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Can Starbucks Make Soda Cool Just Like It Made Coffee Hot?


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These are hard times for the soft drink industry, but no one seems to be telling Starbucks (SBUX). The java giant introduced Fizzio this summer, serving up three flavors of handcrafted carbonated beverages.

It's an odd time for Starbucks to be rolling out new soft drinks. Consumption in this country is waning. We saw that earlier this month when PepsiCo (PEP) posted quarterly results that were more flat than fizzy, with carbonated-soft-drink volume declining 1.5 percent in North America compared to the same period a year earlier. The Pepsi provider saw soda sales in North America slip 2 percent the quarter before that.

We also saw that on Tuesday morning when Coca-Cola (KO) reported fresh financial results. Sparkling-beverage sales in North America declined by 1 percent, and that was with the company gaining market share on the heels of the relatively successful Share a Coke campaign, in which cans and bottles were emblazoned with names and terms of endearment.

(Star)Bucking the Trend

The world's two largest pop stars are faltering when it comes to carbonated drinks in this country, and they're not alone. Industry trade watcher Beverage Digest reports that overall soda volumes have fallen for nine years in a row. Sales plunged 3 percent in 2013, with diet sodas suffering an even bigger decline.

Starbucks can always suggest that its foray into premium soft drinks is about more than what the masses are sipping. It's focusing on high-end root beer, ginger ale and lemon sodas that are made at the store just as they are ordered. Baristas mix up all-natural ingredients. The spiced root beer soda, for example, combines cane sugar, cinnamon, nutmeg, clove and star anise to flavor carbonated water. It's made with the same handcrafted detail and human theater as Starbucks' signature brews.

The early results have been encouraging, and not just because it gives Starbucks yet another product line to sell.

"Consumer response to Fizzio has been strong," Starbucks noted in July's conference call, pointing out that after introducing it through 3,000 stores in the Sun Belt a month earlier, successful tests in Japan and Singapore mean Fizzio will be added to select international markets in the coming quarters.

It's not just about giving non-coffee drinkers something to do while their friends are sipping on their vanilla lattes and mocha cappuccinos. Starbucks hopes that these handcrafted beverages will attract customers during the afternoons and evenings, when things typically slow down for their coffee orders. It is also hoping that it results in a spike in food orders to go alongside the refreshing beverages.

A Latte Potential

Starbucks is trying to do for soda what it did for premium coffee. Starbucks was inspired by the artsy European coffeehouses, but it was ultimately about taking a throwaway morning beverage that consumers associated with greasy-spoon diners or caffeinated fuel to accompany the morning drudgery and transforming it into an aspirational product.

It worked, of course. Starbucks serves 70 million customers a week through its growing empire that currently consists of 21,000 stores in 65 countries. It doesn't matter if soda sales have been slumping for years. Coffee wasn't very exciting until Starbucks made bean-water fashionable.

Growing Fizzio's success both here and abroad won't be easy at a time when the fizz has gone flat for the carbonated beverage industry, but Starbucks knows a thing or two about turning a tired drink category into something that's relevant again. Coca-Cola and PepsiCo had better hope that Starbucks succeeds, because clearly they can't turn things around on their own.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, PepsiCo, and Starbucks. The Motley Fool owns shares of PepsiCo and Starbucks and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola.Try any of our Foolish newsletter services free for 30 days. To read about our favorite high-yielding dividend stocks for any investor, check out our free report.


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