New products and flavors, including some with healthier ingredients, are helping soft drinks and teas experience a healthy resurgence in already jammed cold vaults nationwide, even as traditional carbonated soft drinks continue to decline.
For operators, keeping tabs on trends and adjusting sets to match ever-changing dynamics remains a full-time job.
According to the National Soft Drink Association, consumption of soft drinks is headed toward 700 12-ounce servings per person per year. Since 1978, soda consumption in the U.S. has tripled for boys and doubled for girls. Young males ages 12 to 29 are the biggest consumers at more than 160 gallons per year, or nearly 2 quarts per day—contributing, of course, to the chorus of yowls about childhood obesity.
Carbonated soft drink sales have continued to slow as consumers continue to look to other beverages such as teas, vitamin-enhanced waters and perceived healthier beverages, according to Greg Warren, equity research analyst for Morningstar Inc., a global independent investment research group.
These drinks "have an unhealthy ring around them," Warren noted, adding that "the exception has been, up until this past year, the 20-ounce single-serve soft drinks. But those have started to weaken, and most of that, I would say, is related more to economic conditions." Diet beverages "continue to do better than full sugar (drinks)."
Interestingly, a recent report by the Centers for Disease Control and Prevention found that 24% of the people in the U.S., more than 72 million, are obese. According to the Web site NaturalNews.com, a group of organizations from 20 different countries recently issued a public call for The Coca-Cola Co. and PepsiCo to halt all marketing of their products to children. Consumer organizations including the Center for Science in the Public Interest sent letters to the companies asking them to stop marketing any beverages that contain sugar or caffeine to children under the age of 16.
However, a much less publicized report issued by the American Medical Association (AMA) in June said there is "insufficient evidence to restrict the use of high-fructose corn syrup or label products that contain it with a warning" relating to obesity in children or adults. That said, the group still recommended that consumers limit the amount of all added caloric sweeteners.
Marketing Matters
Jeff Leedy, senior vice president of marketing for Rutter’s Farm Stores in York, Pa., said he doesn’t see carbonated beverages’ sliding fortunes "turning around on a dime. This youthful clientele we have loves energy, they love new and a lot of it is packaging. I don’t see that changing much in the next couple of years."
Like most other operators, Leedy is seeing a sharp surge in energy drinks and bottled water. "I suspect that short-term trends you’ve seen the last three or four years with decreasing volume of carbonated soft drinks and increasing volumes in waters, alternative beverages and energy is going to continue for the next two or three years," he said. "Overall, I don’t see much change from a global standpoint."
Coke, of course, doesn’t see it that way, and with some reason. Traditional sodas still rack up the biggest numbers. "Sparkling drinks remain the No. 1 in-store destination item" in c-stores, according to Linda Cronin, director shopper strategies and solutions for Coca-Cola North America in Atlanta. "More than one-third of the time, consumers purchase these beverages with a food item, an advantage that helps relieve margin pressures."
Coke has had success with its "bundle" programs, which promoted Coke Zero with Hershey’s, Coca-Cola with VAULT and Slim Jim, and others. These initiatives have been successful, Cronin said, "because they are based on insights into the core shopper’s lifestyle and buying patterns."
Still, the soda giants have gotten the message. Morningstar reported in June that the top three American soft-drink makers, Coca-Cola, PepsiCo Inc. and Dr Pepper Snapple Group Inc. are all "working to develop a natural low-calorie sweetener aimed at health-conscious consumers."
Coke, for example, has reportedly been working with agribusiness and commodity trading group Cargill Inc. on a sweetener called truvia, which is made from a South American herb called stevia. PepsiCo is said to be at work on a similar product from the same plant, which is native to Paraguay.
Finding Balance
As product lines expand and new products are introduced, it falls on category managers to strike a balance in a restricted cold vault that combines products customers want with margin that justify their space on the shelves.
"In a way, because there is a finite number of spaces, (category management is) not as difficult a balance as you might expect," said Leedy. The chain uses contribution margins to determine which products receive precious shelf space. Management look at results for a specific three- to 12-month period and examine "how much gross margin it has generated, and then convert that gross margins to a percentage of space and make a decision based on that."
Thus, when Rutter’s executives have to decide on reducing facings or SKUs, "that line gets drawn on a margin level, not necessarily a sales-unit level," Leedy explained. "That’s a discipline we’ve used over the years. It’s a little bit different today than it used to be."
Indeed, five or six years ago Leedy and his colleagues "made a habit of changing maybe 50% of the items every year just because everybody was looking for new. There were a lot of entrants in the market and if there were 100 SKUs that came from, say, our alternative beverage guy we would upgrade 50 a year."
