Bleak Picture Emerging for Carbonated Beverage Business

Soda Sales Volume to Fall 1.5% Yearly as Alternative Drinks Flourish

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CHICAGO ( If you thought last year was bad for carbonated soft drinks, hang on. It's going to get a lot worse, according to the latest market research.
Carbonated soft drinks still control the largest share of the overall liquid refreshment market, but analysts predict ongoing declines in sales volume.
Carbonated soft drinks still control the largest share of the overall liquid refreshment market, but analysts predict ongoing declines in sales volume.

Continuing declines
An increasingly unhealthful image of soda fueled the first domestic volume drop for fizzy drinks last year, and research from Morgan Stanley forecasts future declines will be twice as bad. The investment bank predicts soda volume will fall 1.5% annually for the foreseeable future despite a spate of brand makeovers by the nation's biggest soft-drink marketers.

Extrapolating from that rate of decline and the rapid growth of bottled water, sports drinks, energy drinks and teas, soda could be eclipsed in sales by noncarbonated beverages within the next seven years, according to Advertising Age calculations. The biggest loser in that scenario would be Coca-Cola Co., which has been slower to adopt noncarbonated beverages than rival Pepsi-Cola Co.

Coke disagrees
A Coke spokesman insisted that the beverage giant is bucking the larger trend. "We believe we continue to grow carbonated soft drinks," he said, noting that Coke's soda volume was up 1% in the fourth quarter and positive in the first quarter.

To be sure, soft drinks still control the largest share of the total liquid-refreshment category. But with fewer teens taking up the habit, so goes the notion of turning them into lifelong consumers. Morgan Stanley's poll of 1,550 consumers -- including 525 respondents ages 13 to 17 -- revealed that teens and young adults are drinking less soda and bottled water compared to adults and more juices, sports drinks and energy drinks.

"The current set of teens may become the 'lost generation' for the [carbonated soft-drink] category, which has historically relied on teens for current volume and for lifetime value," wrote Morgan Stanley analyst Bill Pecoriello in the report.

knocking out the fizz

Noncarbonated mega brands
Indeed, noncarbonated drinks have year by year bumped fizzy beverages from the megabrand-drinks lists. Today, five of the top 10 liquid-refreshment brands -- Gatorade, Minute Maid, Tropicana, Aquafina and Dasani -- are noncarbonated . And Beverage Marketing Corp. predicts Gatorade is poised to break into the top tier, displacing No. 5 Sprite.

In the past 25 years, only three new beverage brands have reached over a billion dollars in wholesale revenue, and none of them is a soft drink: Gatorade at $3 billion, Nestle Waters at $3.1 billion and Red Bull at $1 billion.

That explains why U.S. carbonated-soda volume declined for the first time by 0.2% in 2005, according to Beverage Digest. Beverage Marketing paints an even uglier picture of a 0.6% drop for the year, with carbonated-drink share of nonalcoholic beverages falling to 52.9%. Although it may be premature to declare death for carbonated soft drinks, it's still a sobering wake-up call.

'Oldsmobile of beverages'
"[Noncarbonated] brands have done a tremendous job of brand identity," said David Morris, analyst for Mintel. Marketing has also played a role in turning Coke and Pepsi into the Oldsmobile of beverages. Energy drinks have used the internet and newer forms of marketing to connect to younger consumers who dominate their consumer base. "Energy drinks are the new youth drink," said Mr. Morris. "With most of these beverages, the pitch is not health; it's energy and adventure, and the youngest consumers are responding very well to that message."

Newer marketing tools that tap viral marketing and social networks have proved most effective for upstart brands like Izze, Fuze, Monster and Vitaminwater. "Many of these brands are growing by word-of-mouth instead of sheer media weight," said Darrell Jursa, managing partner of influencer-marketing shop Liquid Intelligence. "Just like adults, kids want to be identified with what's new and interesting-it's social currency."
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