Commitment to innovation, new flavors and healthier options emerged as the driving forces behind brands that saw growth in the carbonated soft drink category in 2005. Last year, volume was down for all three major soft drink companies in measured U.S. retail channels. Category volume dropped 3.9 percent in combined retail channels, with Coca-Cola falling 4.2 percent, Pepsi-Cola sinking 4.7 percent and Cadbury Schweppes dipping 1.2 percent. Even flagship diet brands took a hit with Diet Coke’s volume tumbling 5 percent overall and Diet Pepsi’s volume declining nearly the same at 4.7 percent.

For the first time in two decades, the number of soda cases sold in the United States declined. In 2005, case volume was down 0.7 percent to 10.2 billion cases.

Additionally negative media reports linked soft drinks, even diet soft drinks, to causes for obesity and dental health issues. As a result, soft drink developers created newly formulated sugar-free alternatives, extended current lines with new flavor options, refreshed stagnate brands with new packaging and branding, and purchased healthful carbonated soft drink products to add to their offerings. While the market for carbonated soft drinks has yet to turn around completely, signs of success are visible in increased revenue for reinvigorated brands in 2006.

Despite full-year declines, The Coca-Cola Co.’s total sales saw balanced unit case volume growth in the fourth quarter last year, with carbonated soft drinks growing 2 percent, and its other categories growing much larger, such as 12 percent for non-carbonated beverages (excluding water) and 17 percent for water. Trademark Coca-Cola, Sprite and Fanta grew unit case volume by 2, 5 and 4 percent, respectively, in the quarter. For the full year, both global sales of Coca-Cola and Sprite brands recorded their highest growth rates in five years, Coca-Cola’s annual report says.

Coca-Cola’s net income fell 28 percent to $864 million during the last quarter of 2005, but the drop was not as bad as analysts had expected. Fourth-quarter revenues grew 7 percent to $5.5 billion.

Coca-Cola’s full-year revenues rose 6 percent during 2005, with a 4 percent increase in case volumes attributed to strong sales in emerging markets such as China, Turkey, Brazil and Russia. Full-year income was flat at $4.87 million.

For North America, Coca-Cola’s carbonated beverages unit case volume increased more than 1 percent in the fourth quarter, reversing negative trends through the first three quarters of 2005. Continued success of Coca-Cola Zero, which is now at 0.9 market share, and Diet Coke Sweetened with Splenda led to improved trends on Coca-Cola branded products in the quarter, according to its annual report. In addition, the launch of new Fresca flavors contributed to unit case volume and share growth in carbonated beverages during the quarter.

Diet Coke Sweetened with Splenda, launching in the second quarter of 2005, started the year off for Coca-Cola’s new diet offerings. Coca-Cola followed in June with Coca-Cola Zero, a new zero-calorie cola that is sweetened with a blend of aspartame and acesulfame potassium (ace-k). In a different kind of “diet” offering, Coca-Cola released Coca-Cola Classic in an 8-ounce can with only “100 calories per can” posted on the package.

Coca-Cola followed those launches with the introduction of two new zero-calorie line extensions on the Fresca brand and updated the packaging that re-released in September 2005. Fresca was given a contemporary look, including a new logo and new packaging graphics. Two new flavors — Sparkling Peach Citrus Fresca and Sparkling Black Cherry Citrus Fresca — were introduced sweetened with aspartame and ace-k. The sparkling citrus flavor of original Fresca remained unchanged.

With the success of Diet Coke with Lime, followed by the introduced of Coca-Cola with Lime at the beginning of 2005, Coca-Cola saw its lime-flavored soft drink market share increase nearly 42 percent. But the company also watched its market share drop for Coke with Lemon, Vanilla Coke and Diet Vanilla Coke. Vanilla Coke volume declined 43.2 percent and Vanilla Diet Coke volume dropped 38.7 percent. Diet Coke with Lemon volume fell the most dramatically at 68.4 percent. In turn, Coca-Cola phased out the lemon- and vanilla-flavored varieties at the end of 2005.

Countering the hiatus of the lemon and vanilla flavors, Coke began 2006 with new carbonated soft drink launches of regular and diet versions of Black Cherry Vanilla Coca-Cola early in the year. The simultaneous launch of Diet Black Cherry Vanilla Coke and Black Cherry Vanilla Coke was a first for Coca-Cola. Diet Cherry Coke and Cherry Coke, which saw its market share slightly decrease last year, were not affected by the introduction.

