You can forgive Pepsi chairman Roger Enrico for bubbling over with enthusiasm last week as he announced the company's $13 billion purchase of food-and-drink giant Quaker Oats. Pepsi, as second fiddle to archrival Coke in the cola wars, doesn't get that many chances to declare victory. So Enrico, who has recently put some fizz back in the company, wasn't about to pass up this rare opportunity. "We are the category captain, 1 1/2 times the size of the next largest player," he declared.
The runner-up in this case, of course, is Coke, but Enrico wasn't referring to the $58 billion U.S. soda business. Instead, he was talking about the nearly $20 billion emerging market for alternative beverages, those ubiquitous juices, teas, bottled waters, sports and energy drinks, packed with exotic herbs and vitamins, that are overwhelming store shelves. Quaker may be known for oatmeal, but its magic potion is Gatorade, a $2 billion-a-year dynamo of a brand that has a hammerlock on 80% of the sports-drink market. "When we're done," Gatorade chief Susan Wellington told analysts earlier this year, "tap water will be relegated to showers and washing dishes." Coming on the heels of Pepsi's recent $370 million purchase of SoBe, the hottest of the New Age tonics, the Gatorade deal was Enrico's crowning achievement, effectively solidifying Pepsi's dominance in the fastest-growing segment of the drinks business. "In this area," says Emanuel Goldman, an analyst at ING Barings, "the tables are turned."
As it happens, the whole business is turning. Last year, for the first time in decades, Americans' consumption of carbonated soft drinks actually declined. Sodas still command the biggest share of sips in the U.S., but it's the entrepreneurial upstarts like SoBe, Nantucket Nectars, Fresh Samantha and Honest Tea that are making people thirsty. While the nonbubbly business is growing almost 10% a year--and bottled water is chugging along at a rapid, 30% clip--sodas have suddenly gone flat. Noncarbs, which generally command higher prices, now account for more than half of all industry growth, according to Sanford Bernstein & Co. No wonder, then, that every beverage maker is feverishly working to come up with cola alternatives that promise to be healthy, not just refreshing. Norm Snyder, COO of SoBe, says, "Before, the big boys were just watching from the sidelines, but now they're betting on it with their dollars."
And how. Earlier this fall Cadbury-Schweppes, the British owner of Dr Pepper and Seven-Up, spent $1.45 billion to gulp down juice-and-tea leader Snapple. "The ingredients in [carbonated] soft drinks are essentially the same as they've always been. You can only add a little bit of flavor to them," says Todd Stitzer, Cadbury's chief strategy officer, of the deal.