Non-Carbs Shine While Sparkling Struggles
By Elizabeth Fuhrman
Many carbonated soft drink
companies reported favorable results for 2007, thanks to their
non-carbonated acquisitions, non-carbonated launches and CSD sales
increases in markets other than North America.
But industry analysts won’t provide you with a
carbonated or, if you will, sparkling beverage hero for last year, this
year or even next. Even though The Coca-Cola Co.’s Coke Zero posted
promising results and PepsiCo is hopeful about Diet Pepsi Max, analysts say
it isn’t enough to turn the category’s declining sales around.
Consumers even began to put the kibosh on diets, which
had been a bright spot for the category. The total diet CSD category
declined 5 percent in volume sales for all channels in 2007, according to
Information Resources Inc. (IRI), Chicago, and ACNielsen, Schaumburg, Ill.
Instead consumers moved their dollars toward plain and
enhanced bottled waters, ready-to-drink teas and energy drinks.
What’s happened to the love?
Feeling the squeeze
One optimistic CSD finding is that the category still
holds an extremely high penetration level across the United States.
“We haven’t seen increased penetration, and we haven’t
really seen a huge drop or increase in the volume per shopping
occasion,” says Bump Williams, executive vice president, general
manager for IRI Global Consulting. “... It’s one of the
highest beverage penetrating categories that we have. It’s staying
relatively high. It’s not dropping, so we’re not losing
shoppers out of the category.”
One of the problems that is happening though is the
loss of “share of stomach.” For the total non-alcohol category,
carbonated soft drinks are losing share to bottled water, isotonics, energy
drinks and RTD teas and coffee.
“The business model has changed,” says
Brian Morgan, senior research analyst for Euromonitor International,
Chicago. “The idea of large global brands appealing to everyone and
everywhere is no longer a form of business that is going to work ...
It’s much more about brands that are perhaps smaller in scope, but
reach particular segments of the market. People are pretty much discovering
their own preferences; things that are unique. It’s a whole different
sensibility, and a lot of it, of course, is focused on health
“The industry as a whole is shifting its
composition, and some companies have been slower to react to that than
others,” Morgan continues. “So, it’s not all a dower
situation, but it is if you are just talking about carbonates.”
United Kingdom-based Datamonitor reports that in the
United States, carbonates still dominate the non-alcohol beverage market at
63 percent, but are losing share to bottled waters which are currently at
“The competing categories like bottled water and
juices are eating away at consumer carbonated drinking occasions,”
says Matthew Jones, an associate analyst for Datamonitor’s consumer
markets. “We forecasted that there will be a continuing decline in
‘share of throat.’”
The cold shoulder
CSD performance varies by global market and product
type. Generally, mature markets with very high per-capita CSD consumption
are in a decline.
A dividing line exists in the non-alcohol beverage
segment between beverages that will have a very long and profitable future
and those that are going to have a lot of problems, says Tom Pirko,
president of BevMark LLC, Santa Barbara, Calif. The divide began to happen
30 years ago with the emergence of new age beverages.
“They all offered you something beyond what a
soft drink gives you,” Pirko explains. “A soft drink is
carbonated sugar water, but all the other products and everything
that’s coming in the future all somehow hook some kind of benefit
... All the future growth is going to come from things that have some
sort of benefit attached.”
Other problems for CSDs continue to mount. To start
with, young consumers are shopping around and are not as brand loyal as
they were in the past. “That has created huge, huge problems for
every portion of the industry,” Pirko says.
Additionally, bottlers are trying to retool their
industry for the growing number of SKUs they have to make, sell and
deliver. “They are really the ones that get squeezed in the middle
with all the new products,” Pirko says. And retailers don’t
know what to do with the new categories that are arising as they try to
find shelf space for everything.
