conjunction with the ood andbeverage products or sale. In addition, participating companies mayalso sponsor ood reward or incentive programs in elementary schools aslong as the programs are marketed to parents. Examples o incentivizedbehaviors include reading a certain number o books, achieving goodgrades, and earning good conduct marks, all o which can be rewarded witha participating companys product.

Participating companies are also permitted to make charitable donations toelementary schools, provide sponsorships, or underwrite events. The pledgestates, Many participants have ormal charitable gif giving programsto provide schools (ofen schools serving underprivileged students)with materials or equipment they need but cannot afford, or unding orenrichment events that those students might otherwise not experience(e.g., underwriting o eld trips to concerts or art exhibits). These programs,or which corporations may be entitled to charitable tax deductions i theymeet applicable regulations, are outside the scope o the Initiative. 61



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The restrictions cover all areas o the school property, including theathletic elds primarily used or elementary school children. In addition,participating companies cannot advertise on school buses that transportelementary children to and rom any official, school-sponsored event.

Marketing Strategies

To analyze the marketing practices utilized by the nonalcoholic sof drinkindustry, we applied a basic marketing model called STP: a three-stageprocess that examines segmenting, targeting, and positioning strategiesused by an industry or a specic company. The American MarketingAssociation denes these processes as ollows.

Market segmentation is dened asThe process o subdividing a market into distinct subsets o customersthat behave in the same way or have similar needs. Each subsetmay conceivably be chosen as a market target to be reached witha distinct marketing strategy. The process begins with a basis osegmentation a product-specic actor that re lects differences incustomers requirements or responsiveness to marketing variables(possibilities are purchase behavior, usage, benets sought,intentions, pre erence, or loyalty). Segment descriptors are thenchosen, based on their ability to identi y segments, to account orvariance in the segmentation basis, and to suggest competitivestrategy implications (examples o descriptors are demographics,geography, psychographics, customer size, and industry). 62

Targeting is dened asThe process o ocusing on a particular segment o a total population,whereby the marketer utilizes its expertise to satis y that submarketand accomplish its prot objectives.

Finally, positioning re ers toThe customers perceptions o the place a product or brand occupiesin a market segment. In some markets, a position is achieved byassociating the benets o a brand with the needs or li estyle o thesegments. More ofen, positioning involves the differentiation o thecompanys offering rom the competition by making or implying acomparison in terms o specic attributes. 63

To urther break down the marketing strategies used in the nonalcoholicsof drink industry, we also use the 4 Ps model to better understand themarketing mix used to target specic customers. We include a review oexamples o product, price, place, and promotion strategies.



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SegmentationTo understand segmentation, it is use ul to begin at the top (see Figure 11),with the beverage industry as a whole. It is broken down rst by productclass into alcoholic beverages and sof drinks. Within the sof drink productclass, the market can be urther segmented by product orm: CSDs, ruitbeverages, bottled water, unctional beverages, sports drinks, and other.Within each o the product orms, the market can be urther segmented intoadditional subproduct orms; or example, the CSD segment can be brokendown into diet and nondiet drinks and urther segmented into cola andnoncola drinks. Additional examples are shown in Figure 11.

Each o the product classes and orms have customer segments, which canbe dened using a number o different approaches:

J Demographic segmentation by gender, age, and ethnicity J Behavioral segmentation into product usage (e.g., light, medium, and

heavy users; no, medium, or high brand loyalty); or type o user (e.g., withmeals or on special occasions)

J Psychographic segmentation, such as by li estyles (personalities odemographic groups) and attitudes (images associated with the product)

Figure 11: Segmentation o the Beverage Industry

BeverageIndustry

NonalcoholicBeverages

Carbonated SofDrinks (CSDs)

BottledWaters

SportsDrinks

FruitBeverages

FunctionalDrinks Other

AlcoholicBeverages

ColaNoncola

100% Fruit JuicesFruit Drinks

Juice Drinks

Un lavored WatersFlavored Waters

LiquidPowdered

Dairy/Soy-BasedDrinksEnergy DrinksReady-to-DrinkTeas/Coffees

RelaxationDrinks



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Figure 12: Segmentation and Messaging Strategies 64

Product Core DemographicBrand Message(as ound on Coke.com)

Brand Message( rom Katie Bayne,a senior V.P.,Coca-Cola Brands)

Flavor Prole(according to ScottWilliamson, Coca-Colaspokesman)

Diet Coke:Launched in 1982;sweetened withaspartame

Very broad ootprint,with marketing effortsocused on those intheir late 20s to early30s, skewing slightlyemale

Diet Coke is your style, its yoursass, its doing what makes youhappy.So lirt, laugh, dance,prance, giggle, wiggle dowhat eels good.

The adult cola taste thatuplifs with style its a verystylish brand. Its upscale.Its sophistication, but aninvitational sophistication.

According to lore Ive neverheard this internally disputedor conrmed it resembleswhat used to be New Coke.

Diet Coke w/ Splenda:Launched in May2005; sweetened withSplenda [sucralose]and acesul amepotassium

30- to 40-year-olds,skewing slightly emale

For those who love the sweetand intense taste o SplendaBrand Sweetener, nowtheres one more way to enjoyDiet Coke!

