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After a complete absence of core brand spin-offs for an eight-year stretch - the last was Pepsi Max in 1993 - we have seen five new variants in the past 12 months alone.

It began with lemon-flavoured variant Pepsi Twist, introduced to the US in October 2001, followed shortly by Diet Coke with Lemon.

Then this summer we saw Vanilla Coke launched in the US to a feverish media. Pepsi responded by launching Pepsi Blue, a berry-flavoured variant, a few weeks later. Finally, last month, Diet Vanilla Coke hit stores in the US.

The variants have begun to arrive on these shores. Diet Coke with Lemon and Pepsi Twist appeared on the UK market in the summer, with more sure to follow.

So what is behind this flurry of new product development activity? Ultimately, of course, it's about growth. For decades the cola giants were able to turn in incredible levels of growth; initially in the US, then in Europe and Asia.

But this has begun to slow of late. Western markets have matured and Eastern European countries, the great white hopes in the early 90s, failed to embrace the cola companies as 'symbols of Western freedom' as they had hoped.

The cola market continues to grow, even in mature markets. Britvic/ACNielsen's Soft Drinks Report 2002 shows 3% UK growth last year in value terms.

But other soft drinks - bottled water, energy drinks - are growing much faster. Zenith International's most recent report shows the UK bottled water market grew by more than 10%.

"To analysts, cola brands appear stable, almost stagnant, in comparison with bottled water and fruit juice-based drinks, which are showing tremendous growth," says a senior executive in one of Coca-Cola's ad agencies.

Colas, so long seen as the pinnacle of affordable treats for kids, are now seen as one of a portfolio of choices. They therefore need to generate more excitement to stay salient.

But why has the innovation been so sudden? Part of the answer lies in Coca-Cola's share price, which hit a serious low in early 2000 - just over $43, prompting a change of leadership and culture within the world's biggest brand.

"When Doug Daft took over (as chief executive) in the middle of 2000 there was an important shift," says Steve Jones, Coke's Atlanta-based chief marketing officer. "We shifted from being a global company to a local company and became more customer-centric. We repositioned Coca-Cola as a total beverage company and a great growth company. 2001 was a year of testing. We learned that consumers loved Coke, but wanted their own way of drinking it. Now the results of that innovation are appearing."

Customer needs

Coke put its money where its mouth was in late 2001 with the launch of Diet Coke with Lemon - its first new cola flavour since Cherry Coke in 1986 - though Pepsi, as challenger brand, got its retaliation in first.

Jones, however, is keen to stress that flavours are only a small part of the new innovation culture that he believes will boost Coke's fortunes.

The re-introduction and extension of Fanta into Western markets over the past two years has proven successful. This year's Biggest Brands survey by Marketing/ACNielsen revealed Fanta as the UK's fastest growing brand.

It put on around £75m in sales in the year to April 2002, a 69% increase.

Jones also points to new types of packaging and serving devices, and a breakthrough in the occasions where consumers can encounter its drinks.

"There's a move from demographics to need states - in the lunchbox, on the street, in bars - where cola can score more often with consumers," agrees the Coke ad agency executive.

Indeed, insiders say that Coke is even starting to address the needs of the mature drinker. It is looking at lower levels of carbonation and sodium, and smaller serving sizes, to provide Coke's famous refreshment without the bloating or calories.

Although Coke beat Pepsi to market with a lemon-variant cola in the UK, and the successful push of Fanta, Pepsi enjoys the better reputation for innovation. Analysts have been critical of Coke for "sticking its head in the sand", fearing cannibalisation of its core products, while Pepsi executes and markets innovation more effectively.

"Coke's only great innovation claim is creating the whole market in the first place. Pepsi has around 15 brands' worth of $1bn (£630m), providing a good balanced portfolio," says a Pepsi ad agency executive.

This includes new non-cola carbonated drinks such as cherry-flavoured Mountain Dew, Code Red and lemon-and-lime-flavoured Sierra Mist.

"It is through NPD that we've pulled away from Coke in recent years," says Karen Goffe, head of marketing at Pepsi UK.

Pepsi's pride in innovation is represented in its 'Ask for More' ad strapline.

But Goffe concedes that there was a serious 'innovation gap' in the late 90s. "Globally it's taken a while to recognise the value of innovation, but as competition increases, there's a pressing need to grow volume."

But why put so much effort into innovating colas when Western drinking trends are toward other types of drink?

"Cola is still half the market and not to maintain growth here would be foolish," says Goffe. "The UK cola market will still grow by 2.5% this year and this is worth more in value terms than 20% in more niche markets. Launching from the core brand also has a halo effect on the new product."

So is the new strategy working? The early signs are encouraging. "Innovations and new products are driving growth in the US," says John Sicher, editor of industry newsletter Beverage Digest. "They are becoming an important component of an overall marketing strategy because they create news and excitement."

Vanilla Coke has certainly done that this year. Coca-Cola has sold 60 million cases in the US and credits the product for having recruited seven million new users since its launch six months ago. It says that immediately after Vanilla Coke appeared on shelves it received 7000 requests for a diet version and the renewed interest in flavoured colas has boosted sales of Cherry Coke by more than 40%.

Variant success

In the UK, a spokesman describes Diet Coke with Lemon as very successful.

