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BEVERAGE DIGEST

OCTOBER 28, 2016 VOLUME 67 / NO. 19 FOUNDED 1982 BEVERAGE-DIGEST.COM E-MAIL ALERTS

T H E B E V E R AG E I N D U ST R Y ’ S L E A D I N G I N F O R M AT I O N R E S O U R C E F O R B R E A K I N G N E W S , A N A LY S I S & DATA

FDA Joins Dec. 9 Future Smarts Program in NYC. Dr. Claudine Kavanaugh, Senior Advisor on Nutrition & Policy.

Joining the December program is Dr. Claudine Kavanaugh, senior advisor on nutrition and policy for the U.S. Food and Drug Administration. She is the architect of the revised Nutrition Label coming in 2018. Future Smarts brings together key industry insiders to network and discuss the trends and data that will lead to smarter investment, increased market share and higher sales. Register now. Early bird rate expires Oct. 29 for this premium industry event. Register Here.

Future Smarts Conference December 2016 Coca-Cola Dr Pepper Snapple Cott Nestle Waters North America Coca-Cola European Partners Aje Califia Farms Cavu Venture Partners CLSA Americas Consumer Edge Research U.S. Food & Drug Administration Rabobank Twitch

Marcos de Quinto Jim Johnston Jerry Fowden Tim Brown Damian Gammell Juan Lizariturry Moro Greg Steltenpohl Rohan Oza Caroline Levy Brett Cooper Claudine Kavanaugh Ross Colbert Andy Swanson

EVP, CMO President, Bev Concentrates & Latin America Beverages CEO President & CEO COO CEO CEO Partner Analyst, Beverage and HPC Senior Analyst Sr. Advisor on Nutrition & Policy Managing Director -- Global Sector Head -- Beverages VP, Esports Evangelist

Coke and Pepsi Bottlers React to Coming FDA Nutrition Label Change.

Added Sugar Rule Presents CSD Risk, Some Say; Others Say Industry Adjusting.

The U.S. Food and Drug Administration’s revised “Nutrition Facts” label, to be rolled out in 2018, will require a callout for “added sugar.” The label will express added sugar as a percent of the maximum daily value recommended by the FDA within a 2,000 calorie diet. For example, the label would represent the added sugar in a 12-oz regular soft drink as being roughly 130% of the recommended daily intake for an individual. The graphic on page 2 is from the FDA’s website and shows the existing (left) and revised (right) labels. The graphic does not depict a specific product. Some industry insiders have said the added sugar callout represents a Follow Beverage-Digest on Twitter: @BeverageDigest

In This Issue...

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Coke and PepsiCo Bottlers React to FDA Nutrition Label Change.

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Source: Monster Focused on Word of Mouth in Slow Mutant Rollout.

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PepsiCo Previews Premium Lifewtr and Next-Gen CSDs at NACS Show.

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Coke Samples Dunkin’ RTD Coffees at NACS. Shows Off Technology.

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3Q Retail Snapshot: Diet CSD Volume Freefalls. Bottled Water Strong.

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PepsiCo Passes on National Expansion of Mug with Senomyx Enhancer.

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Third Quarter Earnings: Coke North America Volume Grows Again.

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Territory Changes/Deals, People, Briefs l

Dr Pepper Execs ‘Cautious’ About Big M&A Amid Bai Reports.

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Former Coke and Campbell Exec Jeff Dunn Named CEO of Juicero.

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Long Island Iced Tea Signs Distribution Deal with Food Lion.

Additional Information ... l

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Click to Register for BD's Future Smarts Conference.

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Updated BD 'Coke System' and 'Pepsi System' Books Available Soon.

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significant risk to full-calorie cola consumption, which has leveled off after several years of decline. One soft drink executive has gone so far as to call it an “imminent threat.” The impact from such a decline would be magnified for U.S. soft drink bottlers should the current diet cola decline persist. To get a better sense of how Coke and Pepsi system bottlers are reacting to the added sugar callout, BD asked the following questions: 1) How concerned are you about the coming added sugar label and why? 2) Do you believe the label will depress fullcalorie soft drink sales? 3) How should the industry respond to the coming added sugar callout? 4) What are you or your organization doing to prepare for the label change and to mitigate any negative effects? Respondents have not been identified, to ensure their candor. Responses have been edited for clarity and space.

