Beverage Tide Turning
CSP's 2010 Beverage Report outlines where key categories have been, where they might be going.
The challenges are mounting. Carbonated soft drinks may be on their way to an obesity tax. Environmental groups continue to contest the very need for bottled water. Sports drinks? Well, they’re just having a tough go of it as energy drinks and enhanced water steal their share. Meanwhile, all beverage categories are dealing with the recession. Carbonated soft drinks have leveled out, but “bottled water is flat, and a lot of other categories are not performing as well as they have historically,” says Gary Hemphill, senior vice president of New York-based Beverage Marketing Corp. And research by Deutsche Bank shows 31% of consumers cut back on beverage purchases in 2009.
With that groundwork, CSP embarks on its eighth annual Beverage Report, outlining where several key categories have been and where they might be going.
Shift Toward Value, Larger Sizes
CSP Outlook for 2010: Single-digit dollar and unit sales growth continues.
Last year’s prediction: “Expect single-digit dollar sales growth.”
2009’s reality: Dollar sales growth was 4.45%, according to IRI. according to IRI.
Last year saw substantial growth in sales of large beer multipacks as consumers made financially motivated changes to their shopping habits. While the economy appears to be slowly digging itself out from under the weight of the recession, the consumer is no less likely to make a shift toward thrift, at least where beer is concerned.
“The past five years has been marked by … a shift to larger packages to better compete with other channels for valuable beer trips,” says Jeffrey Schouten, director of c-store solutions for MillerCoors, Milwaukee.
To that end, MillerCoors is concentrating its efforts on merchandising and marketing in c-stores to create “beer destinations” and encourage higher sales conversion and basket value. “[These things] will also be very important, helping c-stores to capture greater beer share in the years to come,” Schouten says.
Anheuser-Busch (A-B) is also placing a keen eye on marketing, with added concentration on developing ways to integrate beer with food and other high-potential items. “The current economic conditions have greatly impacted the convenience channel’s core customer, with the key impact on beer sales being the trade down from premium to subpremium beers and loss of traffic,” says Joe Vonder Haar, vice president, convenience channel for A-B, St Louis. “With decrease in traffic comes loss of overall transactions, of impulse buys for daily reward and of routine trips by the channel’s core consumers.”
By offering the customer opportunities to buy a case of beer and receive a discount for a take-and-bake large pizza, for example, A-B expects to “increase the purchasing power of c-store consumers,” which in turn could create growth and profit opportunities for retailers.
Though the beer category has enjoyed consistent growth in the c-store sphere (now roughly the No. 2 category in stores that sell beer), its fate for 2010 seems to rest squarely on the state of U.S. economic affairs.
Growth Is Draining
CSP Outlook for 2010: Flat dollar sales would be a welcome change.
Last year’s prediction: “Expect sales and share to be flat.”
2009’s reality: Dollar sales were down 5.48%, according to IRI
In 2007, bottled water saw a 6% drop in sales, with additional slowing in 2008 and 2009, and the category could potentially see further negative trending throughout 2010. With issues as varied as the environment, water quality and a return to the tap, the category is challenged in several ways.
“The economy, No. 1, would be the biggest issue,” says Rex Griswold, vice president of sales for Nestlé Waters North America, Greenwich, Conn. “It probably mirrors some of the store traffic. And to some certain extent, you’re going to have some bottled-water backlash in there.”
Despite the issues stacked against it, Griswold thinks the bottled-water category is still performing at a good rate vs. other beverage categories. “Across channels, the category has been pretty flat over the last couple years … but it’s outperforming other beverage categories,” he says. “I think the only other category that’s been better than bottled water has been ready-to-drink tea, when you go across all trade channels. So it’s still performing at a pretty good rate in spite of what’s happening with the environment, the backlash and the economy.”
At Coca-Cola Enterprises, marketer of Dasani and glaceau bottled waters, concentration is being focused on its functional water line
“Trends related to functional water, food and beverage choices have helped create a new space within the water category,” says Russell Baker, channel director of convenience retail, drug and value for Coca-Cola North America, Atlanta. “We expect this category to continue to evolve.”
It appears the only direction to go from here is up. Though some expect additional negative trending through 2010, industry insiders indicate it could be less negative than in previous years.
“I expect in 2010, we’re going to show growth vs. 2009. I think we have some positive momentum going on and I think it has to do with the economy and a little bit of everything,” Griswold says. “I’m feeling pretty bullish about 2010, actually. I don’t think it’s going to be big value over the prior year, but I think we’ve turned the corner.”
CSP Outlook for 2010:We’re optimistic enough to suggest single-digit growth.
Last year’s prediction: “A slight rise in sales might be in the cards.”
2009’s reality: Sure enough, dollar sales were up 2.46%, although unit sales were flat, according to IRI.
Although a report published in 2009 from Mintel shows that adults are rapidly switching from soda to other, sometimes lighter beverages, carbonated-soft-drink manufacturers and marketers are hopeful that the trend will turn in 2010. “We’re really two years into the current pattern, which seems to be favoring a back-to-basics trend with c-store consumers,” says Mark Docherty, vice president of national accounts for Dr Pepper Snapple Group, Plano, Texas. “In terms of beverages, category growth in the years leading up to the recession was driven by so-called ‘enhanced’ or ‘functional’ products like flavored water, sports drinks and energy drinks. What we’re seeing now is a strong shift away from many of these segments.”
Indeed, data on 15- to 30-year-olds’ beverage preferences from Deutsche Bank Securities shows that CSDs are still a “vibrant” category, with 77% of consumers drinking them. And perhaps due in large part to recent economic slowing, the lower price point is a big factor behind a potential upswing.
“Consumer value and affordability are key trends that The Coca-Cola Co. has harnessed with our 99-cent entry package,” says Russell Baker, channel director, convenience retail, drug and value for Coca-Cola North America, Atlanta. “This package … has been successfully driving volume and profit growth across the channel.”
A proposed fat tax and others aimed at sugary beverages could stall any hope for growth, but manufacturers are concentrating their efforts on marketing programs that will take advantage of the recession’s turning tide nonetheless. In fact, Coca-Cola recently saturated more urban areas with its red logos and banners with the hope of reversing volume declines. Pepsi is also pursuing an aggressive advertising and marketing campaign.
“We believe there are signs that the economy is picking up, and we are optimistic that this will have a positive impact on sales,” says Pepsi spokesperson Joshua McCutchen.
All Grown up?
CSP Outlook for 2010: Unless a major new product hits, single-digit dollar growth.
Last year’s prediction: “Energy drinks will continue to be the big category winners, but not at past growth rates.”
2009’s reality: Dollar sales growth was 5.90%, well below the double digits (as high as 66%!) of recent years, according to IRI.
While the majority of energy-drink consumers are well below the legal age to drink alcohol (54% of consumers younger than 20 said they drink energy drinks, compared to 25% of those older than 30, according to a recent survey by Deutsche Bank), the category itself is well past puberty in beverage years.
With its prime growth years behind it—the category grew by only 6% in 2009, compared to years of doubledigit growth—and a major threat coming from energy shots, the category must take on a more mature position in the retail space while maintaining its “cool” demeanor. So even as CSDs begin to take back some of energy’s share, where will growth in this previously nascent category come from moving forward?
The majority of sales growth will come from increasing frequency within the category, according to Gina Bingham, senior category manager, convenience and grocery for Purchase, N.Y.-based Pepsi-Cola North America, which markets the Amp brand of energy drinks. “We know … that 82% of all energy purchases are preplanned and that the need for a pick-me-up is expanding throughout day-parts,” she says.
Coca-Cola Co., supplier of Full Throttle and NOS energy-drink brands, acknowledges the recession has challenged sales of energy drinks and other beverage segments in convenience stores.
“With the recession, blue-collar job loss and unemployment have significantly impacted channel traffic,” says Russell Baker, channel director of convenience retail, drug and value for Coca-Cola North America, Atlanta. “These declines in traffic for core shoppers in the channel have hit the energy and sports-drink categories hard.”
The Deutsche Bank report says suppliers need to innovate fast in the energy-drink category, even as it points out that Red Bull, the granddaddy of them all, “is still most popular by far.”
In Need of a Boost
CSP Outlook for 2010: The slip will continue, but not as bad as 2009.
Last year’s prediction:No prediction made.
2009’s reality: Dollar sales were down 6.08%, according to IRI.
A recent report from Deutsche Bank, New York, put it succinctly: Gatorade has a problem. From double-digit growth just three years ago, this convenience- store staple has struggled in recent years, capped by an 8% decline in overall unit sales in 2009.
“Until about 2007 … Gatorade was [growing at] very, very high clips,” said PepsiCo CEO Indra Nooyi during an earnings conference call earlier this year. Since then, “three things have happened: One, there’s many more alternatives for the casual drinker. Two, average temperatures have been somewhat lower than they were in the four years preceding. And third, we’re in a major economic meltdown, which is causing those consumers to trade down to other alternatives.”
PepsiCo has seen Gatorade volumes drop as much as 6% this year, and things aren’t much brighter for Coca-Cola Co.’s Powerade, which was down 5% in 2008 and fared “a little better this year,” according to Hemphill.
“The Coca-Cola Co. hopes to see re-energized growth as the economy recovers,” says Russell Baker, channel director of convenience retail, drug and value for Coca-Cola North America, Atlanta. “We continue to see strong growth in isotonics from our new Powerade Zero portfolio.”
Meanwhile, PepsiCo has taken an aggressive tack, with multiple makeovers of its Gatorade brand and a refocus back onto the core consumer. “That core athletic user has stayed loyal to Gatorade, and the cutback in frequency of consumption is extremely small,” Nooyi said. “Then the question is, what do we do with the casual user who came into the Gatorade franchise? Clearly, some of those users have already switched to cheaper alternatives, like bottled water, tap water and in some cases even CSDs.” All of that, on the whole, should equate to smaller but perhaps healthier growth for the brand and the category overall.
“We’re not looking for a return to the old growth rate in the category,” Nooyi said. “If the GDP improves in 2010, this category should come back to a growth rate of about 0.5% to 1%.”