The polar bears in Coke’s iconic ads are skating on thinner ice these days.

While talk of softening soda sales pops up every couple years, the reality is becoming tough to avoid: sales of regular and diet soda in the restaurant industry fell by 1.7 and 5.7 percent, respectively, between February 2013 and February 2014, according to market research firm The NPD Group.

Blame it on health concerns or a post-recession, value-seeking mindset, but one thing is certain: consumers are purchasing fewer soft drinks than ever before—and restaurants aren’t isolated from the resulting impact. As consumers shy away from soda in favor of healthier, trendier sips like tap and flavored water—and restaurants scramble to replace high-margin soft drinks with more on-trend options—beverage makers are not standing idly by; instead, they are creating a roadmap of how to drive sales of fizzy drinks for a new generation, beginning with re-enginnering their focus toward breakfast and snacking.

“You’re seeing annually that total gallonage of soft drinks in foodservice has probably been down an average of 2–3 percent over the last five years or so,” says Joe Pawlak, senior vice president of foodservice research firm Technomic, Inc. “That puts pressure on the operator from a profitability standpoint, so they’re looking for other beverages, new beverages, to take the place [of soft drinks]—not only from a sales perspective, but also from a marketing perspective.”

The struggle extends beyond foodservice. A 2013 study from beverage publication Beverage Digest revealed total carbonated soft drink sales, including those in the retail sector, fell 3 percent last year to the lowest level of consumption since 1995. The sales skid coincided with the ninth consecutive year of declining soft drink sales.

While there are a number of reasons for this decline in soft drink sales and consumption, a search for value in a post-recession world continues to play a major role, says Bob McDevitt, senior vice president of franchising for family-dining chain Golden Corral. He says 70 percent of consumers at Golden Corral who opt for water over another beverage do so for economic reasons.

Pawlak also counts health concerns and a greater sense of consumer consciousness among the top contributors to the soft drink sales slide. And not even diet soft drinks are safe from these evolving consumer habits.

[pagebreak]

“When you’re talking about health and nutrition today, people are less and less talking about calories,” Pawlak says. “They talk about artificial ingredients, additives, things that aren’t natural. A lot of things you find in soft drinks—even in diet soft drinks—the perception is, they would all fall into that artificial category.”

In place of these less-healthy beverages, he says, consumers are shifting to other offerings—whether it be bottled water, iced teas, or something else altogether—that they think are better for them, or, increasingly, the simplest and cheapest beverage of them all: tap water. In fact, according to Technomic data, nearly 30 percent of consumers choose not to order any beverage with a price tag in a restaurant, opting instead for the customary tap water.

“For the most part, when they don’t order a beverage, they’re asking for water,” McDevitt says of customers at Golden Corral. “It’s a function of either sell a beverage, or don’t make a beverage sale at all.”

Dinner Down, Breakfast Up

The dinner segment is when soft drink consumption has taken the largest hit, with regular soft drink servings declining by 4.7 percent and diet soft drink servings falling by 8.1 percent between February 2013 and February 2014, according to NPD data.

But the research firm found that falling soft drink figures aren’t the same across the board, in terms of either daypart or restaurant segment. In fact, when it comes to full-calorie and full-sugar carbonated soft drinks, servings in the breakfast daypart were actually up in 2014, growing by 9.4 percent between February 2013 and February 2014.

NPD also reports that afternoon and evening snacking occasions have been a boon for carbonated soft drink consumption, with servings of regular soft drinks growing by 5.6 percent in the last year, while diet soft drinks grew 1.6 percent over the same period.

However, this soft drink love disappears at lunch when guests begin seeking healthier alternatives, which include both lower-calorie food and beverages. This is backed up by NPD data that show regular and diet carbonated soft drink consumption was down by 3.3 and 5 percent, respectively, between 2013 and 2014 for the lunch daypart.

When it comes to consumption figures by restaurant segment, many reports show that soft drink sales are declining at a faster rate in the full-service restaurant segment than the quick-service segment. Regular soft drink consumption fell 0.7 percent in the quick-service segment between February 2013 and February 2014, according to NPD; over the same period, regular soft drink consumption declined by a whopping 7.4 percent in the full-service segment, figures that alarm both full- and limited-service operators who rely on soft drinks for making a quick buck or three.

