As carbonated soft drink sales fall, figures show that energy and non-carbonated beverages, such as teas, are growing in popularity.
By Erin Rigik, Senior Editor
Consumer preferences are moving away from carbonated soft drinks (CSDs) and toward beverages they perceive as healthier, such as energy drinks and non-carbonated beverages like teas, bottled water and functional beverages.
As interest grows, non-carbonated beverages are stealing share of the category away from CSDs, according to Bonnie Herzog, managing director, beverage, tobacco and convenience store research for Wells Fargo Securities LLC.
“Diet CSDs in particular are pulling down the CSD category. Diet CSDs saw total 2013 volume declines of 7%,” Herzog said.
CSD volume overall is down 15.5% since 2003 as bottled water and energy have expanded. Meanwhile, non-carbonated beverages have grown 7% CAGR (compound annual growth rate) and nearly doubled volume share since 2003, while CSDs have declined on average 2% per year, Herzog noted.
Bottled water volume has driven the majority of incremental growth in beverage volume, but the category has the lowest average price per case with low margins, making the category relatively unattractive to manufacturers.
Energy, meanwhile, is driving both volume and value growth. Energy offers both the highest price per case as well as largest volume growth. It has the largest growth in incremental sales and is now the No. 2 non-carbonated beverage, according to Wells Fargo. The energy category started off the third quarter of 2014 particularly strong, with growth up approximately 11% quarter to date through the Labor Day holiday. Monster continues to outperform its peers in the energy category, with quarter to date growth of approximately 7%.
The higher average ticket and greater profitability make energy attractive to c-store retailers, and with approximately 40% margins for energy versus approximately 35-40% for total beverages and only approximately 30% for CSDs, retailers are allotting more space to the category. Wells Fargo predicted that energy could ultimately represent about a third of all c-store beverage sales.
Wells Fargo indicated new brands like Sparkling ICE have also been able to capture substantial market share as consumers continue to seek healthier alternatives to full-calorie CSDs. Sparkling ICE, for example, currently has $350-$375 million in annual sales—estimated to surpass $1billion by 2018, Wells Fargo estimated. The beverage has positioned itself as “refreshing”—something customers view as critically important in a beverage.
Even as CSDs lose volume, they still represent a large part of the beverage category and remain the largest category by sales. CSDs make up $76.3 billion or 60.7% of 2013 all-channel retail sales compared to $47.5 billion (39.3%) for all other beverages, according to Wells Fargo.
“You have to be there (in CSDs); it still drives traffic, but some of these sales are being allocated to other beverage categories,” Herzog said.
As aforementioned, diet is trending downward. Customers are leaving the diet segment for alternative options, such as health and wellness beverages, moving back to regular CSDs but consuming less, or choosing the energy category for its functional benefits. Herzog noted that as customers flee the diet category, retailers might feel the absence more strongly than when they leave other categories. That’s because diet soda customers tend to be heavy consumers, drinking several diet beverages a day. The diet downturn is expected to continue.
Branded vs. Private Label
The gap between branded CSDs and private label pricing has been narrowing, and private label has suffered double-digit declines as a result because there has been less down trading. Private label CSDs have lost category volume share since the beginning of 2011 as “trading up” to branded soft drinks has become less expensive to consumers.
Branded CSD pricing is currently less volatile. Manufacturers have become more consistent with pricing over the last several years.
Going forward, energy, water and functional beverages will continue to drive growth in beverage sales at convenience stores.