Bottler 1. I’m not sure I would call the threat “imminent.” It is more of a brick in a growing wall that makes the decision to buy our full-calorie products more difficult. Our charge is to open doors that make people more comfortable to get past the wall when desired, or provide alternative products with less calories and more functionality without cracking the foundation of our business.

Bottler 2. I don’t get that kind of information on my Starbucks [non-packaged] latte, which is three to four times the amount of sugar, so the disparity seems to be isolating soft drinks again. You aren’t going to see that percentage on a lot of other products that would be far more problematic, like my local coffee shop that’s doing macchiatos and mochas that are 500, 600, 700 calories for that same amount. That is one thing that we as an industry are going to have to address -- being isolated unfairly by taxes, by labeling. In terms of preparing, we are well into that. You have a lot more [zero calorie] drinks. You have the small packaging. That’s where we are ahead of the regulatory curve. We’ve already given options to consumers who might be concerned about calories. This shows that companies are going to respond to consumers anyway and we already have. In terms of how big a risk it will be? It’s always hard to determine future risk. I don’t think anyone knows that, honestly. There are just so many currents happening. It’s going to be hard to isolate. Is it great to see 100 or so percent of daily value? No. We would rather stick to, “Here’s the calories.” It’s pretty subjective to say, “As a percent of an average person’s intake.” We have no idea what their activity rate is or what other calories they are taking in. We would certainly prefer to just have the facts on there and not some formula.

Bottler 3. I am not that concerned about increased disclosure rules. People are pulling back from our beverages, imputing much more harm through ignorance than through actual reading of labels.

Bottler 4. Hell yeah, it’s a threat.

Consumers are aware now and make educated choices. This is like trying to drink water through a fire hose.

Bottler 5. It is clearly a threat.

However, it will probably drive further innovation in packaging (portion control), product development (sweeteners) and consumer communication to mitigate impact.

Bottler 6. People who care about this issue are already well informed. For people who do not care about this issue, the label change will not make much difference. In rural areas, many people still do hard physical work and need much more than the 2,000 to 2,500 calories that are recommended. This is just another example of federal bureaucratic overreach. As a society we should get over the notion that the government knows better than its citizens.

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Bottler 7. It will be a threat to gaining new users, and that’s a big deal obviously.

Bottler 8. This is obviously a concern and a risk for the industry but it’s impossible to determine the impact at this point. This issue is not going away. And the larger concern is, it could get much worse if beverage taxes gain momentum. The industry must continue to fight these well-funded campaigns, and we all need to engage in a dialog with all the public interest groups that are targeting our businesses. If that leads to some kind of compromise that we can live with, similar to what we did with schools, it might be necessary to consider that, but only if all added sugars are included in the discussion. We don’t see any issues with complying with the new rules.

Bottler 9. Our labeling is worse [than the rest of the food industry] and the tax soda movement says nothing about ice cream, candy bars, cereal, etc. It is the industry’s own fault for allowing beverages to be the scapegoat for obesity. [The industry] has to change the dialog away from soft drinks to a sugar tax on all items. For example, a tax per number of grams of added sugar in all products (i.e. cereals, ice cream, candy bars, chocolate bars, etc). It basically is liberals’ way of raising taxes to pay for more government spending. There is no need for the beverage industry to pay for that burden. The law will hurt sales and the smart bottlers are focusing on other products.

Source: Monster in No Hurry on Mutant Supersoda.

Retailer Orders Surpassed Initial Production Run, Forcing Allocation, Delays.

Looking to avoid a so-called “boom-splat” rollout of its new Mutant Supersoda, Monster Beverage is launching the brand in a “controlled way,” said a person familiar with the company’s plans. Despite its distribution partnership with Coca-Cola for Mutant, Monster has no plans for a “ubiquitous” and simultaneous launch across all channels and regions. Instead, the brand is being rolled out to limited convenience retailers in select markets to maximize “word-of-mouth” exposure. The strategy is similar to the one Monster uses for energy drink launches. Monster wants to avoid saturating the market. For example, Mutant is not currently being sold into Walmart, the person said. Meanwhile, Coke had earlier pushed for a faster start.