Rutter’s best-performing SKU is, in line with Morningstar’s research, the 20-ounce Mountain Dew. Energy drinks are "still growing, but not at the rate they did one or two years ago," Leedy said. The space allotted to energy drinks—six of seven shelves in a single cooler door—has not been reduced over the last year, he added. Space for carbonated soft drinks has been cut "continually," and is now down to two and a half doors, while enhanced waters have undergone some shifts.
"Still, water is not growing at nearly the rate as for enhanced," Leedy reported. "All of the ‘vitamin water’ entries and the skinny waters, all the enhanced piece, are growing at a much greater rate." Depending on cooler size, Rutter’s devotes between two and two-and-a-half doors for still and enhanced waters. The average Rutter’s store has a total of 11 soft drink doors. "We don’t do beer here, so that gives us a little bit more space to work with."
Teas in Rutter’s market are particularly strong," Leedy said. "We’re a dairy manufacturer, so we make our own tea varieties. We probably have one or two full doors of our own teas depending on the size of the cooler."
The chain also stocks a pretty good representation of other teas, mostly Lipton and Snapple, as well as some AriZona products. Also present are a couple of tea/fruit flavor blends carried by a local beer distributor.
Transit Trends
Terri Murray, general manager of Gulf Oil Co./Gulf Express in Newton, Mass., said that Diet Coke Plus (a sparkling, calorie-free beverage with vitamins and minerals, including vitamins B3, B6, and B12, and the minerals zinc and magnesium), Pepsi Max (like forerunner Pepsi Edge, a low-calorie, sugar-free cola marketed as an alternative to regular Pepsi and Diet Pepsi) and drinks like it are "not doing well. Does it sell here and there? Yes, but there is no major push on the products."
Coke Zero "isn’t doing badly at all. If anything, it’s a winner," said Murray, whose company is one of the Northeast’s largest wholesalers of refined petroleum products and operator of, among other things, branded gasoline retail centers. Mountain Dew, she notes "has just come out with three or four new flavors, and you get to go online and vote for them. Mountain Dew is very popular. Energy drinks "are still hot. The coffee drinks are doing well; Java Monster is doing wonderfully in c-stores. So does Starbucks."
What she sees her vendors doing is "trying to push the antioxidants and the enhanced sodas and waters," said Murray. "Right now, VitaminWater is still number one, and I love the commercial they have that says ‘There are 125 calories in there, let’s do 300 more pushups.’ To me that’s sort of genius, to get people to say, ‘I don’t want that.’"
Murray says she considers gourmet sodas "a little niche," but adds, "It’s funny: I think that for my age group, those 40- to 50-year-olds, nostalgia plays a role. Drinks that hark back to earlier days are fun; I’d choose that over a Coke, but I’m not sure the younger population has any interest."
Touchscreen Nostalgia
Nostalgia is the point at Arcadia, Okla.-based Pops 66, the combination soda pop shop, café, gas station and convenience store that sits along the famed 2,500-miles-long Route 66. The store doesn’t sell a lot of tea, General Manager Marty Doepke said. "Our niche is more the specialty soda market, and people are trying to get away from high-fructose corn syrup and the additives that are in sodas these days."
Though brands like Steve’s and White Rock Organic do well, the store’s top sellers are what Doepke dubbed "the traditional sodas," root beers, colas and Dr. Pepper. "Those are the big guys." Giants Coke and Pepsi, Doepke added, are "not doing as well here, mainly because they are so widespread that you can get them anywhere. It seems to be more of a distribution issue than anything"
There are "a lot of specialty sodas here," Doepke said. "It’s what the bulk of the people are coming in for." That said, what they are glad to find is soda with pure cane sugar, purportedly a healthier choice, at least prior to the AMA’s report, than conventional sodas. Diet and organic sodas are also climbing in popularity, he reports, due to health concerns. In all, Pops’ soda choices number more than 550, which account for an estimated 30 to 35% of total sales out of 11 cooler doors and a dozen or so floor stackings.
Winnowing the selection has never been an issue at Pops, said Doepke, since "just about every one we have here moves fairly well." As for expanding his selection, he said, "We’re always in the market for adding sodas to our store."
Interestingly, Doepke and his colleagues have found that "just about anything we have out there in glass is going to move pretty good." He credited "the nostalgia factor, as well as the green (mindset) everybody is getting into these days."
Pops recently introduced a soda kiosk allowing customers to ship purchases anywhere in the U.S. The touchscreen device allows customers lacking room in their trunks to choose from more than 700 types of soda and have them immediately shipped via FedEx.
