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By Barbara Grondin Francella
For the last few years, energy drinks have lit up the c-store industry's packaged beverage category, boasting double-digit sales growth and unflagging profit margins.
While the energy drink category accounts for more than 18 percent of total c-store packaged beverage sales according to Nielsen Co. data, the powerhouse category is exhibiting signs of fatigue.
"Growth over the last several years has been explosive and at a certain point, that explosive growth is very difficult to sustain," said Krista Faron, senior analyst for Mintel Research Consulting, based in Chicago. "We are seeing a slowing pattern, but we're not at a plateau. We are still forecasting growth."
Energy drink sales increased by 39.6 percent in 2006 and grew another 29.7 percent in 2007, according to Convenience Store News' 2008 Mid-Term Forecast Study, released in August. The study projects 2008 sales will only increase 19.9 percent, and is forecasting only a 15 percent increase in 2009.
"It's impressive growth for any other category, but for energy drinks, it represents a slowdown," Faron noted.
For the 52 weeks ending Aug. 9, 2008, sales of alternative beverages, a segment dominated by energy drinks, were up 16 percent compared to a year ago, reaching $3.7 billion, Nielsen Co. data revealed. Unit sales, however, rose a smaller 7.6 percent. (Energy shots are not included in these figures.)
"To expect 30- or 40-percent sales gains every year wouldn't be realistic," said Gerry Khermouch, editor of Beverage Business Insights. "But the question is how much is [the slowdown caused by] maturity of the market, and how much is caused by the economic climate?"
Energy drinks are somewhat more susceptible to economic downturn than other drinks because a large percentage of loyal customers are blue-collar workers, specifically construction workers, Khermouch said.
"When big energy drink markets, like Southern California, see construction dry up, these workers aren't out buying anymore," he explained. "The largest channel for energy drinks by far is convenience stores. Because people are driving less and [have less money to spend], they aren't in the stores as often." Still, for younger consumers, energy drinks are still a relatively affordable luxury, he said, noting there has been significant promotional pricing in some markets.
The discounts may keep energy drinks affordable in troubled markets, but in the past, energy drinks have held their retails in the face of much greater competition, which casts doubt on whether or not discounts are ultimately beneficial or needed for this beverage segment.
"We're seeing other channels discount energy drinks heavily now and some c-store chains have been for a couple years," said Phil Smallwood, category manager for ampm stores, BP's franchised c-store chain based in La Palma, Calif. "The real question is will there be a breakout in terms of everyday price points? Will we have premium brands and value brands?"
Last November, 7-Eleven unveiled Inked, a proprietary energy drink targeted at consumers with body art (specifically 18- to 40-year-old men and women). Two varieties of Inked, priced at $1.99 for 12 ounces and produced by Cott, are packaged in cans designed to look like brightly colored tattoos. (7-Eleven declined further comment on Inked. It is still sold in many of its stores.)
Also last fall, Alimentation Couche-Tard's Circle K Southeast Division, operator of 366 convenience stores, launched the division's first wholly owned, proprietary energy beverage called GazZu, created in partnership with independent energy drink producer BooKoo Energy. The goal: appeal to all customers with a first-rate offering in a first-rate packaging.
"There are few food or beverage categories that have been immune to private label -- beer and energy drinks are two I can think of," said Khermouch, who questions the wisdom of these private label products in this category. "The lack of success [of private label] is a sign of how brand-conscious and brand-loyal energy drink users have been. If you have a consumer who is happy or willing to pay a super-premium price for a Red Bull, Rock Star or Monster, why would you want to trade him down to a private label brand, even if there is a nice margin there?"
In May 2007, BP plc introduced the private label energy drink Unbound, then later partnered with Hansen's Natural Corp., marketers of Monster energy drinks, to offer Unbound to other retailers such as CVS drug stores. "We offer it as an alternative to the other brands," Smallwood noted. "Even if people are trading a Monster for an Unbound, the penny profit is more favorable with a private label."
Despite the segment's slowing sales growth, the c-store industry remains well positioned to profit from energy drinks. Compared to other products in the c-store cooler, the alternative beverages segment remains a clear winner. For example, sales of carbonated soft drinks, the packaged beverage category's leader, fell by nearly 1 percent to $8.45 billion in the 52 weeks ending Aug. 9. Unit sales were off 4.4 percent for the period.
"Energy drinks have been the catalyst for the entire packaged beverage category for the last five-plus years," Smallwood said.
Influx of Products
With the segment forecast to hit nearly $5 billion this year, manufacturers looking for a piece of the action have flooded the market with new items. Last year, there were 187 product launches. Through August this year, there were more than 270.
To expand the consumer base, manufacturers are introducing hybrids, including energy waters, teas, sodas and juices, often touting energy sources other than caffeine, including acai, guarana, green tea and other antioxidants and various vitamins.
At ampm stores, cold vaults typically feature 30 SKUs, including a variety of drinks from segment leaders Red Bull, Rock Star, Monster, SoBe and AMP, according to Smallwood. He considers two things when selecting products: differentiation and marketing support.
"We need to believe the product will bring a new consumer to the category, instead of trading off the sale of another energy drink," he said. "Carrying around an energy drink is like a badge of honor. The brand, the label, the look is somewhat of a status symbol. Those drinks with the 'it' factor are a one-in-a-million deal. We're not taking a chance on too many new ones."
The story of energy drink sales at ampm is a tale of two coasts. "On the West Coast, where the market for energy drinks is more developed, we saw greater volume percentage increases in the past," Smallwood said. "It is a tougher market in the West now, though we are still selling more on the West Coast than the East Coast."