2014 Beverage Report--Trend: The Stairway to Health. Countertrend: The Road to Flavor

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The year in beverages was alternately marred by controversy and enlivened by it. It was harmed by health concerns and invigorated by them. For every piece of bad news, there was good news.

As carbonated soft drinks, most notably diet sodas, suffered to the tune of a 4.2% loss in unit sales, energy drinks grew 5.7% even in the face of national inquiries and legal action that called their safety into question. And this came as bottled-water unit sales in c-stores grew 3.4%, indicating a continued desire for healthier beverage options.

While beer overall was down 1.8% in convenience-store unit sales, “better beers”—imports, crafts and above-premium brews from the major manufacturers—saw impressive growth.

“[Last year was] somewhat of a lackluster year performancewise,” says Gary Hemphill, managing director and chief operating officer for Beverage Marketing Corp. research, based in New York. “Refreshment beverages grew modestly in 2013, driven by solid performance of the bottled-water category, which continues to get a boost from aggressive pricing.”

“It’s a mixed business right now,” agrees beverage consultant Mary Pellettieri of La Pavia Consulting LLC, Milwaukee. “The consumer is seeking alternatives. That’s made it an interesting time for innovators and entrepreneurs.”

Premium Movement

One noteworthy aspect of beverage sales in 2013 is an apparent willingness on the part of consumers to spend a bit more at retail. Generally flat categories, such as beer and iced tea, are seeing growth on the high end, as are more expensive energy drinks.

Sales of carbonated soft drinks, conversely, continue to sag. It’s part of an overall desire for more flavor and genuine taste.

“There’s an interest in flavors and going back to our roots,” Pellettieri says. “We went to the farthest extremes with clear beer and clear sodas, and now we’re seeing the pendulum swing back to the other extreme.”

This means a willingness to experiment on the part of the consumer, experts say, and convenience stores find themselves in the sweet spot for that experimentation.

“As single-serve specialists, this is the perfect place to buy beverages for consumers who want to try something new,” Hemphill says. Over the next week, CSP will roll out its exclusive 2014 Beverage Report to assess the past year of the major subcategories and where they might go in the future. Oh, and keep your eyes peeled for the musical accompaniment to each category.

Beer & Wine: Bold Flavors Lead the Wedding Band

“High end” and “big flavor” continued to be the lead stories for beer in 2013 as awareness of small craft brews continued to grow and as the major brewers rolled out higher-end beers with distinct tastes.

Anheuser-Busch introduced its popular Shock Top in a single-serve 16-ounce can, branded a new cider with its Stella Artois moniker and added to its “-Rita” line with strawberry and cranberry flavors.

MillerCoors’ R&D team continued to function in high gear with three significant 2014 rollouts or line extensions: Miller Fortune, an undistilled golden lager with 6.9% alcohol by volume; Smith & Forge Hard Cider, the latest addition to the growing hard-cider field; and a new flavor of its year-old Redd’s Apple Ale, now available in strawberry.

Crown Imports aimed for bold flavor with its new Modelo Chelada, a tomato-flavored beer.

And Heineken USA will layer on the flavor this year like never before with Dos-a-Rita, a premium, ready-to-serve lager margarita; Strongbow Honey & Apple, a new hard cider sweetened with honey; Desperados, a tequila-barrel-aged beer with a hint of lemon; and Amstel Radler, a blend of beer and lemon.

The upscale beer “segment is more popular than ever, growing faster than mainstream and value combined,” says Dirk De Vos, senior vice president & chief commercial marketing officer for Heineken USA, White Plains, N.Y. The brands “are delivering more incremental cases and efficient growth thanks to the growing and influential millennial and multicultural consumer base.”

Still, premium and subpremium beers remain the most popular segments of the category, leading brewers to encourage a balanced portfolio.

“Operators that ensure they have the right assortment, with adequate cold and warm space, and engage shoppers in a fun and exciting way will be prepared to fully leverage the potential the beer category offers,” says John F. Knapp, director of category solutions for convenience for MillerCoors, Chicago.

Adds Kevin Wilkerson, vice president of national retail sales for small format for Anheuser-Busch, St. Louis, “Winning retailers utilize a balanced approach toward merchandising and promotion. As economic conditions improve, the formula for success will be availability of cold premium and value package beer and singles, and the right mix of leading high-end brands.”

Wine’s Next Generation

With a healthy 12% growth in unit sales in 2013—on top of 19% growth the previous year—wine continues to capture more customers’ attention in convenience stores.

“Slowly, this channel is beginning to increase their awareness of wine availability,” says George Ubing, director with E&J Gallo Winery, Modesto, Calif.