And last, but not least “manufacturers are faced
with the challenge of being truly innovative and not just line extending,
but taking the risks of putting new products in the market, and that
can be very expensive,” Pirko says. “... It’s very
expensive to innovate, but you’re forced to do it now because of so
Negative news about soft drinks linked to obesity and
the banishment of soft drinks in schools have helped contribute to
“We’ve come across a line that at one time
soft drinks were thought of as not only harmless, but you weren’t
American if you weren’t chugging them down,” Pirko says.
“The carbonated sector really doesn’t have
a good image, and it’s going to be very difficult to overcome
that,” Euromonitor’s Morgan adds. “You are always going
to have people who enjoy the established brands, and there are
opportunities for that everywhere. But the days of high growth are gone for
any foreseeable future.”
“More energy and more resources will be poured
into developing non-cola brands and acquiring non-carbonate brands,”
Morgan continues. “The most potential for growth comes from
Another issue for the industry is the emerging
economic situation of a foretold recession. With costs escalating for
aluminum, PET, oil, sugar, corn and other ingredients and materials, the
situation is going to be difficult to manage without passing those costs
along to consumers. “If you are put in the position of your margins
being narrow and you have to find a way to raise price, but at the same
time a recession is staring you in the face, and there is less consumer
disposable income and there is great pressure by the retailers to hold
prices down, it’s very difficult,” Pirko says. “You get
caught in a squeeze. Higher costs and the inability to raise price means
you are going to make less money.
“There are some people who are going to be able
to successfully raise price and get away with it,” he explains.
“In other cases, there are going to be other companies and brands
that are just going to work on lower margins simply because they are going
to be prohibited because of consumer resistance to raising price.
It’s almost a company-by-company, market-by-market thing.”
Additionally, bottlers’ fierce competition to
keep prices down on CSDs has made consumers soft drink price experts.
“Everyone watches, and in a store they know what [CSDs] cost,”
Pirko says. “You tend to pay more for the new energy drink without
noticing. You don’t do the same value equation because you
don’t shop quite as competitively.”
CSD pricing has come to a point that it has damaged
the integrity of the category, IRI’s Williams continues.
“I’m not sure how many cases in the trade channels that we
measure are sold at full revenue,” he says. “The majority of
them are sold on some type of promotion, whether it’s a feature or a
price reduction or a combination.”
Williams says whether or not soft drink companies can
raise prices depends on the question that every business person needs to
ask: “Am I managing for profitability or am I managing for
“Everybody is in a share war right now,”
Williams says. “You don’t want to drop a share point and you
don’t want to lose volume vs. a year ago.”
If retailers and distributors want to examine a
channel that has a successful pricing strategy, they need look no farther
than convenience stores, which do not run many discount promotions.
“It’s really a destination channel for people to go to, and
they don’t care what the price is of a 16-ounce or 20-ounce favorite
soft drink,” Williams says. “If they want it, they are going to
The convenience store shopper is a different animal
though, Williams explains. “But to me, it tells me that people are
still willing to pay a premium price for their beverage of
Pirko and the team at BevMark are relatively certain
that only one kind of innovation is going help turn CSD sales around, and
it involves pricing and quality. “The one area of the soft drink
business that is just ripe for harvesting that can really, really bring the
sales and innovation that we are waiting for is the super-premium
end,” Pirko says.
As an example from another beverage segment, the vodka
category developed premium and super-premium options to cater to consumers
seeking to go up a notch in quality.
“In the soft drink business, when the line is
broken, when we have a super-premium Coke Classic, that’s going to
change the business,” Pirko says. “That’s going to bring
older drinkers back in because there are some soft drinks out in the market
right now from smaller companies that are very, very good that are up to
this level of quality.”
Historically, soft drink companies have steered clear
of this concept because “they are deathly afraid that a segmentation
of their market might lead to cannibalization, and they don’t know
where they would go,” Pirko says.
Diet CSDs aren’t in as much of a decline as
regular CDS, but the news isn’t wonderful. Providing a sparkle of
hope for sparkling beverages, Coke Zero gained 23.5 percent in volume sales
for the year, according to IRI and ACNielsen. Coke Zero’s popularity
led the company to extend the brand with Cherry Coke Zero and Vanilla Coke
Zero in 2007.
