Teens, the CSD Lost Generation
Carbonated soft drink segment under pressure on health, parental concerns; energy drinks taking toll
NEW YORK -- The U.S. carbonated soft drink (CSD) segment is likely to decelerate further from the contraction seen in 2005, according to a recent consumer survey conducted by Morgan Stanley beverage analyst Bill Pecoriello. In a research note, he said the firm is maintaining a forecast for a 1.5% annual volume decline, more than two times the rate of decline seen in 2005.
And teens may become the lost generation for the CSD category, he said. Teen CSD consumption appear to be declining because of health concerns and parental restriction. Teens increasing [image-nocss] consumption of non-CSDs will likely lead to continued share gains for these segments, Pecoriello said. Among adults, declining CSD equity and health concerns are likely to pressure the CSD segment further, while the rapidly deteriorating image of regular and diet CSDs will also pressure. Current diet CSD offerings are not the answer as consumers that are shifting out of regular colas are 2.5 times more likely to switch to bottled water than diet CSDs.
Morgan Stanley's latest survey of 1,550 consumers age 13 to 65 supports Pecoriello's view that the U.S. CSD segment is likely to remain under pressure. Highlights from the report include:
Health concerns continue to grow, impacting consumers' beverage choices. The CSD category remains weak and the current generation of diet CSDs has not been the answer as diet CSD growth remains sluggish, although still growing low single digits. The image of regular colas (and diet colas) continues to deteriorate at a rapid pace. The percentage of consumers trying to limit consumption of sugar/high-fructose corn syrup (HFCS) and watch calories has continued to grow. Negative news headlines surrounding CSDs have also affected beverage choices. Teen (age 13 to 17) consumption of CSDs are underindexing vs. the overall population and has been declining over the past five years, partly driven by the gatekeepers (parents) not allowing them to consume CSDs more often. Teens are also much less likely to consume diet CSDs than adults. Over the past five years, CSD have been in decline for younger age groups resulting in an aging CSD user base. While teens are less health conscious than adults, it is still relatively high and growing. Once the teens become adults, we believe that they will become more health conscious and thus are unlikely to start increasing their CSD consumption. Non-CSD (sports drinks, ready-to-drink teas, energy drinks) consumption is much higher for teens than for adults. Innovation hasn't been incremental enough. Flavor extensions have appealed to the heavy CSD consumers and variety seekers and thus haven't grown the category but probably helped sustain the category. The risk is that some of the CSD trademarks have now been overextended, using up consumers good will and making consumers skeptical about trying future line extensions. Although very early days, our research shows that Coke Blak will likely be a small niche brand with low repeat levels (based on taste and price). On paper it's the right strategy (borrow from coffee's equity, extend the Coke trade mark, use a premium package and a premium price), but the execution (consumer message, taste profile) might not drive the success the company was hoping for. The image of regular and diet CSDs continues to deteriorate rapidly across all the historical strengths of the category, which will limit the power of future CSD trademark extensions.
Butwhile U.S. CSD sales are slipping, and many experts blame that on a diet-conscious society, high-calorie energy drinks are flying off store shelves, a Reuters report echoed. Image, not nutrition, may be the reason.
Many traditional regular [CSDs] aren't growing, but paradoxically other products which are just a bit different, like energy drinks and flavored sparkling waters, are growing, John Sicher of Beverage Digest told Reuters. Some consumers are looking for products which have attributes or imagery beyond good taste and refreshment.
Energy drink brands are largely marketed as beverages for partygoers for their high levels of caffeine, vitamins and other ingredients designed to boost energy.
U.S. sales of energy drinks are expected to jump more than 70% in 2006 from $3.5 billion last year, according to Beverage Digest. That growth contrasts with a fall in soft-drink volume in 2005 for the first time in two decades.
Wall Street has attributed the decline to consumers moving away from sugary soft drinks to diet versions or healthier low- or no-calorie beverages. Even so, sales growth of zero-calorie diet sodas slowed last year, while Hansen Natural Corp.'s Monster energy drink, with 100 calories per serving, and Energy Brands' Glaceau vitamin water, with 50 calories per serving, saw strong growth.
At some point someone is going to say that these aren't good for you, Ken Harris, a partner at food and consumer products consulting firm Cannondale Associates, told the news service.
Executives of leading beverage companies see a need to redefine soft drinks to gain sales. The categories are blurring, Gary Fayard, Coca-Cola's CFO, said at a beverage conference in New York last week. Consumers move from sugary drinks to diet versions or water. Then they get tired of water and they start having flavored water and then sparkling-flavored water, which happens to be sweetened with aspartame, similar to Diet Coke. Soda may have to be presented as a sparkling, energy-providing beverage, he said.
Coke is trying hard to have its own representative among energy drinks. Its Full Throttle brand garnered 8% share of the segment in 2005. Still, the company is far behind Hansen, whose sales almost doubled and profit tripled last year. The company's share of the U.S. energy drink market has climbed to 22.3%.
A big part of Hansen's success has been image. The No. 2 energy drink company behind Austria-based Red Bull promotes its brand through sports such as desert racing, motocross racing, surfing and skateboarding. Imagery is hugely important, Harris said. Energy drinks are marketed as hip trendy, clubby, while diet sodas are marketed as a low-calorie, great-tasting substitute for regular sodas.