- Kenneth Hein

Cannibalization appears to be eating away at Coca-Cola. The No. 1 soft drink maker, coming off a year in which Coke sales volume shrank 3%, is looking to shrink one of its most profitable items.

Coke's bottlers are currently testing a 16-oz. bottle priced at 99 cents. Analysts have said in a country of expanding waistlines and shrinking pocket books that 20 ounces is more soda than consumers want at too high a price (up to $1.49). Thus the need for the new packaging innovation.

The 16-oz. package has been available in 1,700 stores for the past month within the Coke Consolidated bottling system. Lauren Steele, rep for Coke's No. 2 bottler, said, "The preliminary results are very promising."

Morgan Stanley research suggests otherwise. "The 16-oz. merely cannibalizes the higher margin 20-oz. package," analyst William Pecoriello wrote in a report last week. He estimated the rollout of the new package could cost No. 1 bottler Coca-Cola Enterprises up to $30 million in operating profits during the next 12 months.

Sales of 20-oz. bottles currently make up 43% of Coke's dollar share at convenience stores, per Beverage Digest, Bedford Hills, New York. But throughout the year, sales of 20-oz. soft drinks like Coke, Diet Coke and Sprite have declined in the high single digits, per Morgan Stanley. "It makes sense to try and shake the single-serve market from its doldrums," said Beverage Marketing managing director Gary Hemphill. "Packaging innovation is one way to do that.

To bolster its noncarbonated portfolio, Coke bought Glacéau Vitaminwater last year and it has proved to be a hit. But, even that product has wrought cannibalization issues in "fast-lane" coolers. Consumers who opt to grab a Vitaminwater over the higher-margin Coke are causing headaches for bottlers. "It's an issue the system has to work through," said Beverage Digest's John Sicher. However, Coke rep Scott Williamson argued that, "Variety and choice makes the cooler more productive and generates higher volume and gross profit."