CSP Magazine

Iced Tea: On a Steep Climb

Ready-to-drink tea is brewing up impressive numbers

When you walk into one of QuikTrip’s newest stores, it’s obvious something is brewing.

Twelve spigots of sweetened and unsweetened freshly brewed tea in a variety of flavors line one wall. The fountain in the middle of this assortment offers flavored teas as well. Along the back wall, ready-to-drink (RTD) tea—including four proprietary bottled options—fill a cooler door.

QTea commands a lot of space in QT stores, and for good reason.

“You can detect when certain categories are obviously not just a fad,” says Mike Thornbrugh, spokesman for the Tulsa, Okla.-based operator of more than 700 stores. QT is not only anticipating long-term growth in tea sales, but “we’re making all the proper investments to ensure that.”

Recent growth in sales of ready-to-drink iced tea alone make this thousands-year-old beverage worth a fresh look.

After slumping sales in 2013, unit sales of RTD tea grew more than 4% in 2014 in c-stores and picked up last year with a healthy 6% spike, according to IRI data. RTD tea may not be a cold-vault driver for most convenience stores, but beverage heavyweights Coca-Cola, Pepsi Lipton, Dr Pepper Snapple, Nestlé Waters and others see good things in these tea leaves.

As consumers continue to shift away from carbonated soft drinks, they’re looking for healthier, functional beverages such as bottled water, sports drinks, energy drinks and yes, tea, says Vivien Azer, an analyst for Cowen and Co., New York. “I would expect to see continued outsized growth,” she says.

Thornbrugh doesn’t point to any single motivator pushing QuikTrip customers to choose tea, but RTD tea sales are definitely on the rise.

“Hopefully, for us, it’s because we give the consumer a lot of options,” he says. “It could be for health reasons. It could be for variety. It could be for taste. For whatever reason, a lot of people are going to that particular category.”

Wellness Factor

The growth in RTD iced tea fits neatly with what Gary Hemphill sees as the major trends driving growth and innovation in today’s beverage industry: health, variety and convenience.

“These three megatrends manifest themselves in different ways over time,” says Hemphill, managing director of research for New York-based Beverage Marketing Corp. “But the majority of new products coming into the market today are some reflection of one or more of these trends.”

British research firm Technavio pointed to consumer interest in wellness when predicting in January that the global RTD tea and coffee market will see steady 5% year-over-year growth through 2019. Health-conscious consumers like RTD tea for its low calorie counts and antioxidant properties, researchers pointed out.

Tea not only is considered a healthier beverage but also is one that offers everything from hydration to energy and relaxation, according to Mintel. “Consumers perceive tea as being multifaceted, making it a very versatile beverage ... and giving it significant opportunity for continued growth,” the research firm said in its latest U.S. tea report in July.

Consumers see tea as a caffeine alternative to coffee and a healthier pick-me-up than energy drinks, says Chris Hall, vice president of sales for Talking Rain, the Preston, Wash.-based maker of the new Sparkling Ice Tea, a line extension of Sparking Ice flavored waters.

“Even the full-calorie teas I don’t think they look at as unhealthy,” he says. “I think they look at it as if you’re going to drink the calories, it’s a better option than soda.”

Leaves of Innovation

Big beverage makers are responding to consumer interest with fresh varieties of RTD tea, new packaging and innovative marketing.

“New flavors and varieties of RTD tea beverages drive excitement in the category, especially in convenience retail,” says Geoff Henry, group director for tea and coffee for The Coca-Cola Co. “There are amazing choices of teas in the marketplace now, ranging from refreshment-oriented teas to those with an authentic tea taste and organic teas.”

The company recently introduced a new Fuze flavor, mango orange, and planned first-quarter launches of Gold Peak Peach and Raspberry teas. It’s also continuing to expand distribution of top flavors of its premium Honest Tea.

“We’re continuing to innovate into new spaces within the tea category, and we have a lot in our pipeline for late 2016 into 2017 and beyond,” Henry says. “As the space starts to get more attention, we’re looking forward to bringing more new products and flavors to the category later this year.”

In premium teas, manufacturers are stressing simple and authentic ingredients. With its Tradewinds brand, Nestlé Waters touts “premium tea leaves, real sugar and 100% natural flavor” and also its brewing process.

