Downsizing Supersize

Published in CSP Daily News

Fountain feeling the effect of changing habits

NEW YORK -- The downsizing of supersizing is making it harder for beverage companies to keep the soda fountain flowing, according to a Dow Jones report.

More than one in five soft drinks sold in the United States comes from the spigot of a soda fountain, the report said. It has been a faster-growing market than bottles and cans in recent years, and one where profit margins often can run as high as 90%, it added.

But while more Americans than ever before are eating out more often, increased calorie-counting has changed consumer [image-nocss] habits. McDonald's, for example, has ended the supersizing of its meals. Other restaurants are stocking more water, tea and other drinks in refrigerated coolers. All this potentially curbs soft-drink volume. One way these companies are responding is by focusing on how to better cash in on things such as drive-thru meals, even considering a better cup design as one solution.

People are still eating out more. At the same time, we have reached a limit on going to ever bigger and bigger [beverage] sizes, so that will constrain growth. Also, at the same time, people are moving to water and other beverages in bottles, so it will constrain growth some more, Robert van Brugge, an analyst at Sanford C. Bernstein, told Dow Jones. Net, net, I don't think there is a whole lot of growth in the fountain business.

Technomic, a foodservice consultancy in Chicago, estimates that half of U.S. food spending this year will be in restaurants, cafeterias and other eateries. During the past 15 years, sales in the foodservice industry have risen, on average, 4% to 5% a year, while the value of food sold in retail outlets such as grocery stores has risen about 1% to 2%, said Joe Pawlak, a senior principal at Technomic. This year, the foodservice industry's sales, excluding sales of alcoholic beverages, should rise an estimated 4.5% to $475 billion from $455 billion in 2004, Pawlak said.

The fountain soft-drink business has been growing faster than the overall carbonated soft-drink business for the past five years, said the report, and its growth last year outpaced the overall beverage market, according to data from Beverage Digest/Maxwell.

Right now, if you look at fountain, especially for carbonated soft drinks, it is a very challenging environment, Pawlak said.

Growing concerns about obesity and increased consumer demands for variety are two challenges the industry faces, he added. Hoping to deflect some of the blame for the obesity problem, McDonald's broadened its menu selections and ended its policy of supersizing menu items such as french fries and beverages. Other quick-service restaurants have taken similar steps. More places are offering consumers alternatives to the traditional drink in an ice-filled cup.

It is almost a misnomer to speak of the foodservice business as fountain, Craig Coffey, vice president of marketing and strategy at PepsiCo Inc.'s foodservice division, told the news service. When you look at the makeup of a [foodservice] customer's menu, it provides not only food variety, but also beverage variety.

Eventually, you have to come up with something new to stimulate the consumer, Tom Pirko, president of BevMark LLC, a Santa Barbara, Calif., consulting firm, told Dow Jones.

To be sure, there is incentive to keep the fountain business growing, the report said. Pawlak estimated a typical restaurant can enjoy an 85% to 90% profit margin on a fountain beverage, but perhaps only a 50% to 60% profit margin on a bottled beverage. Given this, companies are focusing on the drive-thru window, which is seeing increased traffic as consumers pack more and more into their already hectic schedules.

Last year, in an attempt to boost its beverage sales, Taco Bell, a unit of Yum Brands Inc., teamed up with Pepsi and began selling Mountain Dew Baja Blast, a turquoise-green soda with a lime flavor, exclusively at its restaurants. Taco Bell realized that two-thirds of its business was being generated at the drive-thru and from a growing late-night business, but customers were driving back home to eat and grabbing a soda from the fridge to wash down their meal.

Taco Bell expects to sell more than one million gallons of Baja Blast this year. We are very happy with this performance, Greg Creed, chief marketing officer, told the news service. This might be a sign of things to come, said the report. Fast-food chains have tempted consumers with new tastes by offering limited-time-only sandwich specials. In the same vein, beverage companies can offer new fountain drinks from time to time, added Pirko.

Coca-Cola Co., which derived 31% of its volume last year from its fountain business, is researching the foodservice business very closely, said Therese Gearhart, vice president of marketing at Coca-Cola Foodservice & Hospitality. The company has realized there is a need for better cup designs, Gearhart told Dow Jonesmore portable packages that will not spill in the car.