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FIZZLED OUT

More and more, Coke isn't the real thing anymore. Nor are Pepsi, Sprite and other mainstream sodas.Recent reports that sales of cola and other sweetened carbonated soft drinks had dropped for the first time in 20 years marked a watershed moment for the category.Supermarket retailers have been adjusting to the shift for years.Niemann Foods, Quincy, Ill., is promoting more energy drinks, waters, teas

More and more, Coke isn't the real thing anymore. Nor are Pepsi, Sprite and other mainstream sodas.

Recent reports that sales of cola and other sweetened carbonated soft drinks had dropped for the first time in 20 years marked a watershed moment for the category.

Supermarket retailers have been adjusting to the shift for years.

Niemann Foods, Quincy, Ill., is promoting more energy drinks, waters, teas and "better for you" quaffs in addition to Pepsi and Coke. "We still have colas on large displays in the stores, but we also try to display more alternative beverages," said Martin Miller, category director.

Sales of carbonated soft drinks are flat at best, but seem to be growing for every other drink category, said Larry Murphy, store manager for Treasure Island Food Mart, an upscale six-store chain in Chicago. "New Age drinks are still going strong," he said. "There have been increases in sales for water, fruit juices, Snapple and Mystic ice teas and drinks like Red Bull and other alternative beverages because of the consumers' concerns about health."

The report by Beverage Digest that sparked the debate about CSD's future showed that case sales of soda dropped by 0.7% in 2005 to 10.2 billion cases after years of increases. Coca-Cola Classic's volume dropped 2%, while original Pepsi's shed 3.2%.

Morgan Stanley beverage analyst Bill Pecoriello predicted the soda category would decline by about 1% per year for the next few years. At the same time, John Sicher, editor and publisher of Beverage Digest, predicted the sales of bottled water and sports drinks, such as Gatorade and PowerAde, and energy drinks, like Red Bull and Full Throttle, would grow at a double-digit rate.

Dollar sales of soda also are declining, despite recent price increases. Supermarket sales of sweetened carbonated cola drinks declined 2.6% for the year that ended March 25 to $3.55 billion, compared to the year-ago period, according to ACNielsen Strategic Planner. That was on top of decreases of 2.2% for the 52 weeks that ended March 27, 2004, and 3.4% for each of the two years prior to that. Likewise, sweetened lemon/lime carbonated drinks declined for those same years.

Miller of Niemann Foods, which has 66 stores in central Illinois, Iowa and Missouri operating primarily under the County Market and Cub Foods banners, said that the price hikes, while boosting revenue, probably further hurt case sales.

"Sales volume for carbonated soft drinks is up year-to-date for us, but that is because we have raised everyday and ad retails with recent cost increases. The unit volume and the case volume are down. It is a difficult time to be raising prices because sales are flat or declining," Miller said. "2005 was a difficult year for soda distributors, and many have noted that 2005 was a very difficult year for them for both sales and profits. Their costs are going up due to fuel costs and plastics costs."

With consumers replacing soda with bottled water and other healthier alternatives, manufacturers and distributors also are trying new things. "Flavored sodas and brands such as Diet Rite from companies such as the American Bottling Co. are growing at a faster pace than colas," Miller said. "7UP is becoming a 100% natural product with no artificial preservatives."

Looking for those alternatives is the key to retailer success in the soda category, said Darrell Jursa, managing partner of Liquid Intelligence, a consulting firm in Chicago, and a former Coca-Cola executive.

"Retailers have smartened up in the past five to 10 years. They are adding water to the CSD displays, and diet sodas and even noncarbonated beverages," Jursa said. "It is not just about brand sets anymore, it is about flavor sets. Retailers are putting new items in the section and picking up smaller distributors and catering to people looking for something different."

That desire for alternatives is driven in part by health and weight consciousness. Diet colas showed increases in supermarket dollar sales of 3.8% for the 52-week period that ended March 25, to $2.54 billion, compared to the previous year and increases of 2.2% and 3.9% for the prior years. Low-calorie lemon/lime carbonated drinks also increased in dollar volume during those years.

"People in this country more than ever have a keen interest in health," said beverage consultant Manny Goldman, president of Goldman Consulting Services of Hillsborough, Calif. "Times are good and people can be pickier about what they consume, and they want to keep their weight down. This has worked against the sugared soft drinks, and sales of diet drinks have gone up. The innovations in the line extensions are now focused on soft drinks that won't put on weight. Studies have shown that sugared soft drinks rank very high for refreshment, but they score pretty low for healthiness in consumers' opinion. That affects sales, and that trend will continue."

However, CSDs' importance as a category makes them impossible for retailers to ignore.

"The category is going to struggle for some years to come," said Beverage Digest's Sicher. "There has been a shift in taste on the part of the consumer from beverages that refresh and taste good to beverages that refresh and taste good and do something more for them.

"At the same time, there is always going to be a core consumer for regular soft drinks. It is a huge part of the business and people love them," he added. "We should all be fortunate enough to own stock in Coke or Pepsi or Dr Pepper."

Balancing those two opposing forces is the challenge for supermarket retailers.

"Water and alternative sodas continue to grow at a steady pace, and we have been advertising water and New Age beverages more than ever recently, but we are not losing our focus on core volume brands," Miller said. "We still advertise Coke and Pepsi can packages every week because that is what the majority of consumers still want, and it is still a large percentage of [direct-store-delivery] beverage volume."

Such heavy promotional activity is needed to combat the negative influence price increases had, Goldman said.

"You had no price increase for at least 15 years from the early 1980s," he said. "Then you start to see increases in the late 1990s in the low-inflation environment of the rest of the supermarket. The slowdown in sales coincides with the increase in prices."

Even if sales are flat, retailers still want to get whatever they can out of the category, he said. That means giving it shelf space, end-of-aisle displays, specials run with the bottlers, and good in-store placement. "Keeping sales up as much as possible requires the bottler and the retailer to work together," Goldman said. "You constantly see sales for larger and larger packages."

Promotions, weekly specials and consistent advertising help sales of the major CSD brands for retailers like Foods Etc. in Clear Lake, Calif., and Susanville Superette in Susanville, Calif., both IGA stores.

Pepsi and Coke sales continue to rise even though overall category sales are down, said Lamont Kucer, who manages both stores. "But it is water sales," he said, "that are up most."

A Function of Demand

Coke and Pepsi have tried to ward off bad publicity about soda's impact on obesity by marketing "better-for-you" versions of their soft drinks.

But as people focus on wellness, it's niche and small beverage makers that are really changing the perception of soda through products that deliver health benefits beyond quenching thirst, contended Packaged Facts, the publishing division of MarketResearch.com.

Energy drinks are the most dynamic segment of these functional beverages, which also can include carbonated and flavored waters, sports drinks, diet soft drinks and a range of other alternatives, Packaged Facts stated in a report, "Market Trends: New Age Carbonated Beverages." Their growth has tempered, but energy drinks remain the hottest segment of the beverage industry, with dollar sales and volume up about 50% in 2005 vs. 2004.

Early New Age beverages were positioned simply as a more healthful alternative to soft drinks, but as their popularity increased, marketers have started catering to different demographics. Now there are energy drinks for the night-life crowd, and wellness drinks targeted to aging yet vibrant adults. New offerings with unusual flavors also help to keep the category lively. "The category is getting increasingly fragmented as brands are being tailored to specific consumer needs," the report stated.