Beverages Move in New Directions

Changes in the cold vault reflect an evolution of c-stores and consumers

CHICAGO -- This has been a curious year for the packaged-beverage category. As retailers deal with slower store traffic in 2018, they have seen competitive threats from other retail channels and a variety of innovation from manufacturers, as well as actions signaling strategy changes that have them waiting for the other shoe to drop.

In September, nearly 30 retailers gathered at CSP’s Cold Vault Forum in Chicago to consider trends in the industry, retail realities and a ramped-up mergers-and-acquisitions pace by suppliers, all of which are pushing the category in new directions.

Sales Growth of Nonalcohol Beverages

Driving Profits

As one of the primary drivers of traffic in convenience stores and a leading category for margins, packaged beverages hold a key role in keeping c-stores profitable.

In 2017, nonalcohol packaged beverages accounted for nearly 16% of in-store sales and 20% of gross-profit dollars, according to NACS State of the Industry data. That means the softening sales of beverages in c-stores over the past two years were reason for concern. According to data from Wells Fargo Securities, the growth of nonalcohol-beverage sales was on a steady decline for almost two years. (See related chart.)

Now, three-quarters of the way through 2018, that trend appears to have turned around. “The tone for the industry is more upbeat,” said presenter Bonnie Herzog, managing director of consumer equity research for Wells Fargo Securities, New York.

Herzog offered several reasons for the turnaround:

Weather trends: On Labor Day Weekend, average temperatures across the United States were higher in 2018 than they’ve been in 12 years, while weather was dryer than in the past four years, according to Wells Fargo data.

Elevated consumer confidence: In April 2018, consumer confidence hit its highest point (indexing at about 130) in more than 11 years, according to data from FactSet, a data research firm.

Beverage promotions: The number of manufacturers’ holiday promotions was up 1.8% and 2.5% for Independence Day and Labor Day 2018, respectively, after hitting low points the previous year, according to Wells Fargo’s Beverage Buzz survey of c-store retailers. Perhaps more important, those promotions “are also increasingly effective at targeting consumers,” Herzog said. “Manufacturers are becoming more effective with the promotions they’re offering.”

Meeting Consumer Needs

Battling Headwinds

But the news for the category wasn’t all rosy. Throughout the Cold Vault Forum, speakers and attendees cited several headwinds that could limit category growth.

Fewer trips and less foot traffic. At the 2018 NACS State of the Industry Summit in April, presenters lamented a decline in foot traffic. In 2017, they said, consumers made one trip fewer per week to c-stores than in 2014, down to 2.6 vs. 3.6 visits, according to NACS Convenience Tracking data.

During the Cold Vault Forum, Mary Corona, associate manager of shopper insights for Plano, Texas-based Keurig Dr Pepper (KDP), shared data corroborating this trend. According to KDP research for the 26-week period ending Sept. 2, 2018, c-store beverage buyers made 21% fewer trips to convenience stores. “Shoppers no longer feel c-stores’ value proposition is unique enough to rationalize price premiums,” Corona said.

Similarly, CSP’s 2018 Outlook Survey of retailers showed retailers agree that traffic remains slower in 2018, but basket ring size is up.

Disruption. From Uber Eats and other third-party delivery services to Amazon Go and other technology-based entrants into convenience retail, alternative ways and places to buy packaged beverages are increasingly encroaching on the traditional c-store customer’s business. How retailers react could mean opportunity or demise.

Related: 8 Macro Trends Driving Beverage Sales

Sugar taxes. Municipal taxes on sugary drinks hit an apex in 2017, when several cities—Chicago, San Francisco, Seattle and Boulder, Colo., among them—added taxes on sweetened drinks to minimize consumption as a way of battling obesity or just filling local coffers. Since then, Chicago’s tax has been reversed and much of the campaigning has died down.

However, Philadelphia’s tax was upheld as constitutional by the Pennsylvania Supreme Court. And a Drexel University study concluded that Philadelphians are now 40% less likely to drink sugary beverages and 5% more likely to drink bottled water than their peers in other cities. This is good news for bottled-water sales—and not so good for other segments.

Prices. Record-low unemployment across the United States has many trucking companies struggling to find drivers. For some retailers, that’s meant out-of-stocks as they wait for deliveries. And as those trucking fi rms raise wages to draw job candidates, the increased costs are passed on to product manufacturers, retailers and, ultimately, consumers.

“Freight costs in North America are up 20%,” said James Quincey, president and CEO of The Coca-Cola Co., Atlanta, in April. This has led Coca-Cola to increase its prices. At the same time, aluminum prices have increased nearly 40% since early 2016, and that’s before the Trump administration’s 10% import tax took effect. In a joint letter to President Trump, major beverage makers said the aluminum tariff would have a “major negative impact on downstream U.S. manufacturers, such as food and beverages makers.” The Brewers Association said the tariffs will cost beer suppliers $347 million annually.

Is Cannabis the Future?

While several attendees of CSP’s Cold Vault Forum reported that the beverage category was making small moves toward healthier products and cleaner ingredient labels, one looming major advance captured more attention. Cannabis found its way into several beverage-related headlines over the past year, whether through investments by Constellation Brands and Molson Coors or reports that Coca-Cola Co. and Diageo were considering its potential as an ingredient.

In states where cannabis products are legal, retailers reported brisk sales of waters and beers that contain the psychoactive ingredient THC. They also saw growth in cannabidial, or CBD, products, which contain no THC but promise medicinal benefits such as relief from stress, insomnia and aches and pains.

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