Production Hiccup. The rollout, which started early this month, hasn’t been without problems. Orders for Mutant among the selected retailers exceeded expectations, the person said. Some retailers were placed on allocation until more product could be produced, the person added. The rollout for some accounts was delayed by as much as a month. Spokesmen for both Monster and Coca-Cola declined to comment. BD published details of the brand and packaging earlier this month (BD 10/7/16). Monster showcased Mutant at the recent NACS convenience retail trade show in Atlanta (photo right).

PepsiCo Debuts Lifewtr at NACS Show in Atlanta.

Also Reveals Coming ‘Next-Gen’ Soft Drink Innovation.

After years without a direct competitor to Coca-Cola’s Smartwater, PepsiCo is set to launch a new premium bottled water brand called Lifewtr nationally in the U.S. in February. The company gave convenience retailers a look during the NACS show last week in Atlanta. The reverse-osmosis purified water includes “electrolytes for taste” and is “pH balanced,” according to the package. The bottles (pictured page 4) will include label designs by various artists that will be rotated quarterly. To make way for Lifewtr, PepsiCo’s SoBe Lifewater will be rebranded and relaunched next year without the Lifewater name. PepsiCo bottlers have requested a premium bottled water to compete directly with Smartwater, which Coke purchased in 2007 as little more than a come-along brand within its $4.1 billion Vitaminwater acquisition. Coke has since grown Smartwater (vapordistilled with added electrolytes) to more than $1 billion in annual retail sales.

Next-Gen CSDs. So-called “next-gen” CSDs will be a major focus for PepsiCo in 2017. These are soft drinks with unique flavors and often lower calorie counts. The company used NACS to show off innovation within the segment. A new sparkling lemonade called Lemon Lemon (pictured page 4) will debut in early 2017 with 70BEVERAGE-DIGEST

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calories per 12-oz can and a stevia/sugar blend. PepsiCo’s Izze brand will debut a Fusions (below) sparkling 5% fruit juice CSD early next year with 60 calories per 12-oz can. It too will be sweetened with a stevia/sugar blend.

Mtn Dew Spiked (below), set for a second-quarter launch, makes use of prickly pear cactus juice and comes in at 100 calories per 12-oz can after a stevia/sugar blend. The launches are examples of PepsiCo’s strategy to concentrate stevia use on new flavored beverages rather than colas. The company also has shifted away from specifically promoting the calorie content of these beverages, which in previous years would have been touted as mid-calorie options. The strategy is modeled after the success of Mtn Dew Kickstart. Meanwhile, Aquafina Sparkling has been reformulated without sugar and now is a zero-calorie drink.

Fountain. New fountain offerings next year include Mtn Dew Pitch Black, Aquafina Sparkling Lemon Lime, and Brisk Iced Tea Strawberry Melon, aimed at multicultural millennials (45 cals/8-oz).

Gatorade. Also next year, Gatorade will roll out a new version called Flow that eliminates the “cloying” aftertaste at the back of the throat that some athletes complain about.

Sugar Goals. PepsiCo’s emphasis on lower-calorie CSDs and bottled water falls in line with the company’s newest Performance with Purpose sustainability goals announced on Oct. 17. By 2025, two-thirds of PepsiCo’s global portfolio will contain no more than 100 calories from added sugar per 12-oz serving, according to the goals. A key level will be sweetener and ingredient technology. “That’s a very significant shift,” PepsiCo Chief Scientific Officer Mehmood Khan said during an interview. “Our current mix is about 40% of our products.”

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Coca-Cola Unveils New Dunkin’, Gold Peak RTD Coffees at NACS in Atlanta.

Technology and Snack Pairings Also Front and Center for Coke at Show.

At the NACS convenience retail show in Atlanta last week, Coca-Cola debuted two new ready-to-drink coffee lines the company will use to compete with PepsiCo’s market-leading Starbucks RTD coffees. Attendees got a first look at the packaging for the coming Dunkin’ Donuts bottled coffee line (pictured below left), which CocaCola will produce, package and distribute jointly with the restaurant chain next year. The beverage will come in at 290 calories per 13.7-oz package and will be offered in four flavors: Mocha, French Vanilla, Espresso and Original. Coca-Cola sampled the drink along with a new line of Gold Peak bottled coffees and Tea Lattes (pictured below right), also set for launch next year.