"It has given us a broader appeal and attracted male consumers who were not previously engaged."

Meanwhile, Pepsi's Goffe claims the firm's Twist variant has "exceeded our volume expectations". She adds: "Our research shows that Pepsi Twist has also taken less from our own brands than from the competition. We were the first to recognise that we could avoid cannibalisation of our four core brands because there are so many new occasions to be exploited."

That may be the case, but some observers see the flavour variants as a smokescreen for a broader malaise the cola giants are failing to address.

"There's a lot of anxiety about how they maintain their 'specialness' and the variants aren't solving this core problem," says an ad agency chief with expertise in the soft drinks market.

There is also concern among investors and analysts that a sizeable portion of the firms' volume growth now comes from spin-offs that aren't as profitable as their core brands.

"While new flavour variants provide added consumer interest on a temporary basis, neither Coke nor Pepsi should allow themselves to be distracted from defining their core brand equity," says Ben Langdon, regional director for McCann-Erickson EMEA, which handles Coke's core brand in the region.

The firms are about to tackle this problem with new ad strategies for their core products. In 2003 Coke will aim to re-connect its core brand with Western youth. The campaign 'Real' aims to communicate Coke's unique status among youth. Created by Berlin Cameron/Red Cell in New York in conjunction with McCann, it focuses on 'real moments experienced by real people'.

The authenticity angle has often been tried over the past two decades.

Most notably with the 'Real Thing' and 'Always' campaigns, but it has failed to emulate its 1971 'hilltop' ad with the song 'I'd like to buy the world a Coke'.

Meanwhile, Pepsi recently announced a tie-up with Sony Music Entertainment (Marketing, November 14) to use SME artists such as Jennifer Lopez in programme sponsorships, ads and retail promotions during 2003. Pepsi, facing Coke's domination of events such as the World Cup, continues to make music and sports stars its marketing mainstay.

Goffe attributes most of Pepsi's 14% growth in UK sales in the first half of this year to its links with Pop Idol's Gareth Gates and its World Cup strategy featuring David Beckham. Pepsi is expressing the importance of this strategy internally by launching the 'Drink Pepsi, Taste Stardom' concept, as the mission behind its marketing.

The wisdom and relative success of these advertising approaches will not become clear for at least six months.But some argue both firms need to tackle something deeper.

Paul Twivy, chief strategy planning officer for McCann EMEA, says: "In one sense neither Coke nor Pepsi are complete. Pepsi has often managed to exude the excitement of a challenger brand but has never managed the stature of market leadership; Coke, on the other hand, has often been an authentic market leader but failed to confidently innovate."

He adds: "Classic modern brands like Nike and Apple manage to combine authenticity with restless self-improvement."

TOP TEN SOFT DRINKS TOTAL UK TAKE-HOME SALES 2002
Rank Brand           Manufacturer          MAT to      MAT to  2001/2002
                                       13 Jul 02   14 Jul 01   % change
                                      (pounds m)  (pounds m)
1    Coca-Cola       Coca-Cola                723         688        5.0
2    Robinsons       Britvic                  218         193       13.0
3    Pepsi           PepsiCo                  184         168        9.8
4    Ribena          GlaxoSmithKline          158         154        2.4
5    Lucozade        GlaxoSmithKline          144         132        9.0
6    Fanta           Coca-Cola                120          81       47.3
7    Tropicana       Tropicana                114          97       18.2
8    Schweppes       Schweppes                 83          83       -0.8
9    Irn bru         A G Barr                  76          73        4.9
10   Ocean Spray     Gerber                    67          58       15.1
Source: ACNielsen MMS
UK ADSPEND TO DATE 2002
Total carbonated soft drinks     £73m
Total flavoured carbonates       £34.3m
Fanta (Coca-Cola)                £8m
Total colas                      £38.7m
Sprite (Coca-Cola)               £5.8m
Tango (Britvic)                  £5.1m
Coca-Cola                        £35m
Dr Pepper (Coca-Cola)            £5.1m
Pepsi-Cola                       £3.7m
Others                           £10.3m
Source: MindShare
TIMELINE - PEPSI
1898: Pharmacist Caleb Bradham in North Carolina names his cola nut and
vanilla soda Pepsi-Cola.
1965: PepsiCo Inc. founded through merger of Pepsi-Cola and Frito-Lay to
form a food and beverage giant.
1993: Pepsi Max introduced to UK, aimed at active, young men.
1995: Pepsi turns cans from red to blue. Marketing tactics included
turning the Daily Mirror blue for a day.
2001: Pepsi Twist introduced in US, a cola with a 'twist of lemon'
flavour.
2002: Pepsi Blue, a berry-flavoured cola, is rushed out in the US. The
UK gets Pepsi Twist.
TIMELINE - COCA-COLA
1886: A small Atlanta pharmacy begins selling a tonic drink from a soda
fountain for five cents a glass.
1971: Landmark 'hilltop' TV ad is screened using the soundtrack 'I'd
like to buy the world a Coke'.
1982: Diet Coke launches in the US. It arrives in the UK a year later.
1985: A sugary new formulation called New Coke has to be abandoned
following public outcry.
2001: Diet Coke with Lemon launched in US.
2002: Vanilla Coke launches in US, Australia and Nordic countries. UK
gets Diet Coke with Lemon.