An adult cola taste, it uplifswith style, and its sweetenedwith Splenda, which is asweetener people say theywant. Its that simple.

Its meant to mimic Diet Coke.But with Splenda, you will tastea difference, and the Splendalover loves this new lavor note.

Coca-Cola Zero:Launched in June2005; sweetenedwith aspartame andacesul ame potassium

18- to 34-year-olds,skewing slightly male

A new kind o beverage thateatures real Coca-Cola taste

and nothing else. Nothing thatcould potentially get in the wayo your chill.

Its really the pause that letsthem recenter in this ast-paced, time-warped world, andkeep going. Thats the justchill part o the positioning.

Its ormulated to match regularCoca-Cola.

Tab:

Launched in 1963;sweetened withsaccharin andaspartame

Urban-sophisticatebaby boomers with asense o ironic kitsch

Tab has achieved a retropop-culture status and has thereputation o being somewhathard to nd.

Its continuing to meetthe needs o the small butunbelievably passionate groupo people who continue tolove Tab, but it isnt activelymarketed.

It has a strong cola lavor, withthat distinctive saccharinsweetness.

DATA SOURCE: WWW.FASTCOMPANY.COM/NODE/ /PRINT

Demographic SegmentationDemographic segmentation using age, gender, and race is commonly usedacross the industry or marketing purposes. Although very ew, i any, o thelarge market players in any segment advertise directly to children ages 12and younger, the teen and young adult market is one segment that is heavilytargeted through many different means o promotion, especially web-basedadvertising viral video, and sponsorships. In general, the age-basedsegmentation can be broken down in to three categories:

J Youth ages 1219 (goal: leverage spending power and build brandloyalty early, and that will be carried through to adulthood)

J Young adults ages 2024 (goal: continue to build brand loyalty) J Adults ages 2535 (goal: ocus mainly on diet products)

One o the key goals o sof drink advertising is building brand loyalty. I thecompanies are success ul in nurturing a segment o customers rom youththrough young adulthood, there will be little need to continue to advertise tothem, because they should be loyal to the brand by adulthood.

As competition in the sof drink market grows, manu acturers are lookingto develop products or specic segments o the market where possible.For example, the Coca-Cola Company has been working on a demographic-centered segmentation strategy and messaging agenda with their diet colaline o products, as seen in Figure 12. 65



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Behavioral SegmentationBehavioral segmentation has been and is currently being used by theCoca-Cola Company and PepsiCo in relation to events such as the SuperBowl, holidays such as Christmas, and seasons such as summer. Up until2009, PepsiCo was the second largest advertiser during the Super Bowl,with ads targeted at ootball ans, but in 2010, Pepsi announced that itwould not advertise during the game via television commercials but wouldinstead shif its advertising ocus to online promotions, especially via socialmedia.66 The company returned to traditional commercials in the 2011 SuperBowl to promote Pepsi Max, the no-calorie CSD aimed at men. 67 The Coca-Cola Company still continues to use a behavioral segmentation each year bycreating a Christmas-themed can and advertisements.

TargetingTargeting in this market is brand-specic and varies depending on theproduct. Targeting takes many orms: companies can target specic agegroups, incomes, or even ethnic groups they believe will be more inclinedto buy the advertised product. In this section, we look at some exampleso the targeting done or each segmentation group. We also take a closerlook at consumption patterns indicating that black and Hispanic groups arekey consumers in the sof drink market, and at how marketers target thesegroups.

CSDsAccording to Mintel, a market research rm, teens and young adults arethe primary targets or CSD marketing, as there is strong demand or CSDswithin this segment, as well as in households with children and those withincomes below $50,000. 68 Other subsegments that have been targeted,especially with diet CSDs, are the middle-aged (3554) and adults ages55 and older. 69 The ocus on diet sof drinks is partly a result o people inthese groups becoming increasingly health conscious and more prone toillnesses such as diabetes (which requires limiting the types o ood theycan consume on a regular basis).

While these segments are primary and secondary targets, it should benoted that overall consumption o CSDs has been declining over the lastew years or a number o reasons, ranging rom an increased level ohealth consciousness to limited household budgets as a result o therecession. There ore, marketers are looking or alternative and, in somecases, smaller subsegments o the market to target in order to increasesales. The Hispanic teen is one such subsegment that Mintel identies asa signicant opportunity or CSD manu acturers, because about 11% oteens (ages 1217) in the United States are Hispanic (compared with Whiteteenagers, who only account or 8% o the total teen population). In addition,this Hispanic teen subsegment is growing rapidly, 70 creating signicantopportunities or CSD manu acturers to target Hispanic teens with ads thatinclude imagery o Hispanic and Latino culture.



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One recent example o targeting bilingual and bicultural Hispanic teens andyoung adults is Dr Peppers Vida23 campaign, which played on the ideao getting more out o every day, because the bicultural teens have a ootin each culture. 71 The ads ran on Hispanic-targeted television channels andradio stations.

Another example o targeting a specic segment o the market is theintroduction o Coca-Cola Zero and Pepsi Max; both products are marketedheavily to males in their 20s. The marketing

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ChangeLab-Beverage Industry Report-FINAL (CLS-20120530) 201109

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