Equipment. Technology was a thrust of Coca-Cola’s booth. The company showed off its virtual store software (pictured below left) that allows sales teams to show customers how to set shelves, display product and coordinate point-of-sale marketing materials. Separately, the company’s Arctic Coke cooler (pictured below center), which has been in test, keeps PET bottles of Coca-Cola, Sprite and Powerade just below their freezing point before gently vibrating them into a slush. Looking into the future, Coke demonstrated a remote-controlled vending robot (pictured below right) to show where the company could go in the next five years or more.

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Snacks. Coke’s booth included examples of displays (pictured below) for pairing snacks with its beverages as part of a stepped-up emphasis on “Coke with food” promotions. A rack not pictured paired bananas with bottled water and Powerade.

Third Quarter Snapshot: Soda Declines Continue Through Summer Months as Diets Freefall.

Bottled Water and Sports Drinks Rise to Quench Consumer Thirst.

U.S. multi-channel retail data for the 12 weeks through mid-September (which provides a good proxy for third quarter and summer performance) shows carbonated soft drinks (CSDs) continued to decline in volume even as overall liquid refreshment beverage (LRB) sales grew. The data in the table on page 7 covers C-stores, drug chains, mass merchandisers including Walmart and some dollar/club stores. In the period, LRBs were up +3.4% in both volume and dollars, an improvement over last summer. The strong LRB volume and dollar performance also represents an acceleration over the second quarter of this year, which provided gains of +1.2% and +2.3% respectively. Meanwhile, CSDs, excluding energy, declined –1.2% by volume in the third quarter while gaining +0.1% in dollars. Energy, sports drinks, RTD teas, coffees and bottled water experienced both volume and dollar gains.

CSD Decline Slows. The third-quarter CSD volume decline represents a deceleration from the -3.1% loss in the second quarter. Soft drinks performed better during the summer third-quarter than in each of the previous two quarters. Diet sodas continued to depress category growth as Coca-Cola, PepsiCo and Dr Pepper Snapple (DPS) saw respective volume declines of -3.6%, -7.2% and -1.3% for their diet brands. Still, the diet soda declines represented a deceleration for all three when compared to Q2. PepsiCo’s improvement over a -9.0% decline in the second quarter may signal some success with the company’s new Diet Pepsi initiatives. Also promising was the performance of regular soda brands for Coca-Cola and DPS, which saw volume gains of +1.0% and +2.3% respectively. This seems to indicate that consumers are still turning to full-calorie soft drinks for summer refreshment, while looking to other categories for low-calorie alternatives.

Energy Drinks. Energy drinks also posted a gain this summer with volume up +2.9%. The category slowed, however, compared to a second-quarter gain of +3.9%. Red Bull saw strong gains due to summer promotional activity that helped it grow +4.2% by volume. Monster, which saw a +3.2% rise in pricing, led in dollar growth with +5.3% increase for the quarter. This continues a year-long trend for Monster as its energy pricing significantly outpaced that of Red Bull and Rockstar in each of the first three quarters. The company’s ability to move away from highly aggressive promotional pricing while maintaining strong volume performance demonstrates a deepening brand loyalty that will serve Monster well as it expands its portfolio.

Bottled Water. The category, which includes both flavored and enhanced water, outperformed all other LRB categories in volume and value growth versus the previous year. PepsiCo in particular saw a strong +10.8% BEVERAGE-DIGEST

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Third Quarter Trends at Retail

