With new healthier beverage options becoming available retailers face the task of resetting coolers to maximize sales.

By: By Howard Riell, Associate Editor.

Who would have thought that packaged beverages could cause so many people so much angst?

Heightened environmental and health concerns and the spotlight on childhood obesity have been used to cast a negative light on the beverage industry, despite the introduction of dozens of healthy beverage brands and line extensions over the past three years.

For example, a BeveragePulse.com study by Concept Catalysts and iModerate Research Technologies found that 94% of Americans are “concerned” about the environmental impact of beverage packaging. Recycling was mentioned by 45% of respondents as their most important environmental concern when it comes to packaged beverages.

The report “Environmental Concerns: The Impact on Beverage and Package Decisions” indicated that anxiety over the environment is actually inhibiting sales of bottled water.

“Our research shows that consumers think about the environment when they are making beverage purchases,” said Bob Falkenberg, founder of BeveragePulse.com and president of Concept Catalyst. “Specifically, the findings indicate that consumers relate positively to packages that are easy to recycle. Beverage companies (and the retailers that sell beverages) should start a full-court press on recycling.”

Functional Use
Ironically, health concerns are also helping to drive the category, as healthier and so-called “functional” beverages build buzz and garner more respect among consumers and retailers alike.

NACS reported in February that so-called relaxation beverages are gaining popularity. Brands like Dream Water, iChill, Slow Cow and Unwind reportedly include tryptophan, valerian root and melatonin among their ingredients.

One brand, which was set to launch nationally in March, boasts that it combats stress, the effects of energy drinks and sleeplessness. The beverages, which come in a variety of flavors—complete with attractive packaging—also carry labels warning that they “should not be consumed before driving or operating machinery.”

Research by Chicago-based Mintel International found that 48% of functional beverage drinkers claimed they wanted drinks that would release stress. During 2010, the firm added, 40 relaxation, nonalcoholic beverages were launched.

“I would say the zero-calories, healthier-option products are easing into the category as opposed to shaking up the cooler,” said Phil Smallwood, category manager for beer, packaged beverages and dairy for ampm stores. “Products like Monster Absolutely Zero, PowerAde Zero and Vitamin Water Zero are performing and meeting customer demand for healthier options. However, these products do not seem to be building incremental sales for the category, and are cannibalizing other products in the brand mix.”

Improved Performance
Despite concerns from schools and health officials, packaged beverage sales have responded nicely in 2010 after a sluggish 2009.
“I’d say first off that what we’re seeing is improved performance in packaged beverages,” said Gary Hemphill, managing director of Beverage Marketing Corp. in New York City. “The category’s performance in 2010 was better than in 2009 and 2008. The primary, over-riding reason for that was a modestly improved economy. Obviously things aren‘t perfect, but they’re better than they were a year ago.”

The second part of strengthening cold vault sales is understanding that Americans’ move to healthier beverages is part of a long-term trend that is being reflected in a number of categories. “This is an ongoing trend, not a new trend. It’s basically about consumers wanting healthier refreshment, and so naturally companies are looking for ways to deliver that to them,” Hemphill said.

While healthier refreshment can mean different things to different people, Hemphill called it safe to say that fewer calories is generally the one trend that applies to the majority of customers. “More natural ingredients may be another part of it,” he said. “We’re seeing innovation driven by demand for healthier beverage options.”

Hemphill sees retailers responding quite logically: by taking on products that fit the bill for what their consumers want. Since the cooler has a finite amount of shelf space, retailers are faced with big decisions on which products to shed from the category. These decisions should be made carefully based squarely on the demographic of each retailer’s marketplace and store scan data.

“A retailer is going to want to have a beverage set that really fills the demand for their particular customer base,” Hemphill said. “So the direction is moving toward healthier refreshment, but that isn’t necessarily what every single consumer is looking for.”

Focus on Ingredients
The other major trend that Beverage Marketing Corp. has identified when it comes to packaged beverages is a move toward pure cane sugar.

Last fall, PepsiCo decided to tap into the growing market for cane sugar sodas by reformulating its Sierra Mist beverage line—eliminating its traditional recipe, which includes high fructose corn syrup, and going instead with the sugar recipe of Sierra Mist Natural. As one PepsiCo executive told Ad Age, “There’s not a strong reason to choose one [lemon-lime] brand over another. And when we asked consumers what would re-engage them in soda, ‘natural’ was the No. 1 concept.”

Dr. Pepper Snapple followed with a reformulated 7UP brand, complete with updated graphics and a fresh advertising campaign.

“Sierra Mist was a good example of what the market can expect,” Hemphill explained. “Pepsi reformulated that brand with sugar, and it’s all natural. That’s an example of a product that has been re-launched and repositioned. To some extent Pepsi has done a similar thing with Gatorade, their leading sports drink brand. Those are a couple of significant examples. There are others out there, obviously, but that’s definitely the way the marketplace is moving in general.”

Setting the Cooler
The way retailers develop their cooler sets must be based on what their customers are telling them through their repeated buying practices. “When we introduce something new we look at the lowest-performing items within that segment and bid a fair adieu to them,” Smallwood said.

“If you take a look at, say, vitaminwater, going to a zero calorie, it is probably the right thing to add in terms of where the consumer is heading. But what tends to happen is it’s just pulling from the paired brand, so then you might have two items, and we don’t have room for that.”

The inevitable result, Smallwood pointed out, is cannibalization to one degree or another. “They’re splitting sales, so now you’re carrying two items that may be OK sellers instead of one item that is a very good seller. At some point,” he said, “the manufacturer is going to have to make a decision on what to cut because you can’t just keep adding more SKUs.  Ultimately,  it’s the customer that’s going to decide what stays based on the products they buy.”