GROCERY: Top of the pops

Move over, full-calorie soft drinks. The diet segment is where it's at these days. Following the lead of virtually every other beverage category, carbonated soft drinks (CSDs), long the nonalcoholic flagship of any grocer's beverage aisle, are reacting -- albeit reluctantly -- to the good-for-you movement that has been infiltrating the beverage category since the early 1990s.

Whereas full-calorie CSDs -- colas in particular -- used to reign supreme, growth in the category today is coming from two distinct segments: diets and flavors. And supermarkets, where the vast majority of consumers go to purchase soft drinks, would be well advised to note that this move toward healthy consumption isn't a passing fancy.

"Diet products continue as the driver of the category," says Jeff Lowrance, a spokesman for Salisbury, N.C.-based Food Lion. "Innovation in new flavors is having some success, without cannibalization."

"The consumer change in attitude toward CSDs is fundamental and long-term," notes the aptly named Bill Sipper, a longtime beverage marketer with brands such as Evian, Clearly Canadian, Nantucket Nectars, and The Switch, and currently a senior partner with the Cascadia Consulting Group in Ramsey, N.J. "Consumers have gotten smarter and would prefer not to put artificial products in their bodies."

In the soft drink category, the good-for-you trend has manifested itself in a gradual shift away from full-calorie CSDs toward their diet counterparts. According to data provided by Beverage World, a sister publication of Progressive Grocer, diet soft drinks accounted for 28.5 percent of the overall beverage category in 2003, based on a volume of 3.62 billion gallons. That represented a 0.2 percent drop from 2002, which had turned in a 0.5 percent decline in market share vs. 2001. In other words, at that time diet was going nowhere fast.

Of course, the CSD category overall was starting to lose consumers to newer, evolving categories such as bottled water, RTD iced tea, sports drinks, and nutrient-enhanced New Age beverages, all of which had the perception among consumers of being healthful. Over the past five years, however, virtually all growth in the carbonated soft drinks category has come by way of the diet segment.

According to ACNielsen data, diets generated 28.6 percent of CSD sales in the supermarket channel at stores with $2 million or more in annual sales in 2000. Overall the CSDs yielded $11.7 billion in the $2 million-plus grocery channel.

Now fast-forward to 2004. In the 52-week period ending Dec. 25, CSDs accounted for $12.4 billion in retail rings in the $2 million-plus grocery channel. That represents only a 6 percent gain over a four-year period.

Diets, however, had grown to a 34 percent market share, with $4.2 billion in sales -- a 25.4 percent gain over four years -- the kind of growth full-calorie CSDs had been accustomed to in "the good old days."

Innovation still key

Historically innovation has been a signature of the soft drink category: Innovation in flavors (vanilla colas, cherry colas, citrus, etc.), in packaging (16-ounce, 20-ounce, two-liter, multipacks), and, of course, in marketing. (Will we ever forget Michael Jackson torching his hair while filming a Pepsi commercial in 1984?)

All that hasn't changed, particularly with cola extensions, and with good reason. According to ACNielsen data, full-calorie colas have been in decline over the past four years, decreasing in sales to $3.69 billion in 2004 from $4.13 billion in 2000 in the $2 million-plus grocery channel. That represents a significant dropoff of 10.7 percent in dollar rings -- a loss only partially offset by a 7.9 percent gain by diet colas. In the process, diets, which accounted for 35.1 percent of cola sales in the $2 million-plus grocery channel in 2000, grew to 40.1 percent of the cola segment's sales in 2004.

"I think diets will continue to outperform their full-calorie counterparts and may eventually eclipse 'regular' CSDs in terms of volume," says Beverage World editor-in-chief Andrea Foote. "Consumer tastes are changing, and so are their attitudes toward calories and sugar consumption. I don't think people will stop drinking CSDs, but more will make the shift to 'diet' drinks."

Toward that end, 2004 saw several initiatives by the CSD giants. For instance, Coca-Cola has relaunched and rebranded its former Diet Sprite brand as Diet Sprite Zero. Plans call for the brand to continue evolving into just plain Sprite Zero in 2005, as it's already known in 20 international markets. PepsiCo, meanwhile, has rebranded its Diet Sierra Mist citrus soda to Sierra Mist Free. Industry insiders report that Coca-Cola is seriously considering launching another no-calorie cola -- Coke Zero -- in 2005. Unlike the Sprite and Sierra Mist initiatives, Coke Zero would be an autonomous brand using the artificial sweetener sucralose, not a rebranding of Diet Coke, the No. 1 diet soft drink brand in the United States.

"A significant trend in the diet category is the movement away from the diet label," adds Foote. "Sprite Zero and Sierra Mist Free are just the beginning. It's a move that allows nontraditional diet drinkers -- i.e., teens and male consumers -- to embrace no-calorie drinks without adopting the diet label."

John Diefenbach, a partner at San Francisco-based TrueBrand, an agency specializing in corporate and brand identities, agrees. "The word 'diet' can have unpleasant connotations," he notes. "It's a word that represents something that doesn't taste good -- a punishment, if you will -- and people don't want to be punished. They want something that tastes good."

