By Mike Esterl and Jennifer Maloney

Two of the big U.S. soda makers are scooping up fast-growing upstarts that market healthier beverages, as the industry struggles with falling demand for diet sodas as well as new taxes on sugary drinks.

Dr Pepper Snapple Group Inc. said Tuesday it would pay $1.7 billion for Bai Brands LLC, which makes low-calorie, coffee-fruit drinks. Dr Pepper estimates Bai's revenue will roughly double this year to $230 million.

Meanwhile, PepsiCo Inc. is buying KeVita Inc., a maker of fermented probiotic and kombucha beverages. PepsiCo is paying slightly more than $200 million for KeVita, which also has roughly doubled its revenue in the past year, to about $60 million, according to people familiar with the matter.

The deals coincide with growing consumer thirst for exotic "functional beverages" ranging from coconut water and kale juice to fermented tea and cider that promise to deliver more than just taste. U.S. sales of natural and organic foods and beverages alone have grown 23% over the past two years, now topping $40 billion annually, according to SPINS, a data service.

At the same time, U.S. volumes of carbonated soft drinks are expected to contract for a 12th straight year as Americans increasingly fret about rising obesity and diabetes rates and avoid artificial sweeteners. Five local governments, including Chicago's Cook County and San Francisco, approved special taxes on sweetened beverages earlier this month.

A new study released Tuesday showed that efforts by Coca-Cola Co., PepsiCo and Dr Pepper to cut beverage calories in the American diet by 20% over a decade are off to a slow start. U.S. beverage calories per person declined only 0.2% in 2015, according to the study, which was funded by the American Beverage Association. "Calorie reduction momentum has stalled," the report stated.

While U.S. consumption of bottled water surged last year, the report found that consumers shifting to water previously drank zero-calorie soft drinks, not full-calorie sodas. "We're trying to figure out what engages people," said Susan Neely, chief executive of the American Beverage Association. "How do you change their buying patterns?"

The industry group said it still expects to meet its calorie-reduction target by 2025 as it continues to ramp up marketing and new retail strategies. The companies have vowed to steer more consumers to bottled water, low-calorie drinks and smaller-size packages.

Adding Bai lessens Dr Pepper Snapple's reliance on traditional sodas, which account for about 80% of its annual revenue. Bai's lightly caffeinated beverages are promoted as rich in antioxidants but low in calories. Its lineup includes carbonated flavored water, coconut water and ready-to-drink teas.

The sale of the Hamilton, N.J., company represents a windfall for majority owner Ben Weiss, a 46-year-old entrepreneur and coffee-industry veteran who sold his first case of Bai in 2009 with the help of his father. Sales have grown more than 10-fold since 2013, when Dr Pepper Snapple became Bai's main distributor and acquired a small minority stake.

The acquisition represents a strategic shift by Dr Pepper Snapple, which has shied away from outright acquisitions since being spun off by Cadbury PLC in 2008. The company increasingly has relied for growth on its expanding stable of brands that it distributes but doesn't own, including Fiji bottled water and Vita Coco coconut water.

Dr Pepper said it expects Bai's revenue to more than double again to roughly $500 million by 2018 as it broadens distribution in convenience and gas stores. It also plans to increase the brand's advertising budget by $25 million next year, putting more marketing funds behind Bai than any brand except Dr Pepper.

"This is about top line growth," Marty Ellen, Dr Pepper's chief financial officer, told analysts on a conference call Tuesday, adding Bai also should generate about $80 million in operating income next year.

PepsiCo is less exposed to traditional soda, which only generates about a quarter of the company's overall revenue. Still, KeVita is the company's largest purchase of a U.S. beverage brand in several years, following an earlier wave of acquisitions including Naked Juice Co. and sparkling fruit juice maker IZZE Beverage Co. in 2006.

PepsiCo is familiar with KeVita, striking a deal in 2013 to distribute the company's products and take a small equity stake. KeVita got its start in an Ojai, Calif., kitchen in 2009 and is headed by co-founder Bill Moses, a Wall Street and wine-industry veteran.

KeVita derives most of its sales from its namesake sparkling probiotic line, but also has posted strong growth since launching kombucha, a fermented tea beverage. The company promotes its drinks as organic, gluten-free and vegan.

Soda industry leader Coca-Cola has said it continues to seek "bolt-on" acquisitions to diversify further beyond traditional carbonated soft drinks, which still represent about 70% of company sales. Coke paid roughly $90 million last year for a 30% stake in San Diego-based Suja Life LLC, a maker of organic, cold-pressed juices. Other recent acquisitions include Honest Tea, an organic tea, and Zico coconut water.

--Austen Hufford contributed to this article.

Write to MikeEsterl at mike.esterl@wsj.com and Jennifer Maloney at jennifer.maloney@wsj.com

(END) Dow Jones Newswires

November 23, 2016 02:47 ET (07:47 GMT)

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