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NEW YORK -- Though long dominated by big brands mass marketed by the major soda companies, the U.S. beverage market is being shaken -- perhaps transformed -- by niche drinks targeted more specific consumer needs, occasions and benefits, according to recent research and industry players.
Two forces are creating sales in the beverage industry: better-for-you trends, including functional, nutrition boosting, and holistic/wellness drinks; and consumers' "quest for quality," including organic, local, artisan-made and retro/nostalgic beverages, according to "Beverage Trends: Culinary Trend Mapping Report," which was recently released by the Center for Culinary Development and Packaged Facts.
"The intrigue is in the fringe part of the beverage businesses, which seems to be growing, even during the recession," noted Gerry Khermouch, editor of Beverage Business Insights.
With Nielsen Co. reporting c-store unit sales of packaged beverages down 4.5 percent for the first 40 weeks of 2009 compared to the year prior, including carbonated soda units down 2.1 percent, bottled water units off 8.9 percent, sports drinks down 13.6 percent and once-skyrocketing alternative beverage units (made up mostly of energy drinks) falling 4.7 percent, niche drinks could bring new vigor to the category.
New, niche drinks meeting specific consumer demands appeal to diverse customers and carry healthy margins. But what do these drinks mean for c-store operators that often rely on the major soda companies and their bottlers, with weak track records in smaller alternative brands, to shape their cooler planograms?
"It will be interesting to see how retailers balance limited space and attractive incentives with the potential of new, not-yet-mainstream, niche beverages that carry more risk, but also higher margins. [These new drinks] may be more desirable to customers who are shunning sodas and have concerns about the ingredients in energy drinks," said Don Montouri, publisher, Packaged Facts, based in Rockville, Md.
At BP's ampm convenience store operation, category manager Phil Smallwood said the evolution of better-for-you product started with the growth of the water segment years ago and continues to evolve.
"Consumers are more health-conscious and have a heightened awareness of product labels and ingredients," he said. "The result is increased consumer demand for products that will provide value through a health or functional benefit. This is great news for the category -- it is the opening of the door for continued innovation and growth."
When judging a beverage's value to ampm's mix, Smallwood's criteria includes whether or not the product is on trend with consumer demand and whether the product will add incremental sales and profits to the stores.
"Manufacturers that can pinpoint emerging consumer trends and develop true innovation will be successful in the market place," he said. "These will be the brands that will grow the category."
As niche brands become more mainstream, Smallwood believes they will find their way from specialty stores to c-stores, as they begin to resonate with convenience customers.
"We have already seen this with Muscle Milk and Pom Juice," he said.
Still, distribution is a challenge when the retail executive attempts to get an emerging brand to market. "Only the brands that truly hit the mark with the consumer will able to overcome the initial distribution hurdles and become successful," he said.
While new brands and start-up activity is spurring beverage sales, especially at the premium end of the business, traditional beverages are still the bulk of the business, a state of affairs the soda companies are not eager to change, Khermouch noted. "But the larger companies seem to be getting better at offering these kinds of niche beverages, in terms of [distribution strategies and other] processes, which is not to say we've seen any outstanding successes of above-premium drinks that have been sustainable," he said.
Niche drinks are also having an effect on the way the soda giants are distributing beverages. When Coca-Cola partnered with Italian coffee company IllyCaffe SpA to launch illy issimo drinks in Los Angeles, New York and San Francisco, it rolled out the coffee drinks through independent distributors, rather than its own bottlers. The drinks, which retail around $2.69 (approximately 15 percent more than Starbucks Frappuccino or Doubleshot drinks), were first distributed to Whole Foods Markets and other more upscale venues.
"Unlike Coca-Cola's flawed partnership with Nestle, which yielded big brands like Nestea ice tea, but nothing at the premium level, Coke has kept the illy issimo drinks at a high quality and the company is willing to let the brand start small," Khermouch noted. "The company is showing some degree of patience to grow the [niche drink] into a significant brand over a period of time."
The soda giant also went outside its bottling network to launch 8-ounce Vio carbonated milk drinks at natural food stores and delis in New York.