[pagebreak]

While full serves have received the brunt of declining soft drink sales, they hurt quick serves more. Because soft drinks are such a high-margin item at quick serves—and an item this segment relies on selling a lot of, thanks to the abundance of meal deals and combos—even the slightest softening of soft drink sales may be more dramatic for this segment than any other in the restaurant industry.

In addition, because many fine-dining, casual-dining, and even fast-casual concepts now serve beer, wine, and other adult beverages, they may be more insulated from soft drink sales declines. That’s certainly the case for Shula’s Steak House and its fast-casual sister concept Shula Burger, says Dave Shula, president of full-service chain Shula’s Steak House. “On the beverage side, we spend more time thinking about wine and beer sales and mixed-drink sales than we do soft drinks,” he says, adding that soft drink sales have been flat—no pun intended—for the brand over the last several years.

The New Pop Stars

According to a 2011 study by NPD, tap water represents 8 percent of the 50 billion beverage servings ordered at restaurants, a figure that has increased 6 percent since 2006. Much of this growth is due to restaurants’ free-refill water policy, which may not apply to other beverages, particularly in the full-service restaurant segment.

For those consumers who prefer water with added health benefits, offerings such as Vitamin Water, Lifewater, and coconut waters have become common replacements. Meanwhile, specialty drinks, super-fruit juices, and other beverages offered at coffee houses and fast-casual eateries—like the Evolution Fresh line of juices and smoothies that Starbucks purchased in 2011—are also fulfilling consumers’ desire for more healthful beverage options.

“This pushing and promotion of juices and healthy drinks is simply not something that’s going to serve soft drink makers well,” says Rick Zambrano, food research editor for market intelligence firm Packaged Facts. “It’s not going to help in terms of [carbonated beverage] consumption within restaurants.”

Pawlak at Technomic says he expects both operators and suppliers to focus more holistically on the overall beverage program, not just soft drinks, proving to consumers that they have a variety of choices—be it soda or bottled water, teas, coffees, flavored waters, or other specialty drinks—when it comes to ordering a beverage. Coke, for example, owns Vitamin Water and recently purchased Zico Coconut Water, while Pepsi houses the Sobe Lifewater brand, among other tea and juice options such as Lipton, Tropicana, and Naked Juice.

At Golden Corral, this beverage variety includes lemonade, flavored teas, fruit juices, and traditional iced tea, of which McDevitt says guests consume a sizeable amount.

“Restaurants have an opportunity to add more beverages to the menu to keep their guests from ordering just water or tap water or no beverage whatsoever,” says Nichole Banducci, marketing manager for chain accounts at Nestlé Professional Beverages. And better still if it’s a matchless, differentiating offer that drives consumers into the restaurant, she adds.

[pagebreak]

Beverage Makers Strike Back

Whether full service or limited service, operators and their beverage suppliers aren’t standing by idly while soft drinks soften. Coke, for one, introduced its Coca-Cola Freestyle Machine in 2009 in a first-of-its kind effort to combat sliding soft drink sales.

“Carbonated soft drinks have been wonderful to restaurants because they’re extremely profitable,” Banducci says. “Coke and Pepsi have built phenomenal business models for these restaurants to make a lot of money when it comes to carbonated soft drinks. They’re really inexpensive and they can charge a good amount for margins.”

Sandwich concept Firehouse Subs is just one chain that’s seen great success since adopting Coke’s touchscreen beverage dispenser in its 750-plus units in 2011. Don Fox, CEO of Firehouse Subs, says the machine’s sheer volume of choices—both in the carbonated and non-carbonated categories—is what amazes customers. “What you have to take into account is the variety of non-carbonated drinks, the diet offerings that are there, the zero- or low-cal options, the caffeine-free options,” he says. “I’m really hard-pressed to think that anyone who’s looking for beverages in any of those sub-categories isn’t going to be able to find what he’s looking for.”

But it’s not just the number of beverage options—more than 100 and counting, to be exact—that guests find appealing; it’s also the technology the machine uses, Fox says. “People have poured soft drinks for themselves in the same way for decades,” he adds. “All of the sudden, you’ve got this unique and fun interface, and it takes what was a routine experience in every other restaurant and now turns it into something quite a bit different.”

