SOFT DRINK MAKERS GO DIET THIS SUMMER

Amanda Chater

NEW YORK -- The nation's top carbonated soft drink manufacturers have bulked up their diet soda lines in time for summer, in a bid to maintain growth during the traditional high season of soda consumption.

Each of the main competitors have added Splenda-sweetened beverages to their lineup. From Coca-Cola there is Diet Coke with Splenda and Coke Zero, two no-calorie products. Splenda also figures prominently in Cadbury Schwepps' revamped Diet 7-Up, as well as Pepsi's relaunched Pepsi One, an alternative to Diet Pepsi.

If last year was any indication, it's going to be a hot summer of competition in the fizz biz, industry analysts said.

"Diet soft drinks drove most of the category's growth [in 2004]," said Michael Bellas, chairman of the Beverage Marketing Corp., based here. "Consumers are increasingly seeking out healthier products."

Such opinions are reflected in the numbers. Last year, diet sodas were largely responsible for propelling the CSD market: Total diet soft drink volume increased 6.4% while the overall CSD market increased only 0.7%. Put another way, regular Coca-Cola dropped by 3.2% during 2004, according to Beverage Marketing, but both Diet Coke and Diet Sprite saw sales jump by 5%.

Chris DeMaio, group director, large-store channel for Coca-Cola Enterprises in Atlanta, said about 35% of CSD consumption is in diet varieties and predicted that in 10 to 12 years, consumption of diet sodas will equal regular sodas.

Indeed, as growth dri-vers, diet sodas have become so important that PepsiCo announced earlier this year that their diet colas are now their flagship beverages, at a time when research shows consumers are looking for healthier options and less sugar, analysts said. Largely, this means they are turning to water and alternatives like diet sodas.

In fact, according to Bill Pecoriello, a beverage industry analyst with Morgan Stanley, New York, 67% of people reported that they try to drink more water because it's healthy and 33% said they don't mind spending more for a healthy beverage.

"People are conscious enough about the calories coming from sugar that there's almost a guilt-factor now associated with drinking full-sugar soda," said Don Montuori, editor of Packaged Facts, a market research report firm, also based here. "Sugar substitutes have gotten so much better that objections to taste have been overcome."

In the coming years, sales of diet beverages are expected to continue to outpace regular CSDs and the gap between the two categories is expected to broaden.

Terry Marks, president, North America for Coca-Cola Enterprises, expected that all categories of beverages will grow in the next three years except for regular soft drinks.

Consumer demographics play a big role in the trend. Diet Coke is aimed more toward an older, female market, said Irial Finan, president of bottling investments and executive vice president of Coca-Cola. Coke Zero is expected to be popular with 18- to 34-year-olds "who want the real cola taste without compromising calories."

Pepsi One is aimed toward people over 40 who prefer the taste and mouth feel of Splenda over other artificial sweeteners, and younger males who aren't comfortable drinking Diet Pepsi, the company said.

Diet soft drink profits are expected to increase by $449 million between 2005 and 2008, outpaced only by energy drinks whose growth is anticipated at $573 million, according to Marks. Regular soft drinks, on the other hand, are only expected to grow profits by $96 million, being outperformed even by sports drinks and juices.

Bottlers have their sights set beyond the summer months, too. Coca-Cola will release a madeover version of its Fresca brand in September. Two new flavors will be added to this zero-calorie line -- Sparkling Peach Citrus and Sparkling Black Cherry Citrus -- to complement the original Sparkling Citrus. All three products will be available in a 12-ounce can with new modernized graphics.

Given all the promotional activity, soda makers are aware that not everything works out the way they want it. Many still recall last year's lukewarm reception of Coke's C2 and Pepsi Edge -- new "mid-cal" offerings that were heavily promoted last summer.