Energy Drinks Energize Third-Quarter Beverage Sales

NEW YORK -- Convenience stores are seeing an uptick in non-alcoholic beverage sales, primarily driven by the energy drink segment.

Wells Fargo Securities LLC's latest Beverage Buzz survey shows that non-alcoholic beverage trends improved during the third quarter, increasing 2.6 percent year over year. Beverage Buzz surveys beverage retailers representing more than 15,000 c-store locations across the United States.

"While we are generally encouraged by the improving sequential sales in the third quarter, we think this was almost entirely due to strength in energy, which offset weakness in virtually every other category," said Bonnie Herzog, managing director of tobacco, beverage and consumer research at Wells Fargo Securities. "We therefore believe U.S. beverage volumes may be under pressure for all the leading manufacturers and are cautious about third quarter and fiscal year 2013 results."

Notably, Monster Beverage Corp. saw its convenience store volume grow 12 percent during the third quarter, according to the survey. This double-digit increase follows a 9-percent increase in the second quarter.

"Our retailers believe that the impact of any negative media coverage on the category remains low and [they] are encouraged by innovation and promotions [that] have translated to increased shelf space," Herzog said.

"The survey results also suggest that the current beverage pricing architecture is being kept artificially low to counteract weak volumes. The combination of aggressive pricing on larger formats to drive volume and the proliferation of package sizes to drive trial has left the beverage manufacturers in a challenged position to drive volume growth, while still creating value to consumers and maximizing profitability," she explained.

As a result, there has been some underpricing in 20-ounce carbonated soft drinks, with Wells Fargo Securities' retail contacts believing that consumers would be willing to pay 10 percent more. Bottom line, manufacturers' aggressive pricing appears below what the market will bear to fight particularly weak volumes.

Looking at specific manufacturers, Wells Fargo Securities estimates average retail price growth decelerated for The Coca-Cola Co., up only 0.6 percent year over year, with volumes up only 0.9 percent year over year as a result.

PepsiCo Inc.'s convenience store beverage sales volume was slightly positive, according to the survey, with 1.1-percent increase in pricing year over year during the third quarter. However, PepsiCo posted the lowest volume gains of any major manufacturer, Herzog said.

"We think PepsiCo's weak position in U.S. beverages will continue to remain under significant pressure as it continues to be 'out-promoted' by its peers," she noted.

In addition, based on findings from Beverage Buzz, Dr Pepper Snapple Group's retail price and volume were up slightly in the third quarter, which Herzog estimates will contribute to a 1-percent increase in channel sales. However, the manufacturer's TEN platform performance continues to decelerate.

"We increasingly have concerns about the long-term viability of TEN," Herzog explained. "Given the ongoing challenges to TEN, our expectations are that the platform has continued to decline. If our c-store retailer contacts are correct in their assessment of TEN's performance, we are simply hopeful that management doesn't continue to 'throw good money after bad' and reconsiders its $30-million planned investment in the platform."