"One problem is [traditional] bottlers know if they neglect Sierra Mist or Diet Coke, they will get their butts kicked, because their objectives are tied to what they are shipping now, not what may grow into a decent brand five years down the road," Khermouch said.
When Pepsi Bottling Group partnered with CytoSport Inc. to distribute Muscle Milk, he noted, the launch did not go smoothly because the package size, third-party production, price point and need for communicating product information presented challenges.
"I can't say the beverage giants have solved the conundrum of putting out smaller niche brands, but they are working on it," Khermouch said. "They are not longer so heavy-handed about buying these smaller brands outright and forcing them on bottlers."
Some retailers, even mainstream grocers and c-stores, are not happy to see small niche brands with big growth potential become part of Coke and Pepsi, Khermouch said.
At 100-store Plaid Pantries Inc., based in Beaverton, Ore., category manager Butch Fulton said he expressed interest in selling Pepsi Natural made with natural sugar, caramel and kola nut extract. "But Pepsi wasn't that interested in putting it in our sets. They didn't feel we were the market for it. We've seen it at Whole Food and New Seasons Market," he said.
But the chain has tapped into consumer desire for better-for-you drinks with the super-premium Naked Juice line, which he says is selling well at $3.59 for a 14-ounce drink. (Meanwhile, c-store sales in the juice/juice drink category as a whole fell 1.8 percent in the channel in the first 40 weeks of 2009, according to Nielsen figures.)
"Initially, I didn't think it would sell," Fulton said. "We put in two SKUs a year ago. This year we expanded the line to five SKUs and we plan to put in two or three more. People are willing to pay for it. Hopefully we won't see a price war in these [niche beverages] like we've had with carbonated sodas. These should be a margin opportunity."
In general, customers are buying fewer carbonated sodas in favor of healthier products, Fulton said. "Sales of bottled water have fallen way off -- because there is such a hammer coming down on PET bottles. Energy drink sales have been flat, or growing slightly this year. Consumers are looking for something perceived to be better for them and the environment."
Plaid Pantries' best-growing beverage category this year, the retail executive noted, has been ready-to-drink teas, "which could be considered better-for-you," he noted. "I had cut back on the shelf space devoted to teas in the last few years because they weren't doing well, but now they've really taken off."
Also under the better-for-you flag, protein-enhanced Muscle Milk is doing fairly well "with a fairly high retail and is getting some legs under it," Fulton noted. He is now testing a few SKUs of Horizon organic (though full of sugar) organic single-serve milk.
While enhanced waters would appear to be better for you, Fulton said the trend has "come and gone" with the chain's sales of this segment flat. "The best seller is SoBe Lifewater, with a totally wrapped package. A problem with many of the enhanced waters is the color changes under the lighting in the cooler. They don't look appealing for very long. The category was dead until SoBe totally redid the package last January. Then we saw a big uptick."
Isotonic sales, too are flat, chainwide, according to Fulton, though low-calorie G2 has seen a sales increase of 18 percent.
But limited-time-only Pepsi Throwback, also sweetened with natural sugar and appeals to those looking to tap into nostalgic/retro products sold fairly well, Fulton said.
Not every trend has been a bulls-eye, however. Fulton has tried a few agave-based products "which haven't done much of anything."
Next on Fulton's radar is all-natural coconut water beverages. "We talked to a few suppliers and will probably put a little bit in and see if we can do anything with it," he said.
Although smaller niche brands may be attracting attention, Coca-Cola North America is seeing growth in a number of categories, including carbonated drinks, noted Ed Coleman, assistant vice president, shopper marketing for the beverage giant. (PepsiCo Americas Beverages declined to participate in this article.) Coke Zero, or instance, is up 25 percent to date in the convenience channel, according to Nielsen data.
"Further, sparkling soft drinks continue to be the number-one destination category in the convenience retail channel," Coleman said. "The sparkling soft drinks category is more than three times as large in unit sales as the next-largest immediate consumption subsegment and purchase frequency of sparkling soft drinks is three times greater than other shelf-stable beverages.
Coca-Cola is filling consumers' desire for functional beverages with "a full line up of innovation" next year across the Vitaminwater, FUZE, Minute Maid and Powerade brands, Coleman said, without offering specifics.
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