Vol Share

Vol +/-

$$ +/-

Price +/-

n/a

-1.2%

+0.1%

+1.3%

CSDs excl Energy

Vol Share

Vol +/-

$$ +/-

Price +/-

Total

n/a

+6.0%

+7.4%

+1.4%

Gatorade

64.9

+7.2%

+7.9%

+0.7%

+3.4%

+3.3%

-0.2%

Sports Drinks

Total CSDs excl Energy

Coke CSDs

37.7

-0.5%

+0.5%

+1.0%

Powerade

20.1

Coke Regular CSDs

25.9

+1.0%

+1.8%

+0.8%

BodyArmor

0.7

Coke Diet CSDs

11.7

-3.6%

-2.1%

+1.5%

Pepsi CSDs

31.3

-3.1%

-0.9%

+2.2%

Bottled Water*

Pepsi Regular CSDs

22.5

-1.8%

+0.3%

+2.1%

Total

n/a

+9.2%

+7.7%

-1.5%

Pepsi Diet CSDs

8.2

-7.2%

-6.9%

+0.3%

Nestle

30.8

+6.5%

+4.2%

-2.3%

Coke

8.4

+6.2%

+5.3%

-1.0%

Pepsi

7.1

+10.8%

+5.9%

-4.8%

Total

n/a

+4.2%

+4.5%

+0.3%

DPS CSDs

21.4

+1.4%

+0.7%

-0.7%

DPS Regular CSDs

16.2

+2.3%

+1.3%

-0.9%

DPS Diet CSDs

5.2

-1.3%

-1.5%

-0.2%

+195.7% +171.7%

-24.0%

RTD Tea Energy Drinks Total

n/a

+2.9%

+4.0%

+1.1%

Pepsi

31.7

+6.7%

+5.8%

-0.9%

Monster

49.9

+2.1%

+5.3%

+3.2%

Arizona

22.4

-0.2%

-2.6%

-2.4%

Red Bull

25.2

+4.2%

+3.8%

-0.4%

Coke

11.8

+13.5%

+16.4%

+3.0%

Rockstar

11.6

+2.6%

+2.7%

+0.2%

DPS

6.4

+3.7%

+1.5%

-2.2%

*Includes single-serve and jug, as well as enhanced/sparkling/flavored waters.

volume gain thanks in part to aggressive pricing (-4.8%) that yielded +5.9% dollar growth. Aquafina’s strong summer growth of +11.7% in the quarter helped the brand gain +0.1 volume share. Dasani dropped -0.2 share over the same period. Nestle Waters lost the largest volume share, -0.7, in the quarter among the three leaders.

Coca-Cola and PepsiCo both priced more aggressively.

Sports Drinks. The sports drinks category posted strong third-quarter performance of +6.0% by volume and +7.4% by dollars. Brands like Gatorade, Powerade and BodyArmor each posted volume and value gains, with Gatorade outperforming Powerade. This demonstrates continued consumer demand for sports drinks as a key hydration beverage during the warm summer months.

PepsiCo Won’t Take Senomyx Sweetmyx (S617) National in Mug. Manzanita Sol to Retain Sweetmyx Reformulation.

After the stock market’s close on Oct. 27, Senomyx told investors during a conference call that its Sweetmyx (S617) synthetic sugar enhancer would not be used nationally in PepsiCo’s Mug Root Beer as Senomyx executives had expected. PepsiCo tested the ingredient in Mug in Philadelphia and Denver for nearly a year.

PepsiCo will continue using the ingredient in the smaller Manzanita Sol brand, which also was tested. Senomyx shares fell by about half the day after the Oct. 27 announcement. Senomyx executives and investors had expected that a national Mug launch would create a lucrative profit stream for Senomyx and lead to more Sweetmyx beverage launches.

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Disappointed. During the conference call, Senomyx CEO John Poyhonen said Nielsen market data showed the reformulated Mug performed well in both test markets. “We were surprised and disappointed by PepsiCo's decision regarding Mug Root Beer,” he said. “We have fully expected the reformulated version of Mug would be launched nationally in the United States during 2016, based in large part on the test market results.”

Signs. In late September, PepsiCo extended a research agreement with Senomyx that shifted the focus to natural sweeteners (BD 10/7/16). In an article analyzing the agreement, BD speculated that a national launch of the Mug Sweetmyx reformulation was less certain than PepsiCo’s continuing with the ingredient in Manzanita Sol. Senomyx shares declined more than -20% at that time.

Coca-Cola North America Volume Up +1% in 3Q. Plus: Quincey Hopes to Accelerate Stills Shift.

On Oct. 26, Coca-Cola reported third-quarter revenue that increased +3% (not including structural changes and the impact of currency fluctuation), matching its second-quarter gain. While that growth falls short of the company’s long-term guidance of a +4% to +5% increase, it matches Coke’s full-year 2016 organic revenue guidance reset in July. Third-quarter per-share earnings of 49 cents slightly beat analyst expectations. Globally, unit case volume grew +1%, marking an improvement over last quarter’s flat performance, which was the worst in almost two decades. Global price/mix rose +1%.

