Packaged to Sell

Where carbonated soft drinks are slipping, RTD coffees and sparkling water are picking up the slack.

By Anne Baye Ericksen, Contributing Editor

According to National Association of Convenience Stores (NACS) data released this summer, carbonated soft drinks (CSDs), energy and sports drinks, water, juices and teas, accounted for about 15% of total in-store sales for convenience stores in 2016.

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“Beverage sales are often impulse purchases so store traffic is one of the keys to improving packaged beverage performance,” said Gary Hemphill, managing director of research for the Beverage Marketing Corp.

The demise of carbonated soft drinks cannot be solely attributed to sugary drink taxes—only a handful of cities currently have enacted them. Rather, sales have been on a downward trajectory for the last few years as consumers are turning to healthier beverage options to satisfy their thirst.

CSDs lost 3.3% in unit sales in all retail channels for the four-week period ending Oct. 7, according to Nielson research, reported by Wells Fargo Securities.

Even new CSD product offerings have struggled to make an impact, such as the super soda Monster Mutant, a collaborative venture between Monster and Coke.

“It has been slow to gain momentum,” said Mike Nelson, category manager for Plaid Pantry. The Beaverton, Ore.-based company operates 110 stores in Oregon and Washington State. “We plan to address the CSD decline issue with expanding other categories such as ready-to-drink (RTD) coffee, tea [and] enhanced/sparkling waters.”

Earlier this year, bottled water sales set a new record when it surpassed soda for the first time as Americans’ top beverage of choice. Indeed, the subcategory has been consistently producing healthy volume gains for the past several years. Ironically, year-over-year comparison indicates a blip this summer when growth slowed substantially between June and August, only to rebound in September.

For the four-week period leading up to Oct. 7. Nestlé Pure Life and Dasani each registered 9.9% gains in unit sales and Aquafina jumped 8.1%. Of the three brands, which represent the majority of the market share, only Nestlé posted growth (0.5%) for the 12-week period while sales for Aquafina and Dasani dropped 1.1% and 2.7%, respectively.

Looking at c-store rings, sparkling water appears to be faring much better.

La Croix and Sparkling Ice each claim slightly more than one-fifth of the dollar share, but La Croix outsold its competitor in unit sales for the four-weeks ending Oct. 7 with a 51% gain compared with 1.4% for Sparkling Ice, according to Wells Fargo Securities. Dasani’s sparkling flavored water also posted impressive gains of nearly 45%.

Packaged beverages in general have dipped slightly, at least during the first half of this year.

However, a few segments are overachieving, said Hemphill.

“In general, niche categories are outperforming traditional mass market categories,” Hemphill said. “Two of the hotter categories right now are sparkling water and ready-to-drink packaged coffee.”

According to Mintel research, coffee is the fastest growing segment of beverages in all retail channels. What’s more, analysts expect it to grow by 67% over the next five years.

Interestingly, coffee shop traffic isn’t what’s driving the high returns. Mintel set expectations for coffee shop sales growth at only 2.17%—the slowest rate in six years.

The Wells Fargo Securities Beverage Buzz Labor Day Retailer Survey, for which approximately 15,000 c-stores were surveyed, shows RTD coffee sales jumped 8% for the third quarter.

Another reason this subcategory is perking up is the growing popularity of cold-brew coffee. The cold-brew process typically takes longer than most traditional drip or single-cup brewing methods. Because of that time commitment, consumers are less likely to concoct the coffee at home and are more willing to pay for the convenience of picking up a single serving from c-store cold vaults.

Not only has the niche mushroomed 460% between 2015 and 2017, Mintel estimated the chugging market could earn more than $38 million by year’s end.

Even with such a strong presence, RTD coffees aren’t in the position to grab cold vault space away from carbonated soft drinks or bottled water just yet, though category managers may be open to different offerings to compensate for slipping soda sales.

“We are seeing more operators embrace more better-for-you offerings because this is where the greatest growth is today,” said Hemphill.

It’s also where beverage producers are focusing efforts, from Coca-Cola’s new television campaign touting its non-soda products to startups on display at the Natural Products Expos East 2017, held in September. The industry event featured a sampling of new products including purple teas, yapoun tea and YOOT-brand tea, which produces three SKUs: Licorice Root, Dandelion Root and Prickly Ash.

“We are seeing new products come into the market, especially more healthier energy drinks,” said Hemphill.

PepsiCo introduced the AMP Energy Organic brand in August, trying to capitalize on health-conscious consumers who want an energy drink with more natural ingredients.
It’s available in citrus, pineapple coconut, grape and tropical burst flavors. Sold at 7-Eleven stores, the 12-ounce cans are priced at $1.99 or two for $3.

While category managers and c-store owners will experiment with different product mixes, sodas remain a significant profit generator, and probably will for the foreseeable future.