Cooling cola wars soak soda sales

Both Coke and Pepsi are betting on bottled water and energy drinks sales to offset sagging soda demand in the United States.

NEW YORK (CNNMoney.com) -- U.S. carbonated soft drinks sales are expected to fall 1 percent this year, and one industry expert says it's partly because Coke and Pepsi have put their legendary cola wars on ice.

"The marketing behind soft drinks has lost its punch over the years," John Sicher, editor of trade publication Beverage Digest, told an industry gathering earlier this week which also included Coke's outgoing CEO Neville Isdell.

"They [Coke and Pepsi] still compete aggressively, but there isn't that intense competition around these few brands ... For a quite a while, there has not been breakthrough, really exciting, news-generating marketing for CSDs [carbonated soft drinks] like the Pepsi Generation or the introduction of the Coke plastic contour bottle," he said.

Sicher, speaking on Monday at Beverage Digest's "Future Smarts" conference in New York, warned that the decline of the cola wars will only exacerbate the ongoing decline in soft drink demand among American consumers.

Both Coke (KO, Fortune 500) and Pepsi (PEP, Fortune 500), the No. 1 and No. 2 beverage makers have seen their share of the North America soda market fall for two straight years, as more health-conscious consumers switch to vitamin-infused energy drinks and bottled water.

Although these non-carbonated drinks are poised for rapid growth, colas still account for 57 percent of total U.S. beverage sales. According to Sicher, Coke holds a 54.4 percent share of the cola segment and Pepsi about 34.2 percent of the market.

"The North America market is the biggest beverage market in the world. Companies have to carefully watch what happens in this market because trends happening here can spring up elsewhere," Sicher said.

Industry representatives, however, still touted the growth opportunity for carbonated drinks.

'We're feeling really good about 2008," Pepsi North America president Hugh Johnston told attendees.

While he acknowledged that Pepsi's future growth will come from bottled water and other non-fizzy drinks, Johnston said it it was "foolish to categorize carbonated drinks as dead or in trouble."

First, he said sodas are more widely available to consumers, and offer the best value for money compared to vitamin-infused water and other energy drinks.

Although retail prices for colas have crept up this past year, largely due to higher raw material costs, such as aluminum for soda cans, corn used to make sweeteners and gas used to transport goods, Johnston said Pepsi would focus on driving prices back down.

Second, Johnston said it was up to Pepsi to "innovate its way out of" the cola slump.

"We are in a down period, but fresh ideas in marketing and innovation will get us out of it," he said.

He gave the example of Pepsi's "Tava" drink, which was expected to launch this year. "We'll launch it in the first half of 2008," he said. "It's a carbonated drink that comes in exotic flavors like black cherry. It's vitamin-infused, low-carb and has no caffeine."

But Coke's CEO Neville Isdell agreed with Sicher that cola makers need to rev up competition in order to spur demand for their brands.

"I think part of that [decline in cola wars] is true," Isdell said. "There's a lot of good profitable growth outside of sparkling [beverages] and all of us are a little guilty of chasing it. We have to refocus back on sparkling. We need that competition back."

Unless cola companies can inject the marketing fizz back into their cola brands, Sicher expects U.S. cola sales could decline at the rate of 1 percent a year over the next 10 years - or about 10 billion cases of carbonated drinks.

"The beverage industry is in a difficult transition," said Sicher. "Non-carbonated drinks are growing at the expense of carbonated drinks. The challenge for companies is to figure out how to grow both categories without compromising [the market] for either one."