Coca Cola gambling on new diet drink

ATLANTA - If Coca-Cola should have learned anything from its embarrassing 1985 attempt to introduce New Coke, it's that you never needlessly risk the loyalty of your most passionate customers.

But that is exactly what the world's largest soft drink maker may have set in motion on Monday, when it unveiled plans to sell Diet Coke sweetened with the popular sugar substitute Splenda, analysts and beverage industry consultants said.

"It's worse than a riverboat gamble," said Manny Goldman, a San Francisco-based beverage consultant who has followed Coca-Cola for more than three decades.

"Coke is jeopardising what may be its No. 1 franchise in the country."

With the new drink, likely to appear in US stores in the spring, Coca-Cola has set its sights on capturing a subset of consumers who may not care for the taste of the current form of Diet Coke, which is made with aspartame.

It also has pledged to continue selling regular Diet Coke, a move designed to assuage consumers already wedded to what is the nation's most popular diet soft drink.

Healthy US demand for Diet Coke has been crucial to the company's efforts in recent years to weather a consumer revolt against regular soft drinks and other sugar-laced, high-calorie products.

The main danger lurking in the launch of Diet Coke Sweetened with Splenda is that it could lead to confusion in supermarkets and other sales venues, especially if its packaging and graphics were too similar to regular Diet Coke's.

Some consumers could buy the new product by mistake, thinking it was regular Diet Coke. Others could become angry if they mistakenly believed that Diet Coke has been reformulated with a different taste.

While acknowledging the logic of Coke developing a diet cola containing Splenda, Morgan Stanley analyst Bill Pecoriello noted that rival PepsiCo Inc. was taking a similar plunge but doing so in what appeared to be a less risky way.

PepsiCo is launching a Splenda-sweetened diet cola this year through a reformulation of its Pepsi One product rather than as a line extension of its Diet Pepsi brand.

Coca-Cola's approach is more of a gamble because it piggybacks on the brand loyalty of a popular product. If the new drink flopped, it could do serious damage to the entire Diet Coke brand and provide an opening for rivals.

Despite the murmurs of concern and puzzlement, some believe that Coca-Cola has embarked on a prudent strategy that is far preferable to the alternatives, which could have included a risky reformulation of Diet Coke.

"I think this is a carefully thought-through compromise to try to maximise incremental sales and minimise risk to the brand," said Goldman Sachs analyst Marc Cohen, who has an "outperform" rating on Coke in the context of a "neutral" rating on the beverage sector.

There is, however, almost universal agreement among analysts and industry observers that Coca-Cola, which is going through a lengthy restructuring, will have to be near-perfect when it markets the Splenda version of Diet Coke.

The company has had a patchy track record in the marketing arena lately. It scored a coup several years ago when it introduced Vanilla Coke but failed to make a splash last year with the roll-out of its mid-calorie Coca-Cola C2 drink.

Shares of Coca-Cola were up US19c to US$42.68 ($61.56) in late afternoon trading on the New York Stock Exchange. Pepsi was up US85c at US$55.55, also on the NYSE.

- REUTERS