Driving the trends for the category is the millennial population, which is discovering wine at a younger age but approaching it from a different perspective, expecting it to be “refreshing” in a way older drinkers historically haven’t required. This has led wineries to introduce sweeter wines and more sparkling wines to satisfy a new niche.

Gallo’s recent introductions to meet these needs have come via Barefoot, the world’s largest wine brand. This includes Barefoot Refresh, Moscato and Bubbly, all of which target the millennial adult consumer. The move to put Liberty Creek wine in a Tetra Pak also targets millennials and their on-the-go lifestyles.

“Single-serve packaging is the fastest-growing size in this channel,” Ubing says.

Just the Stats: Beer & Wine

2013 unit growth in c-stores through Dec. 1: -1.8% (beer), 12.6% (wine)

Bright spots: High-end beer growing; millennials discovering wine.

Pain points: Boredom setting in for some of the biggest beer brands.

If beer and wine were musical entertainers, they would be: a well-rehearsed wedding band. It can get the party rocking or bring the volume down for an intimate encounter. Too much of it, and you may not feel well.

Best-Selling Beers

C-store sales, 52 weeks ending Dec. 1, 2013, Convenience AllScan, IRI

“Better beers,” such as imports Corona and Modelo, saw healthy growth in 2013, propelling Modelo into the top 10 c-store brands by unseating Keystone Light, which dropped to the No. 12 position after unit sales dipped 6.79%.

Bottled Water: Sparkling Bubbles Up

At the NACS Show in October, retailers found no fewer than a dozen brands of carbonated, or sparkling, waters on the expo floor.

Coca-Cola Co. highlighted its Fruitwater flavors. PepsiCo redesigned the packaging of its Aquafina Flavorsplash Sparkling. DrPepper Snapple Group (DPSG) got into the business big with Canada Dry and Schweppes. Nestle Waters featured both Perrier and its regional sparkling waters. Then there were the smaller guys: Sparkling ICE, Cascade Ice, National Beverage Corp.’s La Croix and others.

With such a focus on the subcategory, it’s surprising to find the sale of sparkling waters dipped 2.7% in convenience stores during the 52 weeks ending Nov. 30, 2013, and a whopping 22.6% for the prior four weeks, according to Nielsen.

DPSG, however, sees sparkling water as a growth category for the future and is investing in both sweetened and unsweetened bubbly waters.

“On the unsweetened side, we are taking our Canada Dry and Schweppes sparkling seltzer waters, which have traditionally been available on a regional basis, and rolling them out nationally in single-serve formats for sale in the c-store channel,” says Ivan Alvarado, director of category management for the convenience channel at DPSG. “We also recently signed an agreement with Sunny D through which we are now distributing their [sweetened] Fruit 2o offerings.”

Often, according to consultant Mary Pellettieri, the products are the most obvious alternative when consumers move away from carbonated soft drinks for a perceived healthier beverage profile. And she expects more in the future as consumers seek to keep the fizz but lose the sugar or aspartame.

“I think we’ll go back to carbonation; we just haven’t figured out what that product is yet,” she says. “I think we’ll see carbonated teas. There’s more innovation to come. It’s just going to have to get through this period of people going elsewhere.”

Still Water Stages a Coup

For years, carbonated soft drinks have made up the largest beverage category in the country and certainly in c-stores.

But that won’t be the case for long. Sales trends suggest bottled water will overtake CSDs as the largest-selling beverage category by 2017. It’s already taken the lead in 15 major markets in the United States, and with overall U.S. sales growth of 3.4% and c-store growth of 4.2% for the 52 weeks ending Nov. 30, 2013, according to Nielsen, the takeover will continue.

“The trends are very, very good and continue to point to a consumer who is looking for healthy hydration,” says Jim Donker, director of national accounts for Nestle Waters North America, Stamford, Conn.

Gary Hemphill of Beverage Marketing Corp. agrees. “In bottled water, we will see growth once again—especially in private-label, single-serve waters,” he says among his predictions for 2014. “Due to aggressive pricing, this is where the greatest growth is and is likely to be in the future.”

Nestle Waters sees three key trends driving water sales: health, people on the go more often, and cultural and demographic shifts.

“Consumers are more readily telling us what they need, that they need different beverages and different packaging for different need states,” says Chelsea Allen, senior manager, category and shopper solutions for Nestlé Waters. “It’s clear that a 20-ounce bottle isn’t going to meet every need, so we need to have larger sizes for when they have a longer day, if they’re on the go more or they have a sport cap for when they’re at the gym.”

Just the Stats: Bottled Water

2013 unit growth in c-stores through Nov. 30: 3.4%

Bright spots: Desire for healthy beverages growing; new need states to be met.

