Perennial competitors, Coca-Cola and PepsiCo have long been at war with one another as they vie for consumer affection within the carbonated soft drink (CSD) market. But as consumers turn to healthier beverage options, the love affair with sugary soft drinks has waned, and these companies find themselves embattled not with each other but with new startups entering the market.

According to research firm, Mintel, the sales for CSD in 2013 were to the tune of $42.4 billion, which was a 3.6 percent decrease from the previous year. And it is projecting dramatic declines through 2019.

"The carbonated soft drink market is evolving, and there is an increased focus on health and quality," said Elizabeth Sisel, Beverage Analyst, Mintel.

In recent years, Coca-Cola and PepsiCo have become bonafide villains as they were implicated in the obesity crisis plaguing the country. Furthermore, the diet sodas that had once been viewed as healthy alternatives have lost popularity over concerns about the use of artificial sweeteners. As a result, consumers have been steadily decreasing their soda consumption in favor of other effervescent drinks like carbonated water and kombucha.

As big soda grapples with negative press and how to evolve in the new consumer climate, it has created an opportunity for startups to enter the market. In the last several months, beverage makers looking to take on the incumbents have been making a splash at competitions across the San Francisco Bay Area.

Earlier this year, Patrick's Fine Sodas, a company in Santa Fe, N.M. that specializes in probiotic drinks, was the winner of the FoodBytes! Summit, an event that aims to connect investors and companies in the food industry. Last month, the all-natural energy drink, Mati, from Durham, N.C., beat out 11 tech companies to win top honors at Google for Entrepreneurs Demo Day.

The demand for more options within the CSD market is reaching a fever pitch, and entrepreneurs are heeding the call. And with a groundswell of excitement from investors, it seems that the industry is poised for a significant transformation.

"Big food companies can't cater to what customers want, so it left a big opening," said Tatiana Birgisson, CEO and founder, Mati Energy.

But Coca-Cola and PepsiCo are not sitting idly by. Both brands have been experimenting with natural sweeteners like Stevia and diversifying into fast-growing markets like energy drinks. Last year, Coke bought a minority stake in Monster Energy for $2.15 billion. Most agree that big soda makers will continue to expand their portfolios beyond their core offerings through acquisition versus homegrown products.

While the days are young for Mati Energy and Patrick's Fine Sodas, there is a lot of consumer interest in small producers that use artisanal ingredients, particularly among the Millennial generation. Sisel said she expects that craft soft drinks will mimic what craft beers have done for that market. In an upcoming report from Mintel due out in June, she found that 44 percent of consumers have not tried a craft soft drink but would like to. This suggests a largely untapped market.

Even as consumer tastes shift to healthier options, time will tell whether they are willing to open their pocketbooks. Price remains a critical attribute, and a 12-ounce can of Mati goes for $2.50, and Patrick's Fine Sodas are expected to price at $3, whereas Coca-Cola estimates a 12-ounce soda purchased in a 12-pack costs around 31 cents.

Newcomers to the market are confident though that consumers will pay for a better quality beverage that is good for them.

"For the past 50 years, there has been a dumbing down of food in America. Processed and convenient was how everything worked," said Shawn Patrick, CEO and founder, Patrick's Fine Sodas. "What we are seeing now is a shift to what is important. People care about food and where it is coming from."

Published on: May 8, 2015
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