A sports drinks turf war could determine whether beverage stocks bounce back in 2024

As beverage giants look to sell Wall Street on a rebound after a rough 2023, investors may want to hear more about how the legacy incumbents are fighting off new sports drink challengers. Pepsico CEO Ramon Laguarta said on the company's third quarter earnings call that the sports drink startup Prime — created in part by YouTube star and professional wrestler Logan Paul — was making a dent in the sales of a key Pepsi brand, at least temporarily.

"It is true that the emergence of Prime in the category took some share from Gatorade, less than other brands in the category, or less proportionally to the size of the brand. But I would say ... we're seeing that the size of Prime in the category getting smaller as we go into the fall," Laguarta said during the Oct.

10 conference call. The rise of Prime comes at a time when key beverage stocks are struggling for traction. Shares of Pepsico, Coca Cola and Keurig Dr Pepper are all down over the past 12 months while the broader market has rallied. PEP 1Y mountain Shares of Pepsico have fallen over the past 12 months, along with its two main peers.

The incumbents are taking the competition seriously. Pepsi, for instance, is pushing newer versions of Gatorade with Gatorade Zero, G Fit and Gatorlyte, as well as the Fast Twitch energy drink. If those newer options can prove to be long term hits, they may not only help the incumbents fend off competition but also grow their market share.

Barclays analyst Lauren Lieberman said in a Nov. 28 note to clients that the majority of the sales for those four products appear to be incremental to the sales of original Gatorade, citing data from Numerator. "Whether Prime's success proves sticky or to be a flash in the pan, we think it is serving as an important template for how quickly brands can be built and that there is space for 'indulgence' in the sports drink category," Lieberman said.

State of play The increased competition in the sports drink industry is emblematic of the growth for trendy, health conscious options across different snack and beverage categories, like the rise privately held water brand Liquid Death. One beverage stock that did climb in 2023 was Celsius Holdings , primarily an energy drink company.

Pepsico bought a stake in Celsius in 2022. "There's been a general health and wellness trend, in particular with younger consumers and now they age. Millennials turn into Gen Z'ers. The main theme is that there's increasing demand for beverages that either have function, electrolytes, energy, creatine, some kind of vitamins in there, and are lower sugar, lower calorie, lower carb, etc.

And you've seen that in every category," Wedbush analyst Gerald Pascarelli told CNBC. Gatorade is still the clear category leader for sports drinks. Original Gatorade and the various related brands account more than 60% of the market, according to the Nielsen data tracked by analysts, with Prime still appearing to be below 10%, according to Barclays.

It seems unlikely that Gatorade can be truly overtaken any time soon, Pascarelli said. "These other brands will gain some share, but Gatorade is such an important brand that Pepsi will continue to make the investments and will not give up that leadership position. That's one of the most important brands in their portfolio," Pascarelli said.

Of course, Pespico's competition comes from not just Prime, but also other deep pocketed rivals. Coca Cola has long competed in the space with Powerade, and also bought full control of Bodyarmor in 2021. Other brands in its portfolio include Vitaminwater. "We believe sports drinks present one of KO's biggest pathways toward margin improvement in the US, with the ambition to be best in class within the category.

... And as such, the company has made clear that shoring up sports drinks is one of its top priorities heading into 2024," Lieberman's note said. And in October, Keurig Dr Pepper struck a United States distribution deal with Mexican firm Grupo PiSA for Electrolit, a competitor to the Gatorlyte style of hydration drinks.

One key thing to watch is if the new brands can expand their popularity outside of different customer segments. Gatorade Zero appears to be an outsized hit with women, according to Barclays note, while Electrolit has a strong foothold with Hispanic consumers. Prime's main foothold appears to be with teenagers.

"It's very popular with younger consumers. I know my kids love it. I don't think it's specific to male or female," Pascarelli said. Where to invest The exact impact of sports drinks on beverage stocks can be hard to determine. The big three companies do not break out the financials for their sports drink brands individually, and any impact could be outweighed by other categories, like Pepsi's snack foods.

Wall Street is not particularly bullish on the group either. Analysts are close to a 50 50 split on Pepsico and Keurig Dr Pepper, according to data from LSEG. More than 70% of analysts covering Coca Cola recommend the stock, but the average price target shows upside of only about 10%. Investors may need to pay close attention to this quarter's earnings calls to find out how the sports drink battle is developing.

Pepsico is slated to release its fourth quarter results on Feb. 9, while its two peers have not yet released their announcement dates..