“The only product that has any sort of potential
to branch out and attract new people is Coke Zero, which is very much
positioned as tasting just like Coke,” Morgan says. “It
doesn’t have ‘diet’ in its name, so it can appeal to a
male audience as well.”
In addition to The Coca-Cola Co.’s successful
marketing of Coke Zero, Pirko says Coke Zero’s combination of
sweeteners provides a taste profile that was well received by diet drink
PepsiCo put its efforts into a new diet launch in 2007
as well: Diet Pepsi Max. The zero-calorie cola offers extra caffeine and a
touch of ginseng.
This year, PepsiCo released Tava, a line of
zero-calorie sparkling beverages. The beverages contain vitamin E, B3, B6
and chromium and are available in exotic flavor combinations.
New flavor introductions also remain a solid business
stategy, because this trend mirrors the flavor extensions that other
beverage categories are offering, Williams says. But, “it’s not
going to have a huge impact on the growth of the carbonated soft drink
category,” he adds.
“I think it’s very much like we’ve
seen in other areas of package foods as well, where it’s a cycle of
new launches and flavors that do well initially, but then year two, year
three they start to fade away,” Euromonitor’s Morgan adds.
“People are basically choosing between existing flavors rather than
drawing in new consumers.”
But flavors are still critical for the category
because of the changing demographics of the country, IRI’s Williams
argues. “As I look at the Latino population or the Asian population,
they have a propensity to go more toward a flavor type of environment, more
than a traditional cola,” he explains. “Whether it’s
going to be a zesty or more of an exotic type of flavor, flavors are the
key for the future growth or the change in growth for the carbonated soft
Continuing its limited-time release options, during
the summer months PepsiCo launched Pepsi Summer Mix, a cola with a tropical
fruit flavor. The company also released a limited-edition Mountain Dew Game
Fuel, Mountain Dew, with the addition of Citrus Cherry flavor and more
caffeine. And, PepsiCo released for a limited-time last summer, Sierra Mist
Lemon Squeeze, a lemon-lime soft drink with extra lemon flavor.
Soft drinks also have taken a chapter out of craft
beer’s strategy of launching seasonal beers, Williams says.
“That absolutely plays a critical role in the growth of carbonated
soft drinks in the future,” he says. “... It adds
excitement. It generates trial.”
Cadbury Schweppes Americas Beverages also continued to
extend its brands with new flavors and limited-time offerings. From
November to the end of January, the company released Pomegranate 7 UP, a
blend of 7 UP and pomegranate flavor. This year, Americas Beverages
rolled out Cherry Chocolate Diet Dr Pepper for a limited time.
The company also launched A&W and Sunkist Floats.
The new drinks recreate the creamy flavor of an ice cream float in
11.5-ounce vintage soda-shop inspired glass bottles with twist-off tops.
“You have a small segment of the population
that’s going to go for more kinds of rich flavors and
indulgent,” Morgan says. “I think Cadbury tried to do that with
its Sunkist and A&W Floats. There are some more premium-end boutique
soda brands that cater to this more adult consumer.”
The future of CSDs
Overall, the major three soft drink companies have no
horror stories to report because they are following their fundamentals,
which includes an international focus, Pirko says.
“They are working internationally,” he
says. “There are more and more thirsty consumers, and a lot of new
products that are interesting. That is all very
positive. The only thing that can conceivably slow them down is global
economics, but other than that they should do very well.”
For PepsiCo and Coca-Cola, pushing CSD brands
internationally, especially in developing markets, will be on the agenda.
Back in the United States, cutting production costs
and increasing efficiencies in distribution will be on the top of the to-do
list. And IRI’s Williams says mergers, consolidations, partnerships
and joint ventures will be at their “Tipping Point” for 2008.
“If you think outside of the carbonated soft
drink arena there are other major beverage companies that I think will
enjoy synergies by partnering with the big soft drink companies,” he