Other brands using the Coke Freestyle Machine include Five Guys Burgers and Fries, Moe’s Southwest Grill, and Taco Mac.

At the 2014 National Restaurant Association Show, PepsiCo. unveiled its own version of the Freestyle machine, the Spire. The self-serve, touchscreen dispenser also houses both carbonated and non-carbonated beverage options.

[pagebreak]

Targeted Marketing Increases Sales

In addition, Pepsi is enlisting some of its biggest brand partners to beef up soft drink sales in creative ways. Taco Bell, for example, recently launched its biggest beverage menu expansion in company history by adding six new beverages, three of which are carbonated and all of which are made using PepsiCo. products. These include the popular Diet Mountain Dew Baja Blast, a tropical, lime-flavored beverage; the fruit-infused Mountain Dew Sangrita Blast; and the apple-flavored and carbonated Manzanita Sol. On the non-carbonated side are beverages that include the SoBe Lifewater Yumberry Pomegranate, Brisk Mango Iced Tea, and Brisk Half and Half (half iced tea, half lemonade).

Pawlak at Technomic, too, says softening soft drink sales give operators the chance to introduce one-of-a-kind beverages and market them at a higher price point. “If you look at some of the newer beverages that are coming out, … the price points on those are much higher than they would get on the carbonated soft drinks,” Pawlak says of items like smoothies, juices, flavored waters, and other specialty offerings. “On a dollar basis, they’re making more margin, and it also brings in a consumer for a different occasion beyond just a meal.”

McDevitt at Golden Corral says it’s also critical for waiters and cashiers to suggestively sell beverages, whether they’re soft drinks or something else entirely. “We’re suggestively recommending a beverage to every customer who comes in the door.”

Full-service pizza chain Mellow Mushroom took a different tack to ensure servers upsold Coke products. The brand, with more than 160 locations in the U.S., teamed up with SaaS-based consumer-engagement platform HelloWorld for its “Share Happiness” campaign during the summer of 2013. As part of the partnership, QR codes on tabletop signage led guests to trivia questions and conversation starters. In addition, every time a consumer purchased a Coke product, she received a code at the bottom of her receipt to enter via SMS to win prizes such as Mellow Mushroom gift cards and Live Nation concert cash.

[pagebreak]

“Oftentimes a server, in a rush, will forget to enter the fact that a person bought a soft drink,” says HelloWorld CEO Matt Wise. “Why? Because the price point is low and they’re doing it on the fly. Because of this program, the consumer got a code for every Coca-Cola she purchased, and that motivated the server to make sure they were accurately entering all of the orders for Cokes, because the consumer obviously wanted to see that.”

Wise says that by the end of the campaign, 71,000 purchase codes had been entered, resulting in a measurable uptick of Coca-Cola sales in Mellow Mushroom restaurants.

The Next Evolution

While it may not be much comfort to restaurateurs and beverage suppliers, falling consumption figures aren’t limited to just the carbonated soft drinks segment. According to Beverage Digest’s 2013 study, sales in the overall beverage segment fell by 1.6 percent from 2012. “It isn’t just soft drinks,” Golden Corral’s McDevitt says. “We’re seeing a slow and steady decline in overall beverage sales.”

Another important soft drink fact to note is that while total gallons and servings of carbonated beverages are down, their menu penetration is up, particularly in the casual- and fine-dining segments, says Zambrano of Packaged Facts.

In fact, the use of the word soda on menus rose 2 percent between 2010 and 2013, coming in at 32.5 percent in 2013, according to foodservice research firm Datassential. “It has gone up, but the story there is that it’s gone up only in the casual- and fine-dining segments,” Zambrano says, attributing the uptick to full-service restaurants trying to offer a wide variety of beverages.

Despite the decline in total gallons and servings sold, Banducci at Nestlé Professional Beverages says restaurants don’t need to stop marketing and selling soft drinks altogether. “There’s still a strong customer base that, no matter what, they’re still going to drink soft drinks. They were weaned on it when they were young, and will continue to drink it,” she says, noting that restaurants may begin creating smaller footprints for carbonated beverages to make room for new drink options consumers want.

“At the end of the day, if we’re talking 20 years from now, … carbonated soft drinks will still be the No. 1 beverage in foodservice,” Pawlak says, “but there may be a different spin on it.”