Coca-Cola also kept its new product introductions going in 2006 with Vault, a hybrid energy soda. Vault’s national launch in February followed its debut in select U.S. test markets last fall. Vault features a citrus taste with less carbonation than most sodas and similar ingredients as many energy drinks. Competitively priced with traditional soft drinks on the market, Vault and Vault Zero — a no-sugar version of the brand featuring aspartame and ace-k — are available in traditional soft drink packaging such as 20-ounce and 1-liter bottles, with more packaging, including 2-liter bottles and 12-ounce cans to launch later this spring. The Vault launch is supported by an integrated marketing campaign, featuring the tagline, “Drinks like a soda, Kicks like an energy drink.”

“Vault helps take things to the next level by combining attributes from traditional soft drinks and energy drinks to provide young adults with the taste, refreshment and energy boost they’re seeking,” said Stuart Kronauge, director of flavor brands for Coca-Cola North America, in a release. “...Vault offers the best of both worlds in one appealing package.”

According to bloggers on the Web site vaultkicks.org, Vault has a similar taste and reminds consumers of Coca-Cola’s former Surge product. But today, Vault is going head to head with Pepsi-Cola’s MDX energy soda.

For the first time in their long, competitive history, PepsiCo overtook Coca-Cola in terms of its market capitalization in December. Coca-Cola fell slightly behind at $97.9 billion to PepsiCo’s $98.4 billion — a change that industry experts credited to PepsiCo’s policy of diversification and investment in new health-conscious brands.

PepsiCo’s net revenues rose 11 percent during 2005, on the back of a 7 percent increase in volumes. The company’s full-year figures were boosted by a strong fourth quarter that saw revenues jump 15 percent and volumes grow 7 percent.

Volume at Pepsi Beverages North America grew 10 percent because of increases in Gatorade, Aquafina and Propel fitness water. Sales of diet carbonated soft drinks rose slightly, offsetting a slight decline in sales of regular soft drinks.

In 2005, Pepsi-Cola relaunched a number of brands, including Pepsi One. The company added Splenda to the reformulated Pepsi One, giving the beverage a full-flavor cola taste with one calorie. New graphics of black and silver also helped to grab consumers’ attention.

Pepsi-Cola also released Mountain Dew Pitch Black II for a 10-week period during the fall. The product is Mountain Dew with a blast of black grape, and is packaged in a cool metallic silver label. Pitch Black II is similar to 2004’s Pitch Black, but this time the product has a sour bite. “Consumers loved Mountain Dew Pitch Black and they wanted us to bring it back, but with something new,” Pepsi-Cola North America said in a release. “Sour flavors are big right now with teens and young adults, so we added a sour bite to Mountain Dew Pitch Black II.”

Flavor additions continued to invigorate sales in carbonated beverages for Pepsi-Cola. In May, the company released Pepsi Lime and Diet Pepsi Lime, which is sweetened with aspartame and ace-k. Pepsi-Cola launched Pepsi Lime and Diet Pepsi Lime together to give the flavored-cola category a full measure of incremental growth, the company said.

In August, Pepsi-Cola achieved another first in the release of Frawg, an apple-flavored, caffeinated soda that is available exclusively at 7-Eleven as a Slurpee and a Big Gulp fountain drink. Targeted to teens and twenty-somethings, Pepsi-Cola hopes to appeal to 7-Eleven’s savvy beverage consumers looking for unique products that could not be found elsewhere.

After two years of product development, Frawg marks several firsts: the first time a major soft drink company has created a new brand specifically for a single retailer, the first time 7-Eleven has introduced simultaneous flavors on both the Slurpee and fountain machine and the first apple-flavored carbonated beverage from a major soft drink company. 7-Eleven was given exclusive rights to Frawg for one year.

Last year, PepsiCo also brought the Tropicana brand name to the carbonated soft drink category with the launch of Tropicana Twister Soda. The soda contains 1 percent juice, and is available in Orange, Diet Orange (sweetened with aspartame and ace-k), Strawberry and Grape flavors in a 20-ounce plastic bottle. This year, the industry reports that Pepsi-Cola will reintroduce Slice flavored soft drinks as Slice One, a line of carbonated soft drink flavors, exclusively at Wal-Mart.

Pepsi-Cola rounded out its new releases for 2005 with the launch of Mountain Dew MDX in November. MDX features the familiar citrus flavor of Mountain Dew, but also includes ginseng, guarana, taurine and d-ribose, helping to provide a higher level of energy than regular soda. The launch of MDX also marked the debut of a new single-serve 14-ounce PET bottle. “MDX is the next logical step in our evolution,” Pepsi-Cola said in a release. “Consumers are increasingly looking for energy — witness the explosion of energy drinks — there is great opportunity for an entirely new category.”

