Cigarettes, CSDs & C-Stores

U.S. cigarette sales hit 55-year low; carbonated soft drink volumes reach 20-year low

Published in CSP Daily News

OAK BROOK, Ill. -- The results of separate category studies hitting the streets this week show historic declines and take a swipe at smokes and take some fizz from soda, two of the standard bearers of the convenience store industry sales mix.

The number of cigarettes sold in the United States in 2005 fell to the lowest level in 55 years mostly due to enforcement of marketing restrictions, the National Association of Attorneys General (NAAG) said. And data from Beverage Digest show that for the first time in 20 years, the number of cases of soda sold [image-nocss] in the United States has declined.

Tobacco

On the tobacco front, according to figures compiled by the Tobacco Tax Bureau of the U.S. Department of the Treasury, cigarettes sales declined 4.2% from 2004 levels in the largest one-year percentage decrease since 1999. The 2005 sales figures continue the unprecedented long-term decline in cigarette smoking that began with the 1998 Master Settlement Agreement (MSA) of lawsuits brought by state Attorneys General against the major tobacco companies. U.S. cigarette sales have fallen by more than 21% since the MSA, which imposed public health restrictions on the advertising, promotion and marketing of cigarettes by tobacco companies.

The 378 billion cigarettes sold in the United States in 2005 represented the lowest number of cigarettes sold in the United States since 1951, even though the U.S. population has more than doubled since then.

The decline in 2005 was one of the largest single-year declines in history and is evidence that the long-term downward trend is continuing, NAAG said. The decline in cigarette sales and overall smoking prevalence is a huge public health success, said the AGs. In the years immediately prior to the states' settlement agreements with the tobacco companies, U.S. cigarette sales had reached a plateau. By contrast, the eight-year decline in cigarette sales of 21.1% since the MSA is unprecedented.

The MSA created a broad array of restrictions on the advertising, marketing and promotion of cigarettes. It prohibited the targeting of youth in cigarette advertising. It also prohibited outdoor advertising of cigarettes and the advertising of cigarettes in public transit facilities, as well as the use of cigarette brand names on merchandise. The payment provisions of the MSA were designed to compensate the states in part for the billions dollars in health-care costs associated with treating tobacco-related diseases under state Medicaid programs. [As reported in Wednesday's CSP Daily News, Big Tobacco companies said that they expect to withhold $1.2 billion for their MSA payments to states and are raising the possibility that they will seek similar cuts in years to come.]

Soda

On the soda front, statistics just released by Beverage Digest show that U.S. soda case volume in 2005 was down 0.7%, to 10.2 billion cases. The report said that in 2005, the U.S. CSD industry posted an all-channel volume decline of 0.2%, the first decline since the trade publication began tracking the numbers in 1985, it said. The drop was offset, however, by the strong growth of the energy drinks subcategory.

Beverage Digest estimates that the retail value of the CSD category grew 3.3% to approximately $68.1 billion in 2005, up from $65.9 billion in 2004. It attributes the rise to increases in regular and diet CSD retail pricing and, again, the growth of premium-priced energy drinks. With the decline in CSD volume and increase in U.S. population, CSD per-capita consumption declined to 828 eight-ounce servings in 2005 from 837 servings in 2004, it said.

While soft drinks are still the country's most heavily consumed beverage, the category is losing ground to bottled water, sports drinks like Gatorade and Powerade and energy drinks like Red Bull and Full Throttle, added a New York Times report.

Last year's volume data for these drinks is not yet available, but John Sicher of Beverage Digest told the newspaper he expected that the growth in these three categories would be up by double digits. Traditional [CSDs] have got a tough road ahead, Sicher said. The migration to water and sports drinks and other noncarbonated drinks seems to be permanent.

In a research report, William Pecoriello, a beverage analyst at Morgan Stanley, said he expected the soda category to continue to decline at a 1% clip over the next few years. His research shows that 64% of the growth in bottled water is a result of people switching from soda to what nutritionists say is the healthiest beverage anyone can drink.

Even diet sodas, once a booming category, have fallen off, the report said. Pecoriello attributed this to changing attitudes: According to our research, consumers say they don't like the taste, are worried about artificial sweeteners and [do not view diet soft drinks] as healthy.'

PepsiCo said that for years it has been paying close attention to the fact that consumer tastes are moving away from soft drinks. For the past 10 years, we've been looking at ourselves as a total beverage company because that's where consumers are taking us, David DeCecco, a spokesperson for Pepsi, told the paper. That's why innovation is so important for us.

In 2001, Pepsi bought the South Beach Beverage Co., adding energy drinks and teas to its product lineup, and Quaker Oats, which owns Gatorade and a variety of food brands. As a result, Pepsi's percentage of total revenue coming from CSDs is considerably less than Coca-Cola's. Coca-Cola has continued to promote CSDs. The company said it believes that, despite the recent industry downturn, its U.S. and international CSD business can still grow. It has, however, also diversified into drinks like bottled water, energy drinks, sports drinks, tea and refrigerated juices, said the report, but it is not the market leader in any of these areas and, in several cases, the company was a latecomer in the market.

John Faucher, an analyst at J. P. Morgan Chase, told the paper that soda's declining popularity was not just because of changing health trends and attempts to cut calories, but also because of wandering taste buds. A lot of this is about variety, he said. Consumers want new exciting beverages.