North America. Volume grew +1% in the quarter, matching that in the second-quarter. Price/mix increased +2%, helping grow organic revenue by +3%. Coke’s work to refranchise its North American bottling operations will be completed as planned by the end of next year, according to the company. Chief Executive Muhtar Kent announced six definitive agreements and four transaction closings.

Stills. Chief Operating Officer James Quincey said during a call with analysts that Coke’s global beverage portfolio is split about 70-30 between “sparkling,” or carbonated soft drinks, and “stills,” or non-carbonated soft drinks.

That mix is shifting toward stills by about 1 percentage point a year, he added. Later, during a call with reporters, Quincey said he did not have a specific timeframe in mind to reach a 50-50 split, acknowledging that it would take 20 years at the current rate of change. “I would certainly like to get there quicker than 20 years,” he said.

Added Sugar. During the analyst call, Quincey said the company has more than “200 reformulation initiatives underway to reduce added sugar.” During a call with reporters, Quincey said the company is experimenting globally with various sweeteners, ingredients and sweetness levels. “I wouldn’t say we’ve found one silver bullet but we’ve got a substantive program to look at how we can bring down the added sugar amount while retaining consumer preference for taste across the world,” he said. Later, Quincey added: “Ultimately our goal is to be able to say we can grow revenue ahead of transactions, ahead of volume, ahead of added sugar and have added sugar actually go down.”

Territory Changes and Deals.

Reuters, citing unnamed sources, reported on Oct. 26 that Dr Pepper Snapple is in talks to buy Bai Brands for as much as $1.5 billion; executives declined to comment on the rumors specifically during an earnings conference call the next day while reiterating their “cautious” approach to large M&A.

People.

Jeff Dunn, a former Coke executive who was most recently CEO of Campbell Soup-owned Bolthouse Farms, has been named CEO of Juicero, a maker of high-end juicers … Coca-Cola’s Barry Simpson has been promoted to chief information officer, overseeing Coke’s global information technology strategy, services and operations.

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Briefs.

Dr Pepper Snapple. The company reported third-quarter earnings on Oct. 27. Bottler case sales volume increased +2%, on carbonated soft drinks growth of +2% and flat non-carbonated beverage sales. Volume in the U.S. and Canada grew +1% while Mexico and the Caribbean increased +4%. The company grew its “water” category by +16% helped by Bai, Fiji and Aquafiel. The Dr Pepper brand grew +1%, including fountain.

Correction. In a Q&A with attorney Shanin Specter published in BD’s Oct. 7 issue, Specter should have been quoted as saying it is against Pennsylvania law to have a “duplicative” tax (final answer, page 3). In a separate instance (final answer, page 4), Specter should have been quoted as referring to a governmental “entity.” We regret the errors.

Quick Takes. PepsiCo has offered its flavor expertise to the non-profit TB Alliance to improve the taste of tuberculosis medication for children, according to the NYT ... Red Bull will launch Purple Edition Sugarfree and Lime Edition Sugarfee in January … Prices for Florida orange juice have surged as the region faces the worst orange harvest since records began in 1913, according to the Guardian … Long Island Iced Tea, maker of a nonalcoholic bottled tea, has signed a distribution deal with Food Lion for its 1,000 stores in the Southeast and MidAtlantic … Spotted in a recent Politico story about machine gun enthusiasts’ fear of a Donald Trump defeat: “Jim and his buddies killed time on Friday by shooting full 12-ounce cans of Coca-Cola products out of a modified AR rifle for someone else to hit mid-air with a shotgun.”

Did You Know?

Growth in premium ready-to-drink teas in the U.S. has outpaced other products within the packaged tea segment, as consumers gravitate toward organic, fair trade, non-GMO, functional and low- and no-sugar products. This and much more can be found in the 370-page 2016 Zenith Global RTD Tea Report available now. Don’t miss your chance to get ahead of the market on what’s next in tea.

Order Here.

Duane Stanford, Editor

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dstanford@beverage-digest.com

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