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?

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 benefits.”

“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 17 percent.

“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.’”

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 many challenges.”

Negative news about soft drinks linked to obesity and the banishment of soft drinks in schools have helped contribute to declining sales.

“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 that.”

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 share?”

“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 get it.”

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 choice.”

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 consumers.

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 drink category.”

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.”

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 says.