“What sets our slow-brewed teas apart is our unique, slow-brewing process in steeping kettles to slowly and gently steep the tea leaves, deriving maximum tea flavor and home-brewed taste,” says Joe Franzino, Nestlé Waters group manager.

The Pepsi Lipton Partnership, whose Pure Leaf products led the category in c-store dollar sales last year, recently launched two new flavors: Pure Leaf Unsweetened Black Tea with Lemon and Unsweetened Green Tea.

In select markets, the company also in February revealed a new superpremium line, the Pure Leaf Tea House Collection. Made with organic cane sugar but limited to 90 calories a bottle, the teas are flavored with “a hint of their perfect fruit or herb companion.”

Continued: Brewing Opportunity

The organic and Rainforest Alliance Certified teas come in three flavors: Black Tea with Sicilian Lemon and Honeysuckle; Black Tea with Wild Blackberry and Sage and Green Tea with Fuji Apple and Ginger.

“We know that superpremium is driving category growth,” says Gary So, senior marketing director for the Pepsi Lipton Partnership.

Sparkling tea is another segment expected to grow, given its bubbly appeal to soda drinkers. Lipton Sparkling Iced Tea launched last year, and in January it introduced a new flavor, Citrus Green Tea. Talking Rain rolled out Sparkling Ice Tea last year in peach, raspberry and lemon. Early this year, it relaunched those products in bright new packaging, with the addition of a half-tea, half-lemonade flavor.

Talking Rain, which got its start with flavored sparkling waters largely in the grocery and mass-market channels, is looking for greater expansion of its Sparkling Ice Tea into convenience stores.

“One of the things we pride ourselves on is that Sparkling Ice (water) is refreshing, and we want to do the same thing on the tea side,” Hall says. “You’ll get that fizz that you get with soda but you also get the refreshment you get with water.”

Last year, Dr Pepper Snapple launched its Snapple Straight Up Tea, a line of three brewed teas in varying degrees of sweetness.

“They’re focusing more on natural lower sugar propositions in the Snapple brand, which are resonating with the consumer,” says analyst Azer.

While unsweetened RTD tea is a category that is expected to grow, manufacturers also are likely to continue to innovate with natural sweeteners, such as stevia and erythritol, says Franzino of Nestlé Waters.

Brewing Opportunity

To get a feel for the opportunities that beverage makers see in RTD tea, consider the breadth of some recent marketing.

In February, Pepsi Lipton launched its new Pure Leaf Tea House Collection in Palm Springs, Calif., at Modernism Week, an event celebrating midcentury modern design, architecture, art, fashion and culture. Designer Christopher Kennedy created a tea house in honor of the new Pure Leaf line. Coca-Cola, meanwhile, celebrated the success of an ad campaign for its Fuze Tea that featured iconic ’80s TV tough guy Mr. T dressed as a bold-talking butterfly. “The Mr. T campaign has done particularly well with younger, multicultural consumers,” Henry says.

With all the innovation and choices in RTD tea, c-store category managers face a bit of a juggling act. Some factors tea makers suggest they consider:

Variety: Some consumers want flavor-forward teas, some want authentic brewed taste and some want credentialed ingredients, says Henry, citing that Coca-Cola’s Fuze, Gold Peak and organic and Fair Trade Certified Honest Tea are designed to meet those different desires. “If retailers really want to maximize the opportunity for better RTD tea sales, they should ensure that they have the right balance of brands to meet the various needs of consumers,” he says.

Millennials in particular crave variety in RTD tea, much as they do in craft beer, says Hall of Talking Rain. He suggests convenience stores make more space for innovation and new items, including looking outside of contracts with major suppliers.

Sweeteners: In addition to unique flavor offerings, c-stores need to maintain an overall balance among sweet, unsweetened and diet tea, manufacturers say.

Growth opportunities: Sales of unsweetened iced tea grew 32% in c-stores last year and peach tea sales climbed 26%, says Franzino of Nestlé Waters. “Peach-flavor varieties have become the driver of growth for the mainstream segment brands, where consumers are turning to flavor-rich iced teas as an alternative to CSDs,” he says.

Cross-promotion opportunities: Franzino also encourages merchants to bundle RTD tea with food: “RTD tea overindexes as a meal-pairing beverage, highlighting a notable opportunity for c-stores.”

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