Pain points: Lack of flavor misses a major trend.

If bottled water were a musical entertainer, it would be: old-school Muzak. It’s ubiquitous. It’s endorsed in doctors’ offices everywhere. There’s not a lot of taste. The older you get, the better it sounds.

Bottled-Water Sales Growth

C-store sales, 52 weeks ending Nov. 30, 2013

Single-serve is the dominant packaging for bottled water in convenience stores, carrying the category to 3.4% growth despite dips in multiserve and sparkling water sales, according to Nielsen data.

Carbonated Soft Drinks: Encroaching on Soda

While the battle between Coke and Pepsi continues, other types of beverages have stolen their ground with CSD consumers, according to consultant Mary Pellettieri.

“CSDs are combating the iced teas and the coffee drinks of the world,” she says. “People still desire carbonation, but they’re tired of diet and cola. They’re tired of the flavors. I suspect we’re going to see more coming out of CSDs that bring different elements of flavor that we haven’t explored.”

That’s been the long-term strategy at Dr Pepper Snapple Group for years, and today the company—makers of 7UP, Sunkist and A&W Root Beer, among other brands—proudly crows about flavors being the in-thing in CSDs.

“[CSD] growth is being driven by non-colas,” says DPSG's Ivan Alvarado. “We expect that trend to continue as consumers seek greater variety and choice.”

PepsiCo isn’t shying away from flavor, either. Its Mtn. Dew KickStart positioned the company nicely with a hybrid of CSD and energy drink, and a sales pitch that opened the morning day-part to sodas. Initially introduced in fruit punch and orange citrus, the company has since added limeade and black-cherry flavors to the line, those targeting the evening day-part.

Coca-Cola Co., meanwhile, will go back to its roots in 2014 to drive sales, actively using sampling programs of its Coca-Cola Classic across the country to drive trial and sales.

“When you look at the number of 18- to 24-year-olds that have not tried Coke in the past, it’s kind of shocking,” says Ray Faust, senior vice president of portfolio commercialization for Coca-Cola Refreshments, Atlanta. “That’s why in 2014, you’re going to see a lot of trial and sampling against Coke Classic.”

The company is also developing new packaging to catch consumers’ eyes, beginning with a chill-activated can that changes color with temperature; a reshaped 6-pack that fits easily in a refrigerator; and new package sizes, such as 16- and 19.2-ounce cans.

“Our insights team found people like cans,” Faust says. “We did some pilots [in 2013 of the 16-ounce can] and every one of them was positive.” The 16-ounce can rolled out in November.

Still, it’s an uphill climb for CSDs, according to BMC's Gary Hemphill. “Carbonated soft drinks are expected to decline for the 10th consecutive year in 2014,” he says. “Consumers are broadening their drink repertoire and want healthier refreshment. Keep in mind, though, despite the declines, this is still the most popular beverage in the United States.”

Just the Stats: CSDs

2013 unit growth in c-stores through Dec. 1: -4.2%

Bright spots: Flavored sodas growing; hybrid beverages gain traction.

Pain points: Diets sliding; overall decline expected to continue.

If CSDs were a musical entertainer, it would be: The Rolling Stones. No one expects new material to really rock their world. And when your original audience is in its 70s, yeah, you’re going to lose a few fans.

Energy Drinks: The Newcomer Keeps Buzzing

The energy-drink category started 2013 on the defensive: The high-caffeine beverages—both drinks and shots—were tied to multiple deaths across the country based generally on anecdotal evidence.

And it ended the year on the defensive: A December Mintel survey of consumers concluded that nearly six in 10 Americans (59%) who are current energy-drink or -shot drinkers actually worry about the safety of the products.

Through it all, the category grew 7.4% in unit sales in convenience stores, according to 52-week data ending Dec. 1, 2013, from Chicago-based IRI. The 2013 growth is a slip in growth of a full 10 points from the previous year, but in an otherwise lackluster year for beverages, it stands above the rest.

“The energy category continues to grow and expand in dollar volume and consumer base,” says John Showalter, director of business insights for Red Bull North America, Santa Monica, Calif. “Convenience retailers should take a look at their beverage space to make sure energy is getting its fair share of space.”

Talk to a few convenience retailers and it quickly becomes clear that they’re doing just that, with more space for the category added each year, most often at the expense of carbonated soft drinks.

“Energy is saving the beverage category,” said Chris Borota, category manager for GPM Investments, dba Fas Mart, Richmond, Va., during CSP’s Cold Vault Summit last fall.