With its quest to offer healthful options last year, Pepsi-Cola North America, The Pepsi Bottling Group, PepsiAmericas, Pepsi Bottling Ventures and other leading members of Pepsi’s bottling system declared their support for the American Beverage Association’s new school vending policy. PepsiCo said it would work closely with parents, community leaders and school officials to provide only bottled water and 100 percent juice to elementary school students.

Additionally, PepsiCo said it would provide nutritious and/or lower-calorie beverages to middle school students, such as bottled water, 100 percent juice, sports drinks, no-calorie soft drinks and low-calorie juice drinks. No full-calorie soft drinks or full-calorie juice drinks with five percent or less juice will be provided until after school hours. The company also said it will provide a variety of beverage choices to high school students, including bottled water, 100 percent juice, sports drink and juice drinks. No more than 50 percent of the vending selections for high school students will be full-calorie soft drinks.

Following its strategy of offering healthy options in every category, PepsiAmericas Inc. has purchased Ardea Beverage Co., maker of Airforce Nutrisoda, and will collaborate with Pepsi-Cola North America to market Airforce Nutrisoda in select markets, with the possibility for future expansion. Ardea will operate as a wholly owned subsidiary of PepsiAmericas.

The Ardea portfolio includes a line of nutritionally enhanced, low-calorie, carbonated beverages. “The Nutrisoda brand complements our growing portfolio of healthier beverages, providing a unique and fashionable beverage alternative,” said Robert Pohlad, chairman and chief executive officer of PepsiAmericas.

Nutrisoda targets on-the-go consumers who are nutritionally aware. Each of the seven products within the portfolio contains vitamins and minerals formulated to achieve a specific benefit. The products have few or no carbs, sugar, sodium or calories. Brand offerings include Immune in tangerine and lime flavor, Radiant in pomegranate and black berry, Calm in wild berry and citron, Focus in mango and peach, Flex in black cherry and apple, Energize in mandarin and mint, and Slender in pink grapefruit and guava.

During a year where Cadbury Schweppes sold its European beverage business for $2.2 billion, the confectionery/beverage company still made carbonated soft drinks a priority in 2005. Beverages sales rose 6.2 percent, and Cadbury Schweppes said it increased its market share in the United States to 17 percent, largely due to the introduction of Cherry Vanilla Dr Pepper. The company’s beverage division contributed to a 13 percent increase in underlying full-year profit to $1.5 billion.

“Our business in North America continued to reap the benefits of consolidating three separately run businesses into one,” the company said in a statement.

In November, Cadbury Schweppes sold its European beverage business to Blackstone Group International and Lion Capital LLP. Todd Stitzer, chief executive officer at Cadbury Schweppes said in a statement that after the transaction the company would be able to focus on its faster-growing confectionery and other beverage businesses.

Then in February, The Wall Street Journal printed financial experts’ opinions that Cadbury Schweppes seemed primed for a takeover. The Wall Street Journal’s “Heard of the Street” column highlighted Hershey, Kraft and Nestlé as possible bidders for the company. Cadbury Schweppes’ decision to sell its European soft drinks business reignited talk that the company also could shed its U.S. beverage brands, the paper reported. Stitzer though has told analysts and investors in recent weeks that he has no plans to sell the soft drinks business and expects that Cadbury Schweppes will remain independent for the next several years.

The No. 3 soft drinks group in the United States behind Coca-Cola and PepsiCo Inc., Cadbury Schweppes, like its counterparts, benefited from flavored line extensions and advanced its lines with reformulations. Cherry Vanilla Dr Pepper and its diet version, which launched in 2004 in select markets and rolled out nationwide in 2005, received a marketing push from Cadbury Schweppes in 2005, with special events and tasting opportunities such as roller skating carhops passing out samples.

“Dr Pepper had a tremendous growth year last year really fueled by our innovation around Cherry Vanilla and Diet Cherry Vanilla,” says Jim Trebilcock, senior vice president of marketing at Cadbury Schweppes. “But that brand continues to perform well on regular, diet and with our innovation, and we look to continue to develop that trademark aggressively this year, along with our bottling partners.”

Cherry Vanilla Dr Pepper and the diet version will be a permanent part of the Dr Pepper line up, Trebilcock says. “We’re investing more this year in Cherry Vanilla and Diet Cherry Vanilla then we did last year,” he adds. “We believe we can grow the brand in year two, and not fall into the trap of year two brands that typically fall off, because the repeat purchase on it is so strong.”

Already beginning its marketing push, in February Cadbury Schweppes conducted the Diet Dr Pepper National Sampling Blitz, blanketing the country with more than 250 million free full-size cans, fountain drinks and other giveaways. Free product samples and coupons were distributed through traditional retail partners and high-profile events, including a free Diet Dr Pepper Fountain Day at 7-Eleven stores and special promotions through Target and Wal-Mart