In terms of overall innovation, expect to see more of it from Coca-Cola this year, including:

-Coca-Cola with Lime: a full-calorie extension based on the success of last year's Diet Coke with Lime. Coca-Cola with Lime is expected to hit retail shelves in March.

-Sprite Remix Aruba Jam: an orange-flavored Sprite, and the third annual flavor in the Sprite Remix initiative.

-Vault: a high-caffeine citrus offering from Coca-Cola to replace the failed Surge in its portfolio and challenge PepsiCo's Mountain Dew.

-Blak: a coffee-flavored cola. This is a concept that has already failed at least once in the marketplace (in 1996, as Pepsi Kona). "The timing may be better today for launching more coffee-based drinks," says Bill Pecoriello, a noted beverage market analyst at Morgan Stanley, "but it remains critically important to get the taste and marketing strategy right."

-Full Throttle: an energy drink to challenge market leader Red Bull.

For PepsiCo's part, most of its 2005 new product initiatives involve the non-CSD portfolio, including Flavor Splash from Aquafina (bottled water in three flavors: raspberry, citrus blend, and wild berry), Aquafina Sparkling (sparkling water), Gatorade Endurance (for "high-intensity" workouts), and Milk Chillers (a shelf-stable dairy beverage).

Mid-cals: School's out

Perhaps the biggest initiatives from the soft drink giants in 2004 were their so-called "mid-calorie" launches: Coca-Cola C2 and Pepsi Edge. Although both arrived with great fanfare last spring, neither thus far has been able to capture the imagination of the American soda-drinking public.

According to the Atlanta Journal-Constitution, a report issued by Legg Mason analyst Mark Swartzberg found both brands "either slow builds or something closer to dead on arrival." Basing his opinion on a survey of 51 U.S. retailers, Swartzberg notes, "No one with whom we spoke says the products are selling briskly, with responses evenly split between selling 'not at all' and 'a little.'" He concedes, however, that the findings are "hardly conclusive."

Food Lion's Lowrance concurs. "It's still early," he says. "Marketing plans, and the target consumer, are still unclear." While the concept is to offer half the carbohydrates and calories of regular CSDs -- that is, colas -- by offering half the sugar, just who that is expected to appeal to is a matter of conjecture.

"While the jury is still out somewhat on mid-calorie products, we don't believe mid-calorie products are a big idea at this time," says Gary Hemphill, s.v.p. of information services for Beverage Marketing Corp. in New York. "First, we're not sure if most consumers understand the concept. Second, we believe most health-conscious consumers will opt for diet soft drinks instead of mid-calorie products when given the choice. Companies would probably be better served to work toward developing better-tasting diet soft drinks."

New Age contenders

Smaller brands with a more entrepreneurial bent have recently entered the marketplace with CSDs that offer true innovation. Steaz, a carbonated RTD tea marketed as "green tea soda," and two new brands, Izze and The Switch -- both marketed as "sparkling fruit juices" (100 percent fruit juice blended with sparkling water) -- show promise, as does NectarFizz, a similar product from Nantucket Nectars.

While these products can't be marketed as "low-carb" or "low-sugar" because of their juice content, the sugar contained therein is of the natural variety, with no added sugar, caffeine, preservatives, or artificial flavors. The Switch has been successful in getting into California public schools, where traditional carbonated soft drinks have been banished.

Izze, meanwhile, jumped into the mainstream when it was given distribution at 7-Eleven.

Perhaps the New Age soda brand with the most immediate promise -- because of the clout of its parent company, Cadbury Schweppes, and its inherent DPSU bottling/distribution system -- is 7Up Plus, a mixture of 7Up, 5 percent fruit juice, and such assorted nutrients as vitamin C and calcium. 7Up Plus offers just 10 calories and two grams of carbohydrates per eight-ounce serving (it's sweetened with Splenda, the brand name for sucralose), as compared to regular 7Up (100 calories and 26 grams of carbs). The launch, in late summer 2004, was supported by a $50 million marketing effort, including a national print and TV campaign featuring "Live With Regis and Kelly"'s Regis Philbin and Kelly Ripa, and Cynthia Nixon and Kristen Davis of "Sex and the City" fame.

Initial results have been mixed. While the company maintains the product "met expectations" during the initial rollout, some industry experts aren't so sure the low-carb, nutrient-enhanced, good-for-you CSD trend has long-term legs.

"We have not seen any indication that 7Up Plus will be revolutionary in the same way that diet sodas were, proliferating into a multitude of flavors," says Carla Norfleet Taylor, a beverage analyst for Fitch Ratings, an international investment ratings firm.

Other health-driven initiatives from Cadbury Schweppes in 2005 include new Hawaiian Punch Light with 80 percent less sugar, and several new products from Sunkist's "energy, health, and orange" franchise.

"History indicates that these companies have development pipelines that are continually evolving," says Taylor.
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