Stan Whittaker, category manager for Quality Dairy, Lansing, Mich., agreed, even in a year marred by bad press and crummy weather. “Energy did really well this year for me,” he said. “That customer is very brand loyal.”

Still, innovation has very much been the name of the game for the energy category in recent years.

Red Bull’s flavors and Total Zero line extensions have benefited the category, while other brands have branched into energy-hybrid products, such as Rockstar Energy Water, Mtn. Dew Kickstart and Muscle Monster with protein.

The key, says Showalter, is to keep an eye on what’s really selling.

“As the beverage landscape and consumer demand evolves, beverage sets should evolve to optimize energy-category space as a percentage of total beverage,” he says. “Retailers should use category dollars, units, growth and profit to determine how much space each category [and each brand] should have.”

Adds Hemphill, “Energy drinks are likely to have solid growth in 2014 in mid-single digits. The energy need state is large and still somewhat underdeveloped, so the category is likely to see continued growth.”

Just the Stats

2013 unit growth in c-stores through Dec. 1: 7.4%

Bright spots: Resilience; bevy of new flavors, hybrids

Pain points: Continuing regulatory pressure

If energy drinks were a musical entertainer, it would be: Miley Cyrus. Even when scandal hits, sales continue to grow, consistently falling back on the axiom “There’s no such thing as bad publicity.”

Best-Selling Energy Drinks

Source: Convenience AllScan, IRI; C-store sales, 52 weeks ending Dec. 1, 2013

Red Bull remains on top of the energy-drink charts and continues to grow by double digits, though Monster’s numerous variations often gain it more space in cold vaults.

Iced Tea: The Move to Premium

CSDs’ loss has meant a gain for several other beverage categories, including energy drinks and bottled water. But iced-tea makers believe they’re in a good position to benefit from the slow move away from sodas.

It’s part of what folks at Nestle Waters North America look at as an ongoing consumer migration. “What we see is a lot of households right now leaving CSDs, even diet [soda]; they’re moving into healthier options, and iced tea is considered to be a healthier option,” says Ashley Allen of Nestlé Waters, maker of Sweet Leaf, Nestea and Tradewinds iced teas. “We’re seeing that shift over [to tea], and then those people are migrating to water. So it’s a multistep move.”

Gary Hemphill of Beverage Marketing Group agrees iced tea is hitting a nerve these days. “Today’s consumers have greater awareness that what goes into your body impacts your body,” he says. “People have a greater understanding of the importance of drinking and eating healthier. This overall trend has manifested itself in a movement to products that are better for you, or at least perceived as better for you.”

Consultant Mary Pellettieri agrees, pointing out that iced tea comes with a preconceived notion of being healthier, even if some brands are essentially sodas without the carbonation.

“It’s refreshing. Iced tea is tasty,” she says. “It’s a much more natural, simple product.”

And while volume sales of iced tea are down 2.6% in c-stores through Nov. 1, 2013, according to Nielsen data, sales of premium iced tea were up a remarkable 19.7%.

“The value or mainstream segment, the lower price point, is in decline,” says Jim Donker of Nestle Waters North America. “Where we’re seeing positive growth is in the premium segment of the category.

“The premium products are appealing to the true tea drinker … [who] is interested in a product that tastes like tea and delivers a premium taste. That’s what’s growing.”

Ivan Alvarado of Dr Pepper Snapple Group agrees, encouraging convenience-store retailers to “drive margin by enhancing the position of premium teas. Focus on brands that will help drive profitability (penny profit) for your tea category by placing them in more visible positions.”

And the makers of high-end tea have noticed the trend, too. During a December visit to CSP’s offices, Arsen Avakian, creator of Chicago-based Argo Teas, said his company is focusing on the convenience channel going forward.

“There is an opportunity window [in iced tea] right now, and we’re filling that window as fast as we can,” Avakian said. “I believe the convenience sector is the one [channel] that is making the right choices to serve consumers well into the future.”

Retailers tend to agree, many having made it clear that they don’t need any more 99-cent pre-priced iced teas, even while acknowledging that price has driven the category. “I’m surprised by the resilience of iced tea,” said Lundy Edwards, general manager of retailer Forward Corp., Standish, Mich., during CSP’s Cold Vault Summit. “It’s price-driven. Suppliers are dropping prices to meet” those 99-cent offers.

But it’s been prominent enough to make Lundy “sacrifice CSD space to sell more tea.”

Just the Stats: Iced Tea

2013 unit growth in c-stores through Nov. 30: -2.6%

Bright spots: Consumers interested in high-end products

Pain points: Pre-priced product

If iced tea were a musical entertainer, it would be: The Beatles. It has a long history. Not everyone loves every song (uh, flavor), but most can find something they like.

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