Packaged Beverages: A Reprieve for CSDs
You know the script: The acclaimed but aging actor auditions for and loses the movie role to a fresh-face, up-and-coming player.
Then comes redemption: The acclaimed actor returns to form—maybe thanks to some cosmetic enhancements—and is suddenly relevant again. Acclaimed actor, thy name is carbonated soft drinks, which after a five-year period of declining dollar and unit sales delivered a serviceable performance this past summer and fall.
Marking the first positive dollar-sales performance in more than a year, total carbonated soft drink (CSD) dollar sales rose 0.7% during the four-week period ending Aug. 2, 2014, according to Nielsen. In the c-store segment, dollar sales rose 1.6% in the four-week period ending Sept. 27, marking a second consecutive month of growth, according to a Wells Fargo Securities report citing Nielsen data. This came after a not-so-stellar first half of the year, when sales dropped 0.9% compared to the same six-month period a year prior, and unit sales slid 1%, according to Mintel.
So what kind of a script are analysts writing to explain the segment’s sales uptick?
In the case of many brands, flavor trends and packaging innovations played a part, and competitive pricing didn’t hurt the cause. The real question is what they’ll do to maintain the momentum.
The CSD story arc took an abrupt turn in 2009 when a combination of a poor economy, health concerns surrounding both diet and regular products and the emergence of alternative beverages such as tea, juice, energy drinks and flavored waters all helped tamp down soft drinks.
From 2009 through the first part of this year, total CSD sales declined a composite 15%, according to Mintel. In 2013 alone, the total CSD market saw $42.4 billion in sales, a decline of 3.6%.
When summer arrived, warmer weather helped catalyze sales. Equivalent unit pricing led to an increase of 1.1% and equivalent unit volume decline of 0.4%, according to Wells Fargo Securities. The Coca-Cola Co.’s CSD brands led the charge with dollar sales “up a strong 4.3% as a result of 0.9% declines in equivalent unit volume and 5.3% increase in average equivalent price,” according to the report.
“We see discounting as a way to get consumers to re-enter a category,” says Joe Pawlek, senior vice president for Chicago-based Technomic. “We also noticed some bundling and market-basket trends that helped as some people might buy a tea or juice with a CSD in the same family of brands, and on discount.”
Price points, discounts and flavor expansion all matter, but so does compelling packaging, recently seen in both cans and bottles. “Packaging can do a lot for a segment,” says Pawlek, who expects Coke’s Share a Coke initiative had some effect on sales. “This type of personalization can spark brand relationship-building and carry over beyond the promotion itself.”
In one packaging innovation taken from the beer segment, Coke recently introduced a can printed with thermochromatic ink that reacts to temperatures by changing color. When the can is chilled to 46 degrees, three blue ice cubes appear on the side of the can.
Smaller-size cans and bottles were also introduced by some suppliers, which Pawlek says allows consumers to control their portions sizes, “but also provides indulgence without them feeling guilty about it.”
A burning question remains: What will be CSDs’ role in 2015 and beyond? Is the recent performance a sustained trend or an aberration?
In what could be a parallel cautionary tale, staid quick-serve restaurant chains have been sacrificing business to new-school formats such as Five Guys and Chipotle—much of it fueled by the customization capabilities and company culture that millennials find so meaningful.
In similar fashion, core CSDs are feeling the heat from smaller, often more progressive brands. One unique example is Jarritos, a Mexican soft drink with a cult following that’s grabbing additional shelf space in select c-stores, according to Technomic’s Pawlek.
Naturally flavored, Jarritos means “little jug” in Spanish and refers to the Mexican tradition of using clay pottery as drinking vessels. “It’s one of those best-kept secrets. You would think they are running this business out of someone’s garage,” says Sam Odeh, president of Elmhurst, Ill.-based Power Mart, which has five stores in the Chicago area.
Odeh, who has seen core CSD sales fall 4% to 6% in the past year, stocks Jarritos alongside other small-scale varieties such as Mexican Coke, Green River and Capone.
In a six- to eight-cooler-door configuration, most Power Mart stores devote 80% to what Odeh calls “new, innovative drinks like Muscle Milk and flavored waters. If we are lucky, we have one or two doors for core CSDs. If a customer wants a core CSD, they’ll ask for it. You can actually hide it and not worry much about it.”
All of this is changing the cold-vault landscape. “The days of having all three [major bottlers] participate [in aggressive store programs] are over,” says Odeh. “We look at the share of sales by location and empower our managers to go with the flow.”
The majority (58%) of CSD users say that flavor is the No. 1 reason for making a purchase. Meanwhile, sugar content, ingredient-safety concerns and weight-loss goals are steering people away from soda (see charts, left). So expect to see manufacturers explore new formulations and flavors to remain relevant with changing consumer preferences.
“Taste is the top reason consumers purchase CSDs, which allows brands to accentuate flavor profiles and indulgence,” says Beth loom, food and drink analyst for Chicago-based Mintel. “Along with this, products with natural ingredients and added functionality are consumer priorities, and give manufacturers multiple avenues for innovation.”
Technomic’s Pawlek expects to see soft drinks get enhanced with protein, vitamins or other better-for-you ingredients: “I don’t know what that magic bullet is, but it probably doesn’t require any major overhauls, but subtle but impactful changes to